What Kerala Can Afford to Imagine

The 2026 Kerala Fiscal Status Report devotes most of its pages to proving the state has almost no room to spend. Capital expenditure has fallen to 1.3 per cent of the economy, against roughly three per cent in comparable states. Only about a twentieth of recent borrowing reached anything you could call an asset.¹ Then, near the end, the report turns to growth, and reaches for data centres, energy-intensive advanced manufacturing, rare-earth processing, and the eight thousand megawatts of new power such things would need.² A state that cannot fund a road is invited to imagine a power-hungry industrial future. The document diagnoses thirst and prescribes salt.

I have written, in the companion to this essay, about why Kerala keeps seeing its problems and never binds itself to act on them.³ What I want to do here is the harder thing: be honest about the ceiling. There are real constraints, and optimism that skips them is not a plan. The interesting question is not how to escape the ceiling. It is where, underneath it, imagination still has room to work. The answer turns out to be the near-opposite of what the report, and the national mood, reach for first.

The ceiling, named plainly

Start with the constraints the optimistic version skips.

There is no capital. That is the whole of the companion essay, and it is not a temporary condition; it is structural, and until the state binds itself it will persist. Whatever Kerala builds in the next fifteen years, it will build with very little of its own money to deploy.

The population is the oldest among India’s major states, and its working-age share began to shrink before the rest of the country’s did.⁴ Pensions already absorb more than a fifth of revenue receipts, up from under nineteen per cent a decade ago, and the curve points one way.⁵ A state spending a growing share of a tightening revenue base on its retired cannot borrow its way into a capital-heavy future.

The young leave. More than two million Keralites live and work abroad, and the report puts the paradox without flinching: the state invests in its people and then watches them go.⁶ The money they send back sustains households but not an economy, because it enters Kerala and leaves again through the purchase of goods made elsewhere; the multiplier fires in another state.⁷ And the inflow itself is exposed, tied to the Gulf, to oil, and to the slow automation of the semi-skilled work many migrants do.

What does not leave through consumption mostly parks. Non-resident deposits in Kerala’s banks have crossed two and a half lakh crore rupees and are heading toward three lakh crore, yet the credit-deposit ratio has run ten to sixteen percentage points below the national average for decades, persistent enough to have its own dedicated academic literature.¹¹ The gap is sharpest where the Gulf connection is strongest: in Pathanamthitta, the district with the most overseas migrants, the ratio stands at twenty-seven per cent.¹² The capital is not absent. It is idle. The state is not poor; it is unproductive with what it holds.

None of this is fatal. But it sets the envelope. A capital-poor, ageing, talent-exporting state on a constrained borrowing leash cannot become the thing the brochures want it to be. It can become something else, and the something else is more interesting.

Why the fashionable answer is the wrong one

The reflex, in Thiruvananthapuram as in Delhi, is to chase the capital-hungriest sectors of the moment. Data centres. Chip fabrication. Energy-intensive advanced manufacturing. The 2026 report itself, having proved the state cannot afford to invest, recommends exactly this class of bet, and the enormous power build it would require.²

It is the wrong instinct for a simple reason. These are the sectors where capital is the moat. A data centre is land, power, cooling, and silicon; a fab is the most expensive factory humans build. Their advantage accrues to whoever can deploy the most money fastest, which is precisely what Kerala cannot do and a Gujarat or a Singapore can. To compete for them is to compete on the one axis where the state is weakest, and to do it with borrowed money it has already been told it does not have. The report knows this in another register: it is sceptical of the investment summits whose 2025 edition signed expressions of interest worth one and a half lakh crore rupees and converted almost none of it, a pattern it notes is consistent with every previous edition.⁸ Chasing capital-heavy industry through summit theatre is the same mistake wearing a lanyard.

There is a second reason these bets are wrong. Fabs and data centres, when they do arrive, are capital-intensive in employment as well as investment. They do not absorb the educated young women leaving the state at five times the national unemployment rate. The job creation that Kerala needs is not just scarce, it has to be broad.

Imagination, for a state like Kerala, has to run the other way: toward the sectors where capital is not the moat and people are.

The room: where imagination is cheap and people are dear

Here is what is genuinely open, and why each opening is shaped by the constraint rather than in spite of it.

The work that needs brains, not borrowing. The report’s own appendix says the plainest true thing in it: Kerala’s revenue future depends on the services it underperforms on, because in services the value added and the tax both stay inside the state.⁹ This is the spine. Research-heavy software, design, specialised services, intellectual property, the high end of education itself: these are industries where the input is human capital and the capital expenditure is a building and some laptops. They are the one category where a brain-rich, money-poor state is structurally advantaged rather than structurally behind. The fiscal frame makes it not an aspiration but the only category that fits the budget. You do not need a borrowing ceiling raised to write code or hold a patent.

The care economy, made from the ageing. The oldest population among the major states is the loudest constraint in the ceiling. It is also a sector waiting to be built. Ageing societies everywhere are short of trained care: geriatric medicine, home and residential care, rehabilitation, the long quiet work of looking after people at the end of life. Kerala has the health system, the human capital, and now the domestic demand to build that capacity first and then to train and place care workers into a world that will need tens of millions of them. The burden becomes the build. And it is labour-rich and capital-light, which is to say it fits the envelope exactly.

Building and binding from below. Kerala has something most Indian states do not: real local government, and in Kudumbashree one of the largest women’s networks in the world. The report wants the local bodies to drive industry, on the Chinese model, judged by the investment they generate.¹⁰ Read that against the companion essay and it points somewhere sharper than industry promotion. Where the state has failed to bind itself, the panchayat can bind locally. It can deploy patient local credit. It can build distributed enterprise that does not wait on a borrowing ceiling.

