The White Paper was presented by the UDF government ahead of the revised state Budget, signalling the direction of its forthcoming fiscal policy measures.
The report attributes Kerala's fiscal distress largely to the policies pursued during the LDF's decade-long tenure in office.
According to the opposition, the white paper provides the ideological justification for privatisation and market-driven reforms at the expense of Kerala's welfare-oriented development model.
In the run-up to the Assembly elections, the state of Kerala's finances emerged as one of the principal battlegrounds between the then-ruling LDF and the opposition UDF. While the UDF accused the government of fiscal mismanagement and pushing the state into financial distress, the LDF maintained that its prudent handling of public finances enabled Kerala to sustain welfare programmes and pursue development despite what it described as the Union government's restrictive fiscal policies.
Soon after assuming office, Chief Minister V.D. Satheesan announced the formation of an expert committee to prepare a white paper on the state's economy and finances. The report, presented in the Assembly painted a stark picture of Kerala's fiscal health and triggered sharp reactions from political parties, , policymakers and other stakeholders, reopening the debate over the state's economic trajectory and the reforms needed to address its mounting financial challenges.
Beyond the immediate political sparring, the white paper has brought to the forefront a larger debate on the sustainability of Kerala's welfare model. The report raises questions about the state's growing pension and salary commitments, rising debt burden, and dependence on borrowings to finance expenditure. At the same time, it has prompted a discussion on whether the proposed reforms— including restructuring loss-making public sector undertakings, rationalising government spending, and revisiting retirement policies — can be implemented without undermining Kerala's extensive welfare architecture that has long been central to its social development achievements.
According to the status report, the new government has inherited a substantial backlog of unpaid financial obligations accumulated over the years. These include Rs 21,670 crore in Dearness Allowance (DA) arrears for government employees and Rs 14,387 crore in Dearness Relief (DR) arrears for pensioners. In addition, payments amounting to Rs 3,431 crore are pending to banks and contractors under bill discounting arrangements. Taken together with other deferred liabilities, the report estimates the state's outstanding payment obligations at no less than Rs 48,733 crore, underscoring the scale of the fiscal challenge confronting the new administration.
The state which has one of highest fiscal deficits in the country, also has the lowest spending on Capital Expenditure. This reveals that the state's expenditure pattern has become increasingly skewed towards committed and revenue spending.
Capital expenditure stood at just 1.3 per cent of the Gross State Domestic Product (GSDP), less than half the national average, raising concerns about the state's ability to create productive assets and sustain long-term economic growth.
Another area of concern highlighted by the committee is the performance of Kerala's vast network of public sector enterprises.
According to the report, Kerala has the largest number of state-owned enterprises in the country. However, a majority of these entities are loss-making, with their accumulated losses rising sharply from Rs 31,571 crore in 2021-22 to Rs 78,851 crore in 2024-25. The report notes that just five enterprises account for 86 per cent of the total investment in the sector, underscoring the concentration of public resources in a handful of undertakings.
Growing fiscal burden
To address the growing fiscal burden, the committee has recommended restructuring or, where necessary, privatisation of chronically loss-making enterprises. At the same time, it has argued that social welfare objectives should not be used to justify operational inefficiencies. "The fiscal impact of the operations of the PSEs is large and cannot be ignored," the report said, while emphasising that essential public utilities must remain affordable and accessible to poorer sections of society. It suggested a shift from production-based subsidies to consumption-based subsidies, enabling the state to protect vulnerable consumers while imposing greater financial discipline on public enterprises.
The report has also turned the spotlight on the Kerala Infrastructure Investment Fund Board (KIIFB), the flagship financing mechanism established to bridge the state's infrastructure funding gap and channel investments into large-scale public projects. Reconstituted in 2016, KIIFB was designed to function as the government's principal off-budget borrowing vehicle, enabling accelerated infrastructure development without placing immediate pressure on the state's fiscal accounts.
However, the committee has questioned the sustainability of the model. According to the report, KIIFB carries an outstanding loan liability of around Rs 21,000 crore, the burden of which will ultimately fall on the state government. It also noted that projects worth nearly Rs 35,000 crore remain to be funded. Citing observations made by the Comptroller and Auditor General (CAG), the report argues that KIIFB lacks an adequate independent revenue base and that its borrowings are, in effect, contingent liabilities of the state. "KIIFB cannot function as an independent fundraiser without directly and adversely affecting the state's own borrowing capacity," the report noted, reviving a long-running debate over the use of off-budget financing for development projects.
The white paper has consequently triggered a wider discussion about Kerala's development trajectory and the sustainability of its economic model. While the state continues to rank high on several human development indicators, the report raises questions about whether welfare commitments, infrastructure spending and fiscal prudence can be balanced within the existing framework.
Chief Minister V.D. Satheesan, who also holds the finance portfolio, described the document as a candid assessment of the state's finances and a reflection of what he termed the inefficient financial management of the previous LDF government. The opposition, however, has dismissed the report as a politically motivated attempt to discredit its record, ensuring that the debate over Kerala's economic future is likely to remain at the centre of the state's political discourse.
Disagreement over diagnosis
Not everyone, however, agrees with the report's diagnosis of Kerala's fiscal challenges. "There is absolutely no political economy content in the report," says Dr. K. Raviraman, economist and former member of the Kerala Planning Board. He argues that several of the committee's conclusions stem from a narrow reading of the state's finances. For instance, he disputes the finding that Kerala's capital expenditure as a share of GSDP is unusually low. "The capital expenditure undertaken through KIIFB has not been taken into account. KIIFB's major spending has been on infrastructure. Similarly, the capital expenditure incurred by local self-government institutions has also been excluded while calculating capital expenditure as a percentage of GSDP," he says.
Raviraman also challenges the report's concern that 77 per cent of the state's receipts are absorbed by committed expenditure such as salaries, pensions and interest payments. According to him, these expenditures have been central to sustaining the so-called Kerala Model of development by supporting public investments in education, health and social welfare. "Over the last ten years, the Left government was able to attract private capital without abandoning welfare commitments," he says, describing the approach as "Hybrid Developmentalism" that combines social spending with private investment-led growth.
The opposition has similarly criticised the white paper, describing it as a blueprint for a neoliberal restructuring of the state's economy. It argues that the recommendations place excessive emphasis on fiscal consolidation, privatisation and expenditure rationalisation while overlooking the social and developmental gains achieved through public spending.
"The Kerala economy needs a complete overhaul," says Jose Sebastian, former faculty member at the Gulati Institute of Finance and Taxation. He argues that the state's expenditure structure has become unsustainable and that pension liabilities, in particular, require urgent reform. According to Sebastian, a significant portion of government spending on salaries and pensions is concentrated in the southern districts of the state, creating regional imbalances in the distribution of public resources. "The pension system has to be restructured completely, and subsidies should be targeted only at the most vulnerable sections of society," he says.
Several of the committee's recommendations—including raising the retirement age of government employees, extending the interval between pay revisions from five years to ten years, and restructuring or privatising loss-making public sector enterprises—have already generated intense public debate. Yet for the government, which came to power on the promise of implementing its five "Indira Guarantees", the challenge is not merely one of fiscal reform but of resource mobilisation. How it balances welfare commitments with the need to restore fiscal sustainability is likely to define the next phase of Kerala's economic and political trajectory.
