Kerala Economic Survey 2026 finds state's debt burden easing amid economic expansion

Kerala’s public debt relative to the size of its economy has declined steadily over the past four years, indicating an easing of the state’s debt burden alongside sustained economic growth, according to the Kerala Economic Survey 2026 tabled in the Assembly ahead of the 2026-27 Budget.

The survey shows that Kerala’s debt-to-GSDP (Gross State Domestic Product) ratio fell from 38.87 per cent in 2020–21, a year marked by the economic impact of the Covid-19 pandemic, to 34.87 per cent in 2024-25. While the absolute level of public debt has continued to rise, the reduction in the ratio reflects faster growth in economic output compared to the pace of borrowing.

Key growth indicators

The survey presents the decline in the debt ratio as an important fiscal indicator, suggesting that the state’s economy has regained momentum after a series of shocks that strained public finances over the past decade.

Kerala’s GSDP grew by 6.19 per cent in real terms during 2024–25. At current prices, GSDP increased from Rs 6.45 lakh crore in the previous year to Rs 6.85 lakh crore. Although the growth rate was marginally lower than the 6.73 per cent recorded in 2023–24, the state continued to maintain a growth trajectory comparable with the national average.

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The survey notes that Kerala remains among the larger state economies in the country, with income levels significantly higher than the all-India mean. Per capita income rose from Rs 1.79 lakh to Rs 1.90 lakh during the year, compared to a national average of Rs 1.33 lakh. The increase reflects continued income growth despite pressures on employment and public spending.

Fiscal challenges

Alongside the positive growth indicators, the survey flags persistent fiscal challenges. Kerala’s fiscal deficit widened to 3.86 per cent of GSDP in 2024–25, up from 3.02 per cent in the previous year. The revenue deficit also increased sharply, rising to 2.49 per cent of GSDP from 1.6 per cent in 2023–24.

The widening deficits were attributed to a combination of stagnant revenue growth and rising expenditure commitments. Total revenue receipts grew only marginally during the year, increasing to Rs 1,24,861.07 crore, a growth of just 0.3 per cent over the previous year. A significant factor behind this was a decline in transfers from the central government, which fell by over 6 per cent during the year.

In contrast, total expenditure rose by around 9 per cent. Revenue expenditure, including salaries, pensions and administrative costs, accounted for the bulk of the increase. Capital expenditure also recorded an increase, though at a more moderate pace, reflecting continued investment in infrastructure and development projects.

Improvement in revenue mobilisation

Despite the pressure on overall receipts, the survey highlights an improvement in the state’s own revenue mobilisation. Own tax revenue has increased by more than 44 per cent since 2021–22, while non-tax revenue has grown by over 37 per cent during the same period. These gains point to a strengthening of Kerala’s internal revenue base and a gradual reduction in dependence on central transfers.

The survey attributes the improvement in own revenues to better tax administration, expansion of the tax base and policy measures aimed at improving compliance. However, it cautions that the benefits of higher own revenues have been partly offset by reduced central allocations and rising committed expenditure.

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The document places Kerala’s current fiscal position in the context of repeated economic disruptions over the last decade. These include the effects of demonetisation, the transition to the Goods and Services Tax regime, successive natural disasters, the Covid-19 pandemic, and global economic instability following geopolitical conflicts. More recent challenges such as landslides in parts of Wayanad and changes in the GST slab structures have also affected economic activity and public finances.

According to the survey, these shocks have had a cumulative impact on growth, revenue flows and expenditure patterns, limiting the state’s fiscal flexibility. At the same time, the recovery in growth and the decline in the debt ratio suggest a degree of resilience in Kerala’s economic structure.

Room for cautious optimism

As the state prepares for the presentation of the 2026–27 Budget, the findings of the Economic Survey are expected to shape policy discussions on fiscal consolidation, expenditure prioritisation and revenue enhancement. The government faces the task of sustaining economic growth while managing deficits and maintaining social sector spending.

The survey concludes that while fiscal pressures remain significant, the improving debt ratio provides room for cautious optimism, provided growth momentum is maintained and revenue mobilisation efforts continue in the coming years.