Last week, Kerala formally submitted a supplementary request to the 16th Finance Commission. The state is asking for additional grants and a temporary increase in its borrowing capacity by 0.5% of its Gross State Domestic Product (GSDP). This crucial aid is sought to help Kerala manage the financial setbacks caused by recent adjustments to Goods and Services Tax (GST) slabs and the impact of reciprocal tariffs imposed by the U.S.
Under Article 275 of the Constitution, Kerala is specifically requesting supplementary grants. The state has urged the commission to comprehensively reassess its financial situation and resource requirements for the upcoming five-year period when finalizing recommendations on how tax revenues are shared between the central and state governments, and on grants to cover revenue deficits.
The recent GST rate revisions are expected to widen the disparity between Kerala’s own generated revenues and the funds it receives from the central pool, further straining its ability to meet expenditure obligations. The state’s memorandum highlights the necessity of grants to compensate for this anticipated revenue shortfall.
Previously, Finance Minister Balagopal had estimated that Kerala would face an annual revenue loss of between ₹8,000 crore and ₹10,000 crore due to the GST rate rationalization.
The memorandum emphasizes that “the current rate reduction will exacerbate the vertical fiscal imbalance (VFI) in the next five-year period, starting from 2026-27.” It points out that with the cessation of compensation from the cess previously levied on items under the 28% GST rate, recommending further grants under Article 275 is the appropriate constitutional approach to prevent this imbalance from worsening. These grants would directly address the immediate revenue loss faced by the state.
A copy of this memorandum was presented to the Kerala Legislative Assembly on Wednesday, alongside responses to inquiries regarding the financial implications of the GST slab restructuring.
Kerala has also requested an additional borrowing limit of 0.5% of the GSDP over the medium term. This flexibility is intended to help the state cope with the economic consequences of US tariffs. The funds would be strategically utilized for developing critical export-related infrastructure, such as modern ports and cold chain facilities, and for actively exploring new international markets for products from Kerala.
According to the memorandum, the projected revenue loss solely from the US reciprocal tariffs is estimated to be ₹2,400 crore for the fiscal year 2025-26.
The state initially submitted its memorandum when the commission, led by Arvind Panagariya, visited Kerala in December 2024. However, the subsequent “Trump tariffs” and the GST revamp introduced new economic pressures, prompting Kerala to submit this additional memorandum to voice its intensified concerns.
With a 50% tariff imposed on imports from India, Kerala anticipates a significant decline in its exports to the US, which will inevitably affect local production and employment. The marine sector is particularly vulnerable, along with other key industries like spices, cashew, textiles, coir, plantations, and rubber.
In its initial submission, the Kerala government had also appealed to the Finance Commission to increase the states’ share in the divisible tax pool from the current 41% to 50%. Additionally, it called for a complete overhaul of the existing formula used for distributing resources among states.