The Union government has sharply reduced Kerala’s borrowing limit for the January–March quarter, triggering a political and financial dispute between the State and the Centre over fiscal discipline and development spending.
Kerala Finance Minister KN Balagopal said the Union finance ministry had cut the State’s borrowing permission by ₹5,944 crore, reducing it from the earlier approved ₹12,515 crore to ₹5,672 crore for the last three months of the financial year. This effectively limits Kerala’s monthly borrowing capacity to around ₹2,200 crore, which the State says is far below its operational needs.
Balagopal described the move as a major blow, especially at a time when the final quarter typically sees high government spending. He said Kerala requires nearly ₹20,000 crore to clear pending public works bills and around ₹15,000 crore to meet salary and pension commitments. He warned that welfare schemes, including recently enhanced social security pensions, could also be affected.
Centre’s Position: FRBM Rules Apply To All States
From the Centre’s perspective, the borrowing cut is linked to compliance with the Fiscal Responsibility and Budget Management (FRBM) Act, which caps a state’s net borrowing at 3% of its Gross State Domestic Product (GSDP). Open market borrowings are part of this overall ceiling.
Kerala’s GSDP is about ₹14.27 lakh crore, which allows a maximum annual borrowing of roughly ₹42,800 crore under FRBM norms. According to fiscal data, Kerala has already used or been approved borrowings close to this limit, leaving little room for additional market loans in the final quarter.
Kerala’s fiscal deficit is estimated at around 3.2% of GSDP, already above the FRBM benchmark, while its net borrowing level is close to 2.86% of GSDP, limiting further headroom under central rules.
The Centre has also included off-budget borrowings, such as loans raised by the Kerala Infrastructure Investment Fund Board (KIIFB) and Social Security Pension Ltd, while calculating the State’s borrowing capacity. This “netting out” approach, introduced earlier, has been strongly opposed by the Kerala government but is defended by the Centre as necessary to present a realistic picture of state debt.
While chechi and the other comrades across the left ecosystem will wake up now and cry “fascism”(because what is not fascism) here are the facts.
Per the Fiscal Responsibility and Budget Management (FRBM) Act, Net Borrowing Ceiling of which open market borrowings (OMB) is a… https://t.co/K3zBmrUyu3
— Historianunkil (@SudsG5) December 18, 2025
Additional Financial Pressures
Apart from borrowing limits, Kerala has flagged other financial pressures. It estimates a potential loss of ₹8,000–₹10,000 crore in the next financial year due to GST rate rationalisation. Changes in MGNREGS funding, which reduce the Centre’s share from 90% to 60%, could impose an additional burden of ₹1,600–₹2,000 crore annually on the State.
The Centre has also withheld about ₹3,300 crore linked to public sector undertaking guarantees, pending procedural clearances, despite Kerala setting up a “Redemption Fund” to meet central requirements.
Red Alert
While the Kerala government has accused the Centre of “squeezing” state finances and undermining federal principles, critics argue that the State’s repeated fiscal slippages and reliance on borrowing have pushed it close to the FRBM limit, leaving the Centre with little choice under existing law.
As the financial year draws to a close, the dispute has intensified, with Kerala warning of administrative stress if funds remain constrained, and the Centre maintaining that fiscal discipline norms apply uniformly to all states, regardless of political considerations.
Source: The New Indian Express
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