Kerala’s Economic Development
The course of economic development of the state is closely related to its location, climate and topography. In a way, Kerala's unique pattern of development and its population profile are products of its history as much as of its geography. The location of the region on the Arabian Sea coast permitted trading and cultural relations with outside world.
Musiris situated on the coast and the numerous minor ports attracted traders from around 4 the world.
‘The overwhelming availability of Arab accounts of the Kerala region known as Malabar do indicate the importance of Arabs in the overseas trade originating from this region. In 10th and 11th centuries, trade from India to West was controlled by Arabs of Morocco, Tripoli and Tunis; who operated from Aidhab on the Red Sea. It is said that half the ships from Aidhab went to Gujarat while the other half went to Malabar. There were several Arab Muslim settlements on the West Coast of India, which might have served to strengthen this trade. Similarly, there are evidences of Chinese trade relations with Kerala. As a result of such trade, use of money and different types of coins increased in this region, leading to minting of coins here itself’. The growth in trade had increased the production of spices and other cash crops which in turn have generated more trade (Ibid). But there was not much growth in manufacturing during this period. ‘Kerala could sustain itself as a trading region without a manufacturing base. This might have led to the fact that the Malabar Coast, though acknowledged for long as an important trading region, never developed a manufacturing hinterland like