Kerala, which is frequently criticised for poor financial management, has received a fillip with the rating agency Fitch revising the State’s long-term financial outlook to ‘stable’ from ‘negative’. 

Affirming the ratings at BB, the rating agency said: “The state’s economic expansion should adequately offset the increased debt burden, resulting in steady debt ratios”.

“We expect sustained economic growth to support the State’s steady fiscal performance to the fiscal year ending March 2027 (FY27), although the State’s broad expenditure responsibilities and large infrastructure investment will lead to ongoing fiscal deficits and a steady rise in borrowings,” the rating agency said.

Kerala Finance Minister K.N. Balagopal told businesslinee the revision is a reflection of efficient and judicious financial management, despite the Centre denying the State its legitimate resource allocation. The Minister also ridiculed critics who constantly paint a negative picture of the State’s finances.

Describing the rating agency’s findings as a positive development, Balagopal said it reinforced the State’s economy, especially in attracting new investments. Over the last few years, the government has tried to improve the economy, which was severely affected during the floods and Covid. There is a revival in economic activity and revenue collections, as tax revenue has gone up to around Rs 72,000 crore from Rs 47,000 crore.

The limiting of central allocation has led to a 30 per cent reduction in revenue receipts this year, which has created more pressure in fiscal management, he said.

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V.K. Vijayakuma, Chief Investment Strategist, Geojit Financial, said Fitch’s revised rating is based on the state’s continued growth momentum and national economies. India’s sharp economic turnaround after Covid has improved the prospects of all states. The rating agency’s assessment is based on various parameters, which, in turn, are partly based on the State budget for FY24. Many fiscal targets for FY24, like revenue deficit, are unlikely to be met, he said.

The rating upgradation will help Kerala borrow more at less cost even from overseas, said Akshay Agarwal, Managing Director, Acumen Capital Markets. Investors view the rating as an indicator of the State’s creditworthiness and it impacts borrowing cost a lot.

The revised outlook reflects an improving trend in Fitch’s projected debt metrics, with continued growth momentum in the State. Fitch also hinted at Kerala’s robust revenue profile, based on a stable underlying economy, sturdy revenue sources and a supportive system of federal transfers, Agarwal said.