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Kerala CM flags fiscal concerns, calls for fair federalism

February 17, 2026 5 min read Polity & Governance Economics GS2 GS3
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What Happened

  • Kerala Chief Minister Pinarayi Vijayan publicly raised concerns about what he termed unfair intergovernmental fiscal arrangements, highlighting the state's strong public service delivery credentials despite mounting fiscal constraints.
  • The state has been subject to a Net Borrowing Ceiling (NBC) imposed by the Centre, which Kerala has challenged in the Supreme Court, arguing it restricts constitutionally mandated fiscal autonomy.
  • Kerala's core grievances: (1) devolution from the divisible tax pool is inadequate relative to its development expenditures, (2) the NBC restricts even commercially viable borrowings by state public enterprises, (3) unilateral deductions from state accounts and withheld GST compensation have eroded the state's fiscal space.
  • The 16th Finance Commission (2026-31 period) has retained vertical devolution at 41% — unchanged from the 15th FC, leaving states like Kerala that argue for a larger share disappointed.
  • Kerala's debt-to-GSDP ratio, which rose to 38% during COVID, has since declined to approximately 34% by 2024-25, but remains among the higher ratios for large states.

Static Topic Bridges

Finance Commission and Fiscal Federalism in India

The Finance Commission is a constitutional body established under Article 280 of the Constitution, constituted every five years by the President of India. Its primary mandate is to recommend: (1) the vertical devolution — the share of central tax revenues to be distributed to states (currently 41% of the divisible pool as recommended by the 15th FC for 2021-26, retained by the 16th FC for 2026-31); (2) the horizontal distribution formula — how the 41% is divided among states (criteria: income distance, population 2011, area, forest cover, demographic performance); (3) grants-in-aid to states (Article 275 grants). The divisible pool excludes surcharges, cesses, and non-tax revenues — a contentious issue as the Centre has increasingly relied on cesses (like the Health and Education Cess) which do not enter the pool.

  • Article 280: Constitutional basis for Finance Commission
  • 15th Finance Commission (FC-XV): 2021-26 period; 41% vertical devolution
  • 16th Finance Commission: 2026-31 period; 41% retained
  • Horizontal criteria (FC-XV): Income distance (45%), population 2011 (15%), area (15%), forest & ecology (10%), demographic performance (12.5%), tax effort (2.5%)
  • Cess and surcharge exclusion: Major source of Centre-state tension (cess revenue rose sharply)

Connection to this news: Kerala's complaint about inadequate devolution is structurally linked to the Finance Commission formula — Kerala, a high-income state, receives a lower per-capita share under the income-distance criterion (which favours poorer states), yet its high public expenditure on health and education creates fiscal stress that the current formula does not adequately compensate for.

Net Borrowing Ceiling (NBC) and State Fiscal Autonomy

The Net Borrowing Ceiling (NBC) is a limit imposed by the Union government (under Article 293(3) of the Constitution, which requires states to seek Centre's consent for borrowing if they have outstanding loans from the Centre) on a state's total annual borrowing from all sources. For FY2023-24, the NBC was set at 3% of projected GSDP. The controversy arises because the Centre has progressively expanded NBC coverage to include: borrowings by state-owned enterprises (if debt serviced from state budget), off-budget borrowings, and guarantees given to state entities. Kerala has argued in the Supreme Court that (a) Article 293(3) consent is required only for open market borrowings when Centre loans are outstanding, not for all borrowings; (b) the NBC as currently applied goes beyond Constitutional intent.

  • Article 293(3): States need Centre's consent for open market borrowings if they have outstanding Union loans
  • NBC: 3% of GSDP (FY2023-24); includes OMBs, state PSU borrowings, guarantees
  • Kerala's NBC challenge: Filed in Supreme Court; pending adjudication
  • Kerala fiscal deficit: ~3% of GSDP; debt-to-GSDP ~34% (FY2024-25), down from 38% peak
  • Off-budget borrowings: FY2021-22 onwards, if serviced from state budget, counted in NBC
  • Key grievance: Kerala Infrastructure Investment Fund Board (KIIFB) borrowings included in NBC

Connection to this news: Kerala's flagship infrastructure financing vehicle — KIIFB — borrows from international markets (masala bonds, ADB loans) to fund highways, irrigation, and housing. Including KIIFB borrowings in the NBC has effectively capped Kerala's infrastructure investment ambitions, making the NBC dispute as much about development financing as constitutional interpretation.

Cooperative Federalism: Constitutional Framework and Contemporary Tensions

India's federal structure is described as "quasi-federal with a unitary bias" — the Constitution assigns residual powers to the Centre (unlike the US, where residual powers rest with states). Fiscal federalism is governed by: Article 246 (legislative lists — Union, State, Concurrent), Article 268-281 (revenue assignments — GST with the GST Council; Article 279A), and Article 280 (Finance Commission). Inter-governmental fiscal transfers in India have four components: Finance Commission devolution, Centrally Sponsored Schemes (CSSs), Central Sector Schemes, and discretionary grants. States often criticise: the proliferation of CSSs (which carry conditions and matching contribution requirements), the compression of Plan-period unconditional grants, and rising revenue from cesses not shared with states.

  • Articles 268-281: Revenue assignment framework (taxes assigned to states, taxes shared, duties levied by Centre/collected by states)
  • Article 279A: GST Council; Centre-state joint decision-making on GST rates and structure
  • CSSs: ~100+ active schemes; funded with Centre-state cost-sharing; often impose conditionalities
  • Cess vs. shared taxes: Cess (e.g., Health & Education Cess @4% on income/corporate tax) stays with Centre; excludes divisible pool
  • Kerala's GSDP: ~Rs 11 lakh crore (one of highest per-capita income states); receives lower FC share

Connection to this news: Kerala's public advocacy reflects a broader trend of high-income, well-governed states feeling squeezed by a fiscal architecture that redistributes heavily toward lower-income states while imposing conditions on how states use borrowed funds — a structural tension inherent in India's redistributive federalism.

Key Facts & Data

  • Kerala's debt-to-GSDP: ~34% (FY2024-25); down from 38% COVID peak
  • Net Borrowing Ceiling: 3% of GSDP; includes state PSU borrowings from FY2021-22
  • 16th Finance Commission (2026-31): 41% vertical devolution (unchanged from FC-XV)
  • Kerala's Supreme Court challenge: NBC applicability to KIIFB and state enterprise borrowings
  • Article 280: Constitutional basis for Finance Commission
  • Article 293(3): Centre consent required for state OMBs (if Centre loans outstanding)
  • KIIFB: Kerala Infrastructure Investment Fund Board — state's off-budget infra financing vehicle
  • Kerala's public services: High health and education expenditure (higher than national average as % of GSDP)