Kerala White Paper Urges Private Investment, Retirement Age Hike to Address Fiscal Stress

A white paper on the fiscal health of Kerala said the state must create conditions for massive private investment due to acute shortage of resources, help the co-operative sector invest more in development and job creation, and make room for heavy investment by the central public sector. It also urged the government to make an early call on the future of the Kerala Infrastructure Investment Fund Board, which was floated by the previous LDF regime as off-budget borrowing and fund mobilisation for infra development. The white paper was presented in the assembly by Chief Minister V D Satheesan, who holds the finance portfolio, on Thursday. One of the first decisions of the newly assumed UDF cabinet last month was to appoint an expert committee to bring out the white paper on the financial health of the state. The Kerala white paper comes less than a month after neighbour Tamil Nadu said it would be releasing a similar paper on its own finances. The two southern states, while better developed than most other states in the country, are also the oldest. The Reserve Bank of India noted earlier this year in January that by 2026, Kerala and Tamil Nadu are expected to enter a so-called ‘ageing category’ when more than 15 percent of a state’s population is above the age of 60. “Ageing states are facing high old-age dependency ratios and rising social sector expenditure obligations,” the RBI had said, adding that addressing the “mounting fiscal pressures stemming from population ageing and safeguarding public finance sustainability requires a comprehensive policy strategy”. The Kerala white paper too addresses this aspect, saying that it was the time for hard political decisions and that the age of retirement for state employees should be raised to the same level as the central government. The age of retirement in Kerala for government employees is 56 years as opposed to the Centre’s 60 years. “The state will save retirement benefits of about Rs 6,000 crore with each increase in the age of retirement by one year. Another related suggestion is to have pay commissions only once in ten years as in the central government.” The report has flagged serious concerns about the state’s fiscal stress. It said the committed expenditure of Kerala absorbs about 77 percent of revenue receipts, far above the national average of 46 percent. This leaves less than one-fourth of revenue for all other spending, including development, welfare, and infrastructure. Interest payments alone were 20.9% of revenue receipts in 2025-26, nearly double the national average of 12.2 percent. Salaries and pensions are also higher than peer states, with salaries at 30.1 percent of revenue receipts in 2025-26. The report said Kerala faces a large burden of outstanding liabilities of Rs 5.07 lakh crore, with capital expenditure at only 1.3 percent of Gross State Domestic Product – one of the lowest among Indian states. This is despite a high fiscal deficit, which indicates borrowings are not being used to fund growth-generating investments. It said parallel financial structures like KIIFB and public sector undertakings deplete resources and create additional liabilities. The end of Goods and Services Tax compensation and revenue deficit grants from the Centre, coupled with stricter fiscal deficit targets, have worsened the situation. On expenditure, the new government inherits accumulated payment arrears: Rs 21,670 crore for dearness allowance and Rs 14,387 crore under dearness relief. If other deferred payments are taken into account, the total inherited liability of the state is around Rs 48,733 crore, according to the data furnished by the state’s Finance Department. This is almost as large as Kerala’s net annual borrowing, the report said. The KIIFB, it has been suggested, should be brought under the budgetary control of the Finance Department and be subject to a performance audit by the Comptroller and Auditor General immediately. “It would be prudent for the government to take an early call on the future of KIIFB, keeping in mind also the legal status of the bonds issued and possible impact on the status of funds raised on the strength of direct budget flows.”