Impact of U.S. tariffs, GST slab rejig: Kerala seeks supplementary grants, ‘extra borrowing limit’ of 0.5%

In a supplementary memorandum submitted to the 16th Finance Commission last week, Kerala has sought supplementary grants and eligibility for a “temporary extra borrowing limit” of 0.5% of the Gross State Domestic product (GSDP) to help it absorb the losses arising from the Goods and Services Tax (GST) slab rejig and the US reciprocal tariffs.

Seeking supplementary grants under Article 275 of the Constitution, Kerala has asked the commission to “reassess” State finances and resource needs for the next five years when finalising its recommendations on vertical devolution and revenue deficit grants.

The GST rate revision will further widen the gap between own and devolved revenues and the expenditure obligations of States, including Kerala. This needs to be compensated through a provision of grants, according to the memorandum.

Earlier, Finance Minister Balagopal had put the estimated annual revenue loss to Kerala due to the GST rate rationalisation between ₹8,000 crore and ₹10,000 crore.

“The present rate reduction will worsen the vertical fiscal imbalance (VFI) in the next quinquennial period starting from 2026-27. Since the compensation from cess levied on items falling under the 28% rate has stopped, an appropriate Constitutional way to prevent worsening of VFI in the next quinquennium is to recommend further grants under Article 275, taking into consideration the immediate revenue loss to the State,” according to the memorandum which Mr. Balagopal handed over to the commission last week.

The Kerala Legislative Assembly was provided with a copy of the memorandum on Wednesday along with replies to questions on the impact of the GST slab restructuring.

Kerala has sought the extra borrowing limit of 0.5% of the GSDP in the medium term to help it absorb the consequences of the US tariffs. This, according to the State, will be used for developing export-related infrastructure such ports and cold chains and exploring new markets for exports from the State.

The memorandum notes that the revenue loss on account of the US reciprocal tariff alone is estimated to be ₹2,400 crore during 2025-26.

Kerala had submitted its initial memorandum when the commission headed by Arvind Panagariya visited the State in December 2024. However, the implications of the “Trump tariffs” and the GST revamp that followed on the State economy had prompted it to submit an additional memorandum conveying its concerns.

Given the 50% tariffs on imports from India, exports from Kerala to the US are expected to fall “significantly,” affecting production and employment in the State, it said. The marine sector is likely to be among the worst-affected. Other industries that would be hit include spices, cashew, textiles, coir, plantation and rubber.

In its initial memorandum, the State government had asked the Finance Commission to raise the share of States in the divisible tax pool from the present 41% to 50% and overhaul the formula used for resource sharing among States.