The grandchildren who never lived here. The more interesting question, and the harder one, is the second and third generations: the Malayalis born and raised in Toronto and London and the Gulf, who carry the name and the food and perhaps the language, and have no automatic reason to set foot in Kerala at all. They are not the economic engine; the engine has to be the founder who never left. But they are an enrichment layer worth designing for, because a person raised abroad with global options who chooses to build something in Kerala brings a network and a standard the state cannot manufacture for itself. The money is in fixed deposits. The patience is there. Patient capital has found ways to make this kind of attachment pay returns elsewhere. What has not been designed is a destination: a return-generating stake in something Kerala-built, that a second-generation Malayali in Toronto could point to as something she helped create.

The discipline underneath

Notice what unites the four. Not one of them needs the capital Kerala does not have. Software, care, local enterprise, a returning grandchild: each runs on human capacity, which is the asset the state has spent seventy years building and then exporting. The ceiling does not forbid the future. It selects it. It rules out the capital-heavy fashions and rules in the human-heavy ones, and the human-heavy ones are where Kerala was always going to have an edge.

But selecting the future is not the same as funding it, and here the two essays meet. Even the cheap version needs choices made and held: money moved from the consumption the state cannot stop subsidising toward the few things that compound, summits declined, the capital-heavy temptations refused even when a neighbouring state is signing one. That is binding. That is the real cost of the ceiling: not money, but the discipline to keep choosing the cheap, high-return future after the photographs are taken.

The road has been visible. What is new is that the map now fits the budget.

Sources

Figures are verified against the Kerala Fiscal Status Report, 2026; section references are to that document. This essay is the constructive companion to The Diagnosis Was Never Missing, which carries the full sourcing on the fiscal diagnosis.

1. Capital expenditure at 1.3 per cent of GSDP in 2025-26 against a major-states average near 3 per cent (Ch. 1, §1.2.2; Ch. 2, §2.5.2); a C&AG finding that “only 5.18 per cent of borrowings during the period were directed towards capital creation” (Ch. 1, §1.2.2).

2. The report’s growth recommendations include private investment in “artificial intelligence, cloud technology, IT applications, and the development of our rare-earth resources,” names “artificial intelligence, data centres, cloud computing, advanced manufacturing and digital services” as “highly energy-intensive,” and proposes large power additions (6000 MW solar, 8000 MW pumped hydro, and small modular / closed-loop reactors) to support them (Ch. 7, §7.1; Ch. 5, §5.5). Semiconductor fabrication is the wider national fashion, not a recommendation of this report.

3. The Diagnosis Was Never Missing, on Kerala’s binding deficit and KIIFB.

4. Kerala’s “demographic profile is the oldest among the major states, with a working-age share that began to decline before the rest of the country” (Appendix A, §A.1).

5. Pension liabilities rose from 18.9 per cent of revenue receipts in 2015-16 to 21.5 per cent in 2025-26, driven by a large pre-NPS workforce, longevity, and DA revisions (Ch. 2, §2.5.1).

6. Over 2.2 million Keralites live and work abroad; the report frames the paradox that “the more educated a woman becomes, the less likely she is to find work at home,” and that Kerala “invests in its people and then watches them leave” (Ch. 1, §1.2.1). See also Literate, Yet Jobless.

7. Remittances are about 23.2 per cent of NSDP, but remittance-funded consumption means “income earned abroad enters Kerala and exits through purchases of goods produced elsewhere,” with the multiplier generated outside the state; the inflow is exposed to oil-price cycles, geopolitical shifts, and automation of semi-skilled work (Appendix A, §A.2; Ch. 1, §1.2.6).

8. Despite expressions of interest worth ₹1.53 lakh crore at the Invest Kerala Global Summit 2025, “actual investment on the ground remains a small fraction of announced intent - a pattern consistent with previous editions” (Ch. 1, §1.2.6). See also Factories Will Not Save Kerala.

9. “Kerala’s revenue future depends on two things it currently underperforms on - expanding the services sector, where value addition and tax incidence both accrue within the State” (Appendix A, §A.2); on higher education, “Higher education can be the next hub of Kerala’s growth story” (Ch. 7, §7.1). See also Beyond Literacy, a Research Republic and Builders, Not Investors.

10. “The local bodies will have to play a big role in promoting industry, as was done in China… evaluated based on the investments they generate,” and the report points to the roughly ₹1.3 lakh crore credit base of Primary Agricultural Credit Societies as a resource for employment (Ch. 7, §7.1).

11. Non-resident deposits in Kerala’s scheduled commercial banks reached ₹2.86 lakh crore as of December 2024 (SLBC Kerala data). Kerala’s credit-deposit ratio stood at 61.84 per cent against a national average of 77.86 per cent in March 2016 (Kerala State Planning Board, Economic Review 2016, Ch. 1); later estimates place the gap at around nine percentage points below the all-India figure as of 2021. The structural persistence is examined in D. Narayana, ‘Why is the Credit-Deposit Ratio Low in Kerala?’, Centre for Development Studies Working Paper 342 (Thiruvananthapuram, 2012).

12. Pathanamthitta credit-deposit ratio of 27.04 per cent (Kerala Economic Review 2016, ibid.), against Idukki at 134 and Wayanad at 133.73, two plantation districts with active enterprise credit demand. The inverse correlation between remittance concentration and productive credit deployment is the sharpest single illustration of the structural gap.