This article empirically examines the debt sustainability of the state of Kerala using three established approaches: the indicator-based approach, an econometric approach and a forward-looking sensitivity analysis. The indicator approach, applied over the period 1983–1984 to 2022–2023 in alignment with Finance Commission (FC) periods, indicates violations of Domar’s (1944) debt sustainability condition. The econometric analysis suggests that Kerala’s debt trajectory is unsustainable. Unit root tests reveal a lack of mean reversion in key fiscal variables, while the autoregressive distributed lag (ARDL)-based fiscal response function shows no long-run stabilising relationship between the primary balance and debt, suggesting that the intertemporal budget constraint does not hold. Sensitivity analysis yields mixed results: while sustainability is observed under historical averages, the debt trajectory becomes unstable under scenarios involving interest rate and growth rate shocks.
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