Salaries, pensions, and promises: How Kerala’s fiscal mess is looming over the ballot box

“I want change,” he said. Not that he is unhappy with the current Left Democratic Front (LDF) government led by octogenarian Communist Party of India (Marxist) leader Pinarayi Vijayan. “This government has done a decent job but 10 years is a long time for any party to be in power,” he added.

Syam Sankar from Mallapuram and an Uber driver in Thiruvananthapuram echoed Hamza’s views. “A new government will do better and we need to give younger people a chance,” he said.

This need for a change, the anti-incumbency—not necessarily due to poor governance—is proving to be the biggest challenge for LDF as it seeks to deliver a hat-trick, something no party has managed ever in the state’s history.

Between the late 1980s and now, political power in Kerala alternated between LDF and the United Democratic Front (UDF), headed by the Congress Party. In 2021, LDF broke that trend and improved on its 2016 performance to retain power in the 140-member Kerala Assembly.

There is some discontent as well. “Only people outside Kerala think we have a communist party running the government. In reality, CPM is like any other party,” said Muralidharan M., a teacher in Kottayam. “Chief minister Vijayan has been behaving like a king.”

Lack of jobs, especially for educated youth, is hurting LDF. Opinion polls give UDF an edge.

A third player in the polls is the Bharatiya Janata Party (BJP)—it is promising a change from both LDF and UDF. The party is on a high after winning the recent local body elections in Thiruvananthapuram. It is expected to improve its vote share in the coming elections. However, in the previous state polls, BJP drew a blank. In fact, the only time it has ever won an assembly seat was back in 2016—the Nemom constituency in Thiruvananthapuram.

As the LDF and the UDF battle each other, what is certain is that the next government will have to deal with a serious financial crisis. The state’s finances are already precarious. It struggles to pay salaries and pending payments run into hundreds of crores. With the state pay commission set to announce a hike in salaries, the wage bill is all set to rise. Also, consumption is likely to take a beating as the West Asia crisis upsets the flow of remittances which account for 18% of Kerala’s economy.

“The next government will have the unenviable task of managing this mess,” said K.P. Kannan, a development economist and former director at the Centre for Development Studies, Thiruvananthapuram.

“In the last 10 years, the government has done well when it comes to education, healthcare, social security, building roads and bridges. There have been no communal clashes or cases of corruption and hence there is no anti-incumbency,” said V. Sivankutty, minister for general education and labour in the LDF government. “People are happy and the LDF will come back to power,” he added during his campaign trail in Thiruvananthapuram. He is contesting from Nemom constituency.

To counter the narrative of needing change, LDF has been highlighting the need for continuity. “It took us more than five years to eliminate extreme poverty in the state. That was possible because of continuity, pointed out P. Rajeeve, minister for law, industries and coir. The state, he added, is now primed for investment. It tops the ease of doing business ranking and investments have started to flow. “We have attracted investments worth ₹3.3 trillion and more will come if LDF returns to power,” he said. As many as 15 lakh jobs have been created so far and more will be created if the policies continue, he added.

Apart from need for change, LDF is also battling perception issues. UDF has been accusing LDF of having a tacit understanding with the BJP. If this accusation sticks, LDF could lose minority votes that enabled it to retain power comfortably in 2021.

“LDF has done a lot to protect the interest of minorities, we are confident that we will get their support,” said Rajeeve.

Across most constituencies in south Kerala, LDF has activated its disciplined cadre to reach out to the people and ensure a historic third term.

In 2024, UDF bagged 16 of the 20 Lok Sabha seats and more recently, in the local body polls last year, UDF bagged the maximum seats across the state. “We hope to get more than 100 seats and win comfortably,” he told Mint while reviewing a few promotional videos from his campaign team. “I have travelled across the state twice and I can tell you there is huge anti-incumbency.”

The government employees have not been paid their dues and arrears alone exceed ₹1 trillion, he claimed. Various services including healthcare, have declined for lack of funding. Farmers have not been paid the minimum statutory price and there has been no procurement of rice, rubber or coconut. “People are suffering and they have no intention of voting LDF back to power,” Satheesan added.

Kerala’s precarious finances notwithstanding, UDF has announced five guarantees. This includes free bus travel for women, an increase in welfare pension, healthcare cover of up to ₹25 lakh per family and cash support for college-going girls.

“These guarantees won’t worsen the financial position of the state,” he responded when asked about the financial implication of the sops. He is also confident that the consolidation of minority votes, especially in north Kerala, will work in UDF’s favour.

But what can derail its chances is infighting among the leaders. He denies there is one. “There is no infighting. The seats were allotted among partners and within the Congress Party in 48 hours and without any dissent,” Satheesan said.

Congress leader Rahul Gandhi, during his recent campaign, emphasised the need for UDF partners and Congressmen to work together to ensure the front’s victory.

Speaking to Mint between his campaign stops, Chandrasekhar said that for the first time in the history of Kerala, people see an alternative in BJP.

“Till now, it was a Hobson’s choice between LDF and UDF,” he said. “Now BJP is offering an alternate model of governance based on what Prime Minister Narendra Modi has delivered in the last 12 years. People are listening.”

Post-elections, he expects a major change in political landscape of Kerala, he said. BJP would become a force to reckon with.

His confidence stems from the rising vote share of the saffron party in the state. In the 2021 state assembly election, the party garnered 11.3% of the votes polled. It shot up to 19.26% during the 2024 Lok Sabha elections. In last year’s local body elections, the vote share totalled 14.76%. In select areas like Thiruvananthapuram, the vote share exceeded 23%, and the party bagged the mayorship for the first time.

Considering that almost half the electorate in the state are Muslims and Christians, he is reaching out to them too. “I am telling them to vote on basis of performance not perceptions fed by mis-information. By painting BJP as communal, LDF and UDF kept BJP out of the equation and enjoyed a cozy little duopoly in the state. Not anymore,” Chandrasekhar said. “Kerala needs a new direction and we are ready to provide it and create a Vikashita Keralam (developed Kerala).”

Chandrasekhar terms it a ‘Ponzi scheme’. The state, he said, is surviving by moving funds from one scheme to another and is afloat because of borrowings. “By blaming the Centre for the financial mess, LDF is basically deflecting its incompetence,” he said. UDF’s Satheesan warned the fiscal position has never been so vulnerable. “Kerala is on a ventilator,” he added.

As mentioned earlier, Kerala’s finances are indeed dire and experts warn of a deep-rooted financial crisis. The state’s ability to raise taxes has declined progressively. Its tax to gross state domestic product (GSDP) ratio has fallen to 7.8% in the 2021-26 period from 11% levels in the 1990s. “Despite being one of the fastest-growing states in the country, Kerala has not been able to collect taxes that are due,” pointed out Kannan.

Inability to raise revenue meant increased borrowings. The state’s outstanding debt is 34.2% of its GSDP. As much as 71% of its revenue receipts go to fund its committed expenses such as salaries, pension and interest payments. Not surprising that its capital expenditure, at 1.4% of GSDP, is among the lowest in the country.

“Kerala has been in a debt trap for the last 10 years,” Kannan said. With the wage and pension bill set to rise sharply due to the pay commission recommendation, the financial crisis is only set to worsen.

Both BJP and UDF have come up with a plan to shore up the state’s finances. BJP’s manifesto calls for an economic rebuilding. It has promised an investment and job revolution. Kerala’s highly educated youth typically goes elsewhere, within India or outside, for jobs. “We want to end this practice by accelerating economic growth and creating jobs,” Chandrasekhar said. Infrastructure is another area of focus. BJP has promised a high-speed rail network connecting Thiruvananthapuram in the south and Kannur in north Kerala. Unlike all other states, Kerala’s highways are still two-lane roads. It took this writer over seven hours to travel between Thiruvananthapuram and Kochi through Kottayam—a distance of mere 210 kilometres. Delhi to Agra, similar in distance by road, doesn’t take more than three hours.

Congress leader Satheesan says the state’s financial management needs to be improved and for that he wants the tax administration to be revamped. Kerala, he said, was a consumption economy and with the introduction of GST, a consumption-based tax, its revenue should have risen sharply. “That has not happened because unlike other states Kerala has not re-structured its tax administration after GST was introduced,” he explained.

He also blames large-scale leakages for poor revenue mobilisation. “Kerala’s tax collection from gold has remained flat despite gold prices rising sharply. This shows something is fundamentally wrong and needs to be fixed,” he added.

These steps may not be enough. The next government will have to find ways to increase taxes, cut subsidies and charge for some public services. These measures won’t be popular—expect the new government’s honeymoon period with the voters to be a short one.