BUDGET EDITION
CBS LINE
Budget Edition
Director’s Message
Director, Centre for Budget Studies
A budget is not merely a compilation of numbers; it is a statement of vision and a reflection of a society’s priorities. One message stands out clearly in today’s economic discourse — development cannot be achieved through announcements alone; it must be realized through deliberate, well-designed, and accountable planning. The CBSline Budget Special brings together the discussions and analyses conducted by CBS, along with key insights and factual highlights drawn from the recent Kerala and Union Budgets. The conversations held ahead of the budget cycle, including our interactive sessions and engagements, reveal a common expectation: growth must be inclusive, fiscally responsible, and regionally balanced. Economics is not an abstract academic discipline confined to theory. It is a practical framework that shapes everyday realities. Fiscal discipline, the strengthening of local governance institutions, infrastructure development, support for the MSME sector, and the effectiveness of social security systems are interconnected pillars of sustainable progress.
Meaningful development begins with clarity of purpose. Policies must be grounded in real public needs and accompanied by consistent evaluation. Rising growth figures may signal expansion, but if improvements are not visible in the quality of life of ordinary citizens, that growth remains incomplete. Prudent management of revenue and expenditure, responsible debt control, and efficiency in tax administration are essential to long-term economic stability, while maintaining a balance between financial discipline and social commitment. Development must also extend beyond urban centers. Investment in rural infrastructure, healthcare, education, and digital connectivity is critical for balanced regional advancement. MSMEs remain vital engines of employment and grassroots innovation; simplified taxation, improved access to credit, market facilitation, and technological modernization are key to strengthening this sector. Ultimately, development cannot be measured by statistics alone. It must reflect social justice, fiscal sustainability, and cooperative federal balance. As this Budget Special presents analysis alongside verified facts from the recent Kerala and Union Budgets, the focus remains not merely on allocations, but on outcomes; not merely on growth, but on equitable progress. This issue seeks to encourage informed dialogue, responsible critique, and constructive engagement — because a budget is not just a financial statement, but a roadmap for collective progress.
Director, TIBEC
Kerala is seeing major changes in its labour market. Informal and gig work are growing, even in sectors that were once considered secure. At the same time, AI and automation are increasing job uncertainty, making continuous skilling and a higher education system focused on lifelong learning essential.
Meanwhile, despite Kerala’s strong repair culture, the state does not have a dedicated circular economy policy that could support labour-intensive and resource-efficient jobs. Women’s workforce participation also remains low, and instead of limiting support to finance alone, the state must provide integrated assistance—including licensing, branding, and operational support—to help home-based and informal women entrepreneurs succeed.
Director, GIFT
Kerala’s budget should be seen as a strategic economic tool, not just a routine exercise of balancing income and spending. Fiscal policy must respond to the state’s changing socio- economic realities, such as the decline of traditional sectors and rising inequality. Nearly one-fourth of Kerala’s revenue comes from central transfers, which limits fiscal autonomy. While the state recorded growth above the national average in the mid-1990s, this was followed by a long period of slower growth, despite strong social indicators.
Addressing future challenges, therefore requires a shift in investment priorities, moving away from an excessive focus on physical infrastructure toward growth-enhancing investments that can attract private capital and generate sustainable returns. The finance minister must also clearly highlight Kerala’s economic strengths to support long-term fiscal resilience.
Assistant Professor, GIFT
Kerala’s spending pattern shows that revenue expenditure dominates state finances. Salaries, pensions, and interest payments account for a large share, but this should not be seen as purely non-developmental, since they support essential services such as healthcare, education, and social protection. While capital expenditure is still limited, it has improved in recent years. Kerala’s capital expenditure growth rate has been higher than the all-states average, showing a gradual increase in fiscal space.
Public–Private Partnerships may provide alternatives, even though there are institutional and approval-related constraints. Overall, welfare spending has not been completely pushed aside. The main challenge is therefore to improve the composition and productivity of spending, rather than simply reducing it.
Director, CDS
Public spending in Kerala must be redesigned to achieve maximum development impact within tight fiscal limits. Nearly 65 per cent of revenue expenditure is committed to salaries and pensions, which greatly reduces flexibility. Rationalisation should therefore protect essential welfare spending, while reducing inefficiencies through pension reforms, better subsidy targeting, avoiding duplication, and restructuring loss making public sector enterprises.
At the same time, improving outcomes depends not only on cutting costs but also on spending better. This requires stronger technology-based monitoring, real-time data systems, and independent evaluation of public schemes. These reforms can help Kerala achieve greater development impact even without increasing its fiscal resources.
