Kerala warns of deep fiscal strain from proposed GST cuts, fearing welfare and salaries may suffer, even as global agencies project India’s economy will stay resilient….reports Asian Lite News
Kerala Finance Minister K N Balagopal has voiced strong concerns over the Centre’s reported Goods and Services Tax (GST) reform proposals, warning that they could strike at the very heart of state finances and undermine welfare schemes that millions depend on. Speaking to reporters on Tuesday, Balagopal urged the union government to protect state revenues while pursuing reforms aimed at cutting rates and stimulating consumption.
The minister stressed that Kerala was not against tax cuts per se, but said their benefits must tangibly reach ordinary citizens. “When you reduce taxes, it is important that the revenue of states be protected, otherwise welfare schemes will be affected,” he said. Kerala estimates that it could face an additional revenue shortfall of between ₹8,000 and ₹9,000 crore if the reforms go through, on top of existing cuts.
Already grappling with a revenue deficit exceeding ₹24,000 crore, the state government fears that further losses could derail critical welfare programmes such as the LIFE housing project and the state’s free insurance scheme, which benefits over 42 lakh families. Balagopal added that the financial squeeze could also affect salary payments to government employees, school operations, and public hospitals.
“What will happen if another ₹10,000 crore is lost? The state simply cannot withstand such a hit,” he said, pointing out that 95 per cent of Kerala’s revenue income is earmarked for salaries and pensions.
The minister warned that the proposed GST reforms could negatively impact not just Kerala but all Indian states, including those ruled by the BJP. “The greatest concern is that the proposed reforms may impact public finances in the worst manner post-independence,” he remarked, adding that while the Centre has multiple revenue streams to cushion any losses, states do not enjoy such fiscal flexibility.
Balagopal noted that India’s GST revenue in 2024–25 stood at ₹22.08 lakh crore but said the reforms could shave off as much as ₹4 lakh crore from that figure, inevitably reducing allocations to states. He confirmed that Kerala will raise its objections at the upcoming GST Council meeting next month, though he expressed scepticism that the forum would deliver immediate solutions.
The warning from Kerala comes at a time when national and international observers are watching the proposed GST reforms closely. A new analysis by Fitch Solutions’ BMI suggested that the reforms, particularly the rationalisation of GST slabs into a simpler two-rate system, could actually help offset the drag from US tariffs imposed on Indian exports.
BMI noted that India’s growth prospects remain robust despite external challenges. “We forecast India’s economic growth to steadily slow to just above 6.0 per cent by the decade’s end, slightly below the 2010–2019 pre-pandemic average of 6.5 per cent, yet still positioning India among Asia’s fastest-growing economies,” it said in its note.
The report highlighted that productivity growth of around 5 per cent over the coming decade would provide substantial momentum to India’s GDP, keeping it ahead of many peers in Asia. However, it acknowledged the downside risks from the US tariff war, estimating that a 25 percentage point hike in reciprocal tariffs could trim GDP growth by 0.2 per cent in FY2025–26 and FY2026–27.
In this context, BMI argued that the proposed GST reforms could serve as a growth cushion. “Depending on the specifics, the GST reform could cancel out the drag on growth from the tariffs,” the report stated. The firm emphasised that the details of the reforms were yet to be confirmed but highlighted them as a “slight upside risk” to its current forecasts.
Domestic research has echoed this optimism. A recent SBI Research report estimated that GST reforms, coupled with recent income tax cuts, could inject as much as ₹5.31 lakh crore into consumption, equivalent to around 1.6 per cent of GDP. Such a boost would be particularly beneficial to sectors like automobiles, consumer staples, cement, and financial services, which are expected to see improved profitability and demand under a simplified GST structure.
Meanwhile, Fitch Ratings has affirmed India’s sovereign rating at ‘BBB’ with a stable outlook, saying US tariffs would have a limited impact on the country’s growth trajectory.
For states like Kerala, however, the picture looks more complicated. While the Centre may see national-level consumption gains, the loss of state-level revenues without adequate compensation could leave local governments struggling to fund essential services. Balagopal underscored this distinction in his remarks, insisting that reforms must balance national growth aspirations with the fiscal survival of states.
“If common people can enjoy the benefits of a tax cut, it is a good thing. But steps should be taken to protect the revenue of state governments to ensure that it does not impact their exchequer,” he said.
The finance minister also responded to recent allegations by Opposition Leader V D Satheesan regarding corruption among some GST officials in Kerala. Balagopal promised a comprehensive probe, saying details would be collected and strict action taken if the charges were proven true.
As the debate intensifies ahead of the GST Council meeting, the Centre finds itself in a delicate balancing act: simplifying taxes to spur growth while ensuring that states like Kerala are not left to bear the brunt of reform.
