Centre again slashes Kerala’s borrowing limit by Rs 5,944 crore

Kerala is reeling from a fresh directive from the Union Government that sharply curtails its borrowing limit for the remainder of the current financial year, a move that state officials and economists say threatens fiscal stability, social schemes, and even the fundamentals of India’s federal fiscal structure

Kerala's borrowing limits tightened

The Union Finance Ministry has informed the Kerala government that the borrowing limit for January-March 2026 has been cut by approximately Rs 5,944 crore, constraining the amount the state can raise from the market for expenditures in the final quarter of this fiscal year.

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This cut comes on top of earlier reductions made by the Centre, bringing the total trims to tens of thousands of crores over the year.

According to state figures, after factoring in prior adjustments such as reductions tied to the Kerala Infrastructure Investment Fund Board (KIIFB) and the Pension Payment Company borrowing, the state’s total withdrawal in borrowings and central grants now amounts to roughly Rs 17,000 crore less than originally envisaged for this fiscal year alone.

‘Major setback’ to federalism

Kerala’s Finance Minister KN Balagopal described the cut as a “major setback” that undermines essential government functions and violates the cooperative federal spirit. The communication from the Centre arrived only months before the financial year ended, leaving little time for alternative fiscal planning.

“This is not an issue of any single political party or front, but a problem affecting all the people of Kerala. Strong protests must be raised against the denial of the state’s rightful share. Despite the financial crisis, the government is making efforts to ensure that welfare pensions and other commitments continue without interruption”, the minister said.

The state government estimates that simply meeting routine financial obligations, including contractor payments, salaries, pensions, welfare pensions, which recently increased to Rs 2,000 per month, and ongoing welfare schemes, will require far more than the now-reduced borrowing capacity. Reports suggest that between January and March alone, Kerala needs around Rs 20,000 crore to settle bills and meet statutory commitments.

Spending constraints

Officials warn that the limited borrowing headroom could force the state to curtail spending on infrastructure, welfare, and public services or risk delays in payments to employees and contractors. Many analysts argue this will inevitably slow economic activity at a time when the state is seeking to consolidate growth and social investment.

The dramatic cut in borrowings resurfaces long-standing tensions between Kerala and the Centre over fiscal policy, especially the power of the Union government to restrict a state’s market borrowings.

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Financial governance under the Fiscal Responsibility and Budget Management (FRBM) framework allows states to borrow up to 3 per cent of their Gross State Domestic Product (GSDP). In Kerala’s case, this ceiling was already reduced in earlier years through central interventions including a Net Borrowing Ceiling declaration, which set limits on how much the state could raise from the market.

Threat to fiscal federalism

Kerala has challenged these curbs in the Supreme Court, arguing that borrowing is a matter exclusively within the state’s legislative competence, and that arbitrary caps stifle its ability to function.

The matter is under judicial consideration, with senior counsels arguing over constitutional interpretations of Article 293 of the Indian Constitution, which governs state borrowing with and without central consent

Critics, including former finance policymakers, contend that the Centre’s approach in redefining what counts as “public borrowing” to include extra-budgetary or off-budget borrowings fundamentally alters fiscal federalism to the detriment of states’ autonomy. These critics argue that similar rules are not applied to Union borrowings, creating asymmetry in fiscal governance.

Policy shifts add pressure

The borrowing limit cut comes amid other central policy shifts that Kerala officials say are compounding financial stress: The Centre has proposed transitioning from the long-standing Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) to a new Viksit Bharat Guarantee for Rozgar and Aajeevika Mission (Gramin) Bill, 2025.

Under this new scheme, the Centre’s share in funding is set to fall from 90 per cent to 60 per cent, raising Kerala’s potential annual burden by Rs 1,600–Rs 2,000 crore according to state estimates.

Left-leaning economists say this change will hit Kerala especially hard; the state has historically delivered high performance under MGNREGS, creating millions of employment days for rural households.

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The unification of Goods and Services Tax (GST) rates has also shifted revenue dynamics, with studies estimating that Kerala may lose Rs 8,000–Rs 10,000 crore in revenues next year a significant shortfall for a state with ambitious welfare and infrastructure programs.

Global tariff pressures

New international tariff policies, particularly from the United States, are projected to hit key Kerala export sectors such as shrimp, spices, and plantation crops — further squeezing external demand and revenue streams.

Kerala has repeatedly asked for a separate 0.5 per cent borrowing window for capital expenditure, arguing that the current 3 per cent limit constrains infrastructure growth when welfare spending crowds available fiscal space, a suggestion backed by finance officials.

Whether the Supreme Court will redefine the limits of central consent on state borrowing, and how fiscal federalism will evolve, remains uncertain.

But for Kerala, the immediate concern is clear: with the financial year’s end approaching, the state faces formidable fiscal constraints that will require urgent political, economic, and administrative responses to safeguard public services and development goals.