Adjunct Faculty, CSES
Kerala’s fiscal challenge is not mainly due to overspending. Spending on salaries and pensions is only slightly higher than the national average, while higher spending on health and education reflects improved social standards. Cutting expenditure is therefore neither practical nor desirable, especially given the state’s focus on human development.
The priority should instead be to improve revenue mobilisation and strengthen decentralisation. Local self-governments must function as effective decision-making units, not just spending agencies. With greater fund devolution and stronger institutional capacity, decentralisation can play a key role in addressing Kerala’s fiscal and development challenges.
Associate Professor, GIFT
The GST system has structurally disadvantaged consumption-driven states like Kerala, where high consumption exists alongside a weak manufacturing base. Despite a large inter-state trade imbalance—imports of nearly ₹1.5 trillion compared to exports of about ₹550 billion— Kerala’s IGST receipts are only slightly higher than its SGST collections. In 2023–24, the state received ₹16,977 crore as IGST settlement, which does not match its actual level of consumption, especially when over ₹3 lakh crore of IGST remains unsettled at the national level.
The lack of a transparent and timely IGST settlement system weakens fiscal planning for consumer states. Expected gains from service taxation have also not materialised, since key sectors like health and education are outside the GST net, while manufacturing-heavy states receive a larger share of service tax revenues. Ensuring fiscal fairness, therefore requires timely IGST settlement, better data transparency, and stronger technological support within the GST system.
HOD of Economics, St. Theresa’s College
Kerala’s revenue challenges must be understood within India’s fiscal federalism. A declining share in central tax devolution reflects a “success penalty” created by Finance Commission equalisation formulas. Under the 15th Finance Commission, Kerala receives only 1.925 per cent of the divisible pool despite high spending pressures. This has pushed the state to strengthen its own tax base, with State’s Own Tax Revenue estimated to rise to ₹76,656 crore in 2024–25.
Tourism is therefore key to Kerala’s future revenue strategy. Vision 2031 shifts the focus from high-volume to high-value tourism, with greater emphasis on MICE tourism. Initiatives like the KSRTC Budget Tourism Cell, the K- Home project, and the Kovalam–Bekal Inland Waterway reflect this direction, with tourism- led growth seen as an important route to improving Kerala’s fiscal resilience.
Associate Professor, GIFT
Kerala’s declining share of central transfers is mainly due to Finance Commission equalisation principles, not discrimination. The 15th Finance Commission gave 45 per cent weight to income distance, which benefits lower-income states. Since Kerala is relatively higher-income, its share dropped from around 2.5 per cent under the 14th Finance Commission to 1.925 per cent under the 15th. The weight given to demographic performance is also not enough to balance this effect.
Given these limits, Kerala must focus on strengthening its own revenue base. This includes expanding medical and wellness tourism, attracting diaspora capital, building a high-value knowledge economy, and formalising the service sector. The main challenge is to turn Kerala’s human development achievements into tradable, high- productivity economic activities.
HOD of Economics, Maharaja’s College
Infrastructure investment must be seen through a public finance lens, since such spending cannot always be expected to generate direct financial returns. Many projects create long-term public benefits and positive spillovers, making it difficult to rely on user charges without raising equity concerns. In this context, taxation remains the main way to finance infrastructure that produces broad social gains.
At the same time, strict adherence to FRBM targets can limit productive public investment, especially in sectors important for long-term growth. This calls for a more balanced interpretation of fiscal rules, one that clearly separates consumption spending from investment with high social returns. Well- planned public investment can attract private investment, improve productivity, and strengthen the long-term revenue base, which can justify temporary fiscal flexibility.
Associate Professor, GIFT
Kerala’s non-tax revenue system has serious coordination gaps, especially in tourism. Revenues collected by autonomous bodies often do not flow into the state’s consolidated fund, which weakens overall fiscal capacity. Since non-tax revenue contributes only around 11–13 per cent of total receipts, there is clear untapped potential. This can be improved through inflation-linked revision of user fees and selective monetisation of non-essential services.
Digital ticketing systems can reduce leakages and improve transparency, while stronger enforcement and recovery mechanisms are needed to prevent revenue loss. In addition, GIS-based property mapping and stronger local-level revenue systems can expand the revenue base and improve accountability, especially in municipalities and panchayats.
