Budget 2026 disappoints Kerala; 16th Finance Commission raises State’s tax share

The ‘Sunday Budget’ presented by Union Finance Minister Nirmala Sitharaman was largely disappointing for Kerala, with the State’s inclusion in the Dedicated Rare Earth Corridor scheme emerging as the only major gain.

Key demands in Kerala’s wish-list—a request for a ₹21,000 crore ‘Special fiscal Correction Package’ to overcome “the current year’s borrowing constraints” and an All India Institute of Medical Sciences (AIIMS)—remained unfulfilled.

The State’s hopes for a high-speed rail corridor failed to figure among the seven such corridors announced in the budget. A clutch of proposals made by the State Government seeking Central support for port-led projects centred on the Vizhinjam international port, which included rail connectivity, also remained untouched.

Apart from the Rare Earth Corridor scheme, which Kerala had proposed in its wish-list and the State budget, the only other mention of Kerala in the budget speech pertained to the State’s inclusion in a proposed Turtle Trails project along nesting sites in three coastal States.

On the other hand, the 16th Finance Commission report, tabled along with the Budget documents, raised Kerala’s share in the divisible tax pool to 2.382% from 1.92% under the 15th Commission. Kerala Finance Minister K.N. Balagopal said that the State’s “collective hard work” had paid off in this respect. At the same time, the State’s demand to raise the share of States in the divisible tax pool from 41% to 50% was not accepted, with the 16th FC retaining it at 41%.

Mr. Balagopal described the Budget as disappointing for both Kerala and the broader Indian economy, noting that several demands—including a Defence R&D Corridor, State-specific rescue packages for traditional small-scale industries, and a ₹1000-crore allocation for mitigating human-wildlife conflict—were ignored.

Kerala may, however, benefit from a clutch of announcements such as the Mahatma Gandhi Gram Swaraj initiative for khadi, handloom and handicrafts, and the Coastal Cargo Promotion Scheme meant to incentivise and increase the share of inland waterways and coastal shipping from 6 % to 12% by 2047. The impact of the proposed ‘Seaplane VGF Scheme’ on the State’s tourism sector remains unclear.  

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In the farm sector, Kerala could gain from the Coconut Promotion Scheme, a dedicated programme for cashew and plans for focused cultivation of sandalwood. Potential benefits from proposals to strengthen fisheries value chains in coastal areas and tap marine resources beyond the territorial waters are yet to be assessed.