Kerala's Finance Department has issued a strict expenditure-control circular to all state government departments ahead of Budget Estimates preparation for the next financial year, signalling that the state's fiscal position remains deeply stressed despite the recent change in government. The directive underscores that Kerala's outstanding liabilities exceed ₹5 lakh crore, a figure laid bare in a White Paper released by the Satheesan government shortly after it assumed office in May 2025.

What the Finance Department Has Directed

The circular instructs departments to ensure that revised estimates do not exceed original budget estimates, and bars them from proposing projects that yield no tangible economic benefit. Repair and maintenance works that can be deferred must be postponed, while department heads are required to critically evaluate all schemes before including them in the Budget.

Departments have further been asked to prepare realistic salary estimates and provide justification for any expenditure that surpasses the previous year's level. Non-plan expenditure, excluding salaries, must be held at or below last year's figures. Surplus staff are not to be retrenched but may be redeployed against emerging vacancies — a measure that avoids politically sensitive job cuts while managing the wage bill.

Revenue Rises, But Pressure Persists

Kerala's revenue receipts during the first quarter of the current financial year climbed to ₹33,311.21 crore, an improvement over the corresponding period last year. However, expenditure and borrowings have risen in tandem, keeping the state Treasury under sustained pressure. The circular also seeks details of pending tax and non-tax arrears, the reasons behind such dues, and the recovery steps taken — pointing to a wider effort to plug revenue leakage alongside cutting costs.

Local Bodies Bear the Brunt

Thiruvananthapuram Corporation Mayor V.V. Rajesh said he met Chief Minister V.D. Satheesan on Monday to explain the civic body's deteriorating financial position. Rajesh said the Corporation faces a shortfall of nearly ₹250 crore for the current fiscal, with several months still remaining.

'As soon as the new financial year began, the then Chief Minister Pinarayi Vijayan reduced the plan allocation. The present government has also reduced the plan size, leaving the Corporation with a shortfall of nearly ₹250 crore for the current fiscal while several months still remain. I explained the entire situation to the Chief Minister. He heard me patiently but did not indicate either way,' Rajesh said.

Rajesh made history in December by becoming Kerala's first Bharatiya Janata Party (BJP) Mayor after his party ended the Communist Party of India (Marxist) (CPI(M))-led Left's more than four-decade hold over the Thiruvananthapuram Corporation.

The Broader Fiscal Context

One of the Satheesan government's earliest decisions after taking office was to release a White Paper on Kerala's finances, which revealed outstanding liabilities of more than ₹5 lakh crore. This is not Kerala's first brush with fiscal stress — the state has repeatedly bumped against borrowing ceilings set by the Centre, and successive administrations have struggled to contain the revenue deficit. Notably, the current squeeze affects both the ruling dispensation and local bodies controlled by the opposition, suggesting the problem is structural rather than political.

What Happens Next

Departments are expected to submit Budget Estimates in line with the new austerity framework. The review of temporary employees and the push to recover pending arrears could yield some fiscal relief, but analysts caution that without structural reforms to Kerala's revenue base, expenditure compression alone is unlikely to resolve the underlying imbalance. The state's fiscal trajectory will be closely watched as the Budget season progresses.