Associate Professor, GIFT
In a welfare-focused state like Kerala, cutting expenditure is neither practical nor desirable. This makes stronger revenue mobilisation essential for fiscal stability, especially from underused non-tax sources. Kerala faces rising fiscal pressure due to slower growth in its own tax revenue after GST, declining central transfers linked to demographic factors, and increasing spending on pensions, healthcare, and an ageing population.
Non-tax revenue—earned from public services, assets, and regulatory privileges—therefore offers an important way to strengthen fiscal autonomy. Although non-tax revenue has grown in recent years, this increase is mainly driven by lotteries, which hides declines in areas like power, irrigation, forestry, and industrial services. Fixing this imbalance requires better pricing of high-value public services, responsible monetisation of public assets, and stronger institutions to manage non-tax revenue in a sustainable way.
Former Director, Centre for Budget Studies
As Kerala prepares its budget, deeper policy engagement is necessary, especially in the area of fiscal decentralisation. Although local governments have surplus funds and borrowing capacity, weak institutions and political contestation have reduced public confidence, making institutional credibility essential. Public sector enterprises were also recognised for their past role, but rationalisation was seen as needed to reduce inefficiency and fiscal burden, while still being sensitive to social and employment concerns.
The discussion also raised wider questions about the future of welfare policy, especially the balance between employment generation, income transfers, and care-based support. It noted that while income transfers help ensure coverage, effectively using Kerala’s human capital remains a key challenge.
Professor, Government College for Women, TVM
Administrative reform remains an important but often overlooked part of fiscal sustainability, even though rationalisation is moving slowly. Efficiency gains are possible without extra spending, as shown by the redeployment of surplus government college teachers to newly established institutions. Similar reform potential also exists in departments like Public Works and Civil Supplies.
Bureaucratic inefficiency—especially delays in file movement between departments— continues to increase transaction costs. Weak internal delegation also reduces the benefits of decentralisation. Strengthening judicial reform was also highlighted as necessary for faster service delivery and more effective administration.
Former HOD of Economics, University of Kerala
ala’s rapidly ageing population has major fiscal implications. The elderly share crossed 20 per cent in 2024 and is expected to reach nearly 28 per cent by 2051, along with a rising incidence of disability. Care responsibilities within households have increased, placing a heavier burden on women and reducing their participation in the workforce.
Income-based social security is therefore no longer enough. Rising healthcare costs and mental health challenges require the expansion of direct care services alongside cash transfers. This shift has important budget implications, needing sustained public investment in health, long-term care, and community-based support systems.
It also creates opportunities for employment in the care sector, especially for women, if care work is properly valued and formalised. Treating care as a public good, and linking income support with service delivery, is essential for inclusive and fiscally sustainable development.
Professor (Retd.), Government College, Kasaragod
Kerala’s main challenge is sustaining long-term growth, not just managing short-term slowdowns. Current stability can hide future risks caused by consistently low capital investment. Increasing capital expenditure is therefore necessary, but it must be balanced carefully so it does not weaken essential social spending on health and education.
Strengthening local governments, especially by improving their ability to raise revenue, offers a practical way to reduce pressure on state finances. Stronger local bodies can also take on a bigger role in financing and maintaining capital assets, supporting more balanced and sustainable long-term growth.
Assistant Professor, GIFT
Kerala’s fiscal stress is structural, driven by ageing, rising pension liabilities, healthcare costs, and the high cost of maintaining strong social standards. These “second-generation fiscal problems” make Kerala more similar to welfare states in developed economies than to typical state governments. Such pressures cannot be solved through expenditure cuts alone, since that would weaken hard-earned social achievements.
Instead, Kerala needs differentiated fiscal treatment, including flexible borrowing limits, interest support, and credible long-term debt management frameworks. Since the problem is mainly a stock issue rather than a short-term flow issue, solutions must focus on long-term structural changes, not temporary fiscal tightening. This also requires closer Centre– state coordination so fiscal rules better reflect demographic and social realities. A sustainable fiscal path therefore depends on viewing social spending as productive investment, not as a fiscal burden.
Kerala Budget: Expectations & Reality
Kerala’s Budget 2026 was presented in a context of growing fiscal challenges. In the weeks before the budget, the Centre for Budget Studies, CUSAT, organised a pre-budget discussion series titled “Before the Budget: Shaping Kerala’s Fiscal Future”, bringing together several experts. The discussions were focused on key challenges facing the state, including Kerala’s fiscal stress, demographic ageing, the impact of GST, and major changes in the labour market. A clear understanding emerged from the discussion that Kerala’s financial difficulties are not temporary but arise from long-term factors. Therefore, the expectation was not for a flashy budget, but for one that clearly explains how the government plans to address these long-term challenges while continuing Kerala’s welfare model.
Alongside expert deliberations, the pre-budget period also saw a CBS survey that offered an important picture of citizen expectations. The survey shows that respondents strongly support government action when it improves long- term welfare through better public systems, stronger labour protections, and fairer market regulation. The strongest public backing is seen for improving the quality of education, strengthening MSMEs, improving fisheries and supply-sector workers’ conditions, expanding insurance coverage for lifestyle diseases, and ensuring the quality of agricultural imports. There is also a clear demand for regulation of rising extra charges in online delivery platforms and multiplexes, along with strong support for legal protection for gig workers in taxi and delivery services. At the same time, the survey highlights that public trust in intervention depends on perceived effectiveness. This is reflected in the comparatively more divided views on government intervention in controlling essential commodity prices. Views on Harita Karma Sena’s household waste collection services are mixed, suggesting uneven service delivery across regions. Overall, the findings indicate that citizens prefer policies that build employability, strengthen essential public services, and protect consumers and workers—while also expecting better implementation and accountability in government-led interventions.
These public priorities also echoed the themes that emerged in the expert discussions, particularly around employment and labour market change. A central focus of the pre-budget discussion was the transformation of Kerala’s labour market. Experts pointed out that insecure informal employment is no longer limited to low-skilled sectors, with gig and platform-based jobs spreading even among educated workers. Alongside this, the discussion highlighted the growing importance of the care economy. The ageing population and rising care needs were seen as a major barrier to women’s participation in the workforce. Against this backdrop, there was an expectation that the budget would signal a shift away from isolated employment schemes towards an integrated labour market strategy encompassing skill development, employment security, and institutional support for women’s work.
The budget responds to these concerns in a recognisable manner. Employment generation, skill development, and support for self-employment continue to feature prominently. Allocation for skill development institutions and welfare schemes is largely maintained, while women-oriented programmes and social security measures were expanded. The budget acknowledges the rising demand for care and social protection and continues allocations for health, pensions, and social security. In this sense, the budget broadly aligns with the survey’s emphasis on strengthening employability, protecting workers, and expanding essential services. However, the survey also suggests that citizens increasingly judge intervention by visible outcomes, meaning that the effectiveness of implementation will be crucial in sustaining public trust.
A second major theme in the discussion was concerned with expenditure composition and fiscal flexibility. Experts strongly challenged the narrative that Kerala’s fiscal difficulties stem primarily from excessive welfare spending. Revenue expenditure on health, education, and social protection was widely defended as developmentally necessary, particularly in the context of an ageing population. Simultaneously, there was an expectation that the budget would emphasise improvements in the quality of expenditure through better targeting, administrative reforms, and gradual restructuring of pensions and public sector enterprises. The budget broadly aligns with this perspective. Welfare expenditure is protected, pensions and social security allocations remain substantial, and capital expenditure shows a modest increase relative to previous years.
Revenue constraints, particularly those arising from the GST regime and declining central transfers, constituted one of the strongest areas of consensus in the pre-budget discussions. Kerala’s consumption-oriented economy was widely understood to place the state at a structural disadvantage under GST, compounded by delays in IGST settlements. Demographic changes further reduce the state’s share in Finance Commission transfers, thereby narrowing fiscal space. While the budget clearly articulates these concerns and situates Kerala’s fiscal stress within the broader context of fiscal federalism, it offers limited new mechanisms to address them.
Tourism and non-tax revenue are areas where the budget most closely reflects pre-budget expectations. Experts had called for a shift towards high- value tourism and better use of public assets to raise revenue. The budget gives importance to tourism development and recognises the importance of non-tax revenue. Decentralisation was also discussed extensively before the budget, and the budget continues to provide substantial funds to local self- governments.
Overall, the budget shows a clear understanding of Kerala’s long-term challenges. The budget focuses more on stabilising the present than reshaping the future. At the same time, both the expert discussions and the pre-budget survey point to a consistent message: citizens remain supportive of government-led welfare and regulation, but they expect quality, fairness, and accountability in return. Kerala’s fiscal future will therefore depend not only on protecting welfare spending but also on improving the effectiveness of public systems and ensuring that interventions translate into visible, consistent outcomes across regions.
MSc in Econometrics and Finanacial Technology, Centre for Budget Studies
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