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Kerala had a cushion that was hiding its fiscal crisis. UDF’s white paper uncovers it

One figure from the UDF's white paper warrants significant attention. No, it’s not the headline debt figure.

Last month, I wrote that the incoming Congress government in Kerala would encounter “the most structurally challenging legacy” among the three states that had recently undergone a change in administration. This challenge pertains to a productive structure whose welfare obligations have long surpassed its capacity for revenue generation. While I had the relevant data to draw this conclusion, I lacked specific numerical details. Now, I have access to several pertinent figures, with one in particular warranting significant attention. No, it’s not the headline debt figure.

And with Chief Minister VD Satheesan set to present his first Budget on 19 June, all eyes are on the UDF government.

According to its report, “Kerala’s Fiscal Health: A Status Report,” the state’s outstanding liabilities amount to Rs 5.07 lakh crore. Although this figure has dominated media coverage, it should not be the primary concern for economists. The critical figure is as follows: In 2025, Kerala engaged in borrowing from the Reserve Bank of India under the Ways and Means Advances for 262 days and was in outright overdraft for 84 days—a total of 346 days. Given that there are 365 days in a year, the state was, by any reasonable definition, cash-insolvent for the majority of the year. This situation resulted in the state incurring interest rates ranging from 7.25 per cent to 10.25 per cent per annum, in addition to the interest already embedded in its market borrowings.

When the borrower can’t stop borrowing

To understand the implications of this, one must consider a fundamental concept in public finance: The Domar condition. Named after the economist Evsey Domar, this condition posits that a government’s debt remains sustainable only if the economic growth rate surpasses the effective interest rate on its borrowings. When this condition is met, the economy expands sufficiently to generate revenues that adequately service the debt. Conversely, if borrowing costs exceed growth, the debt accumulates more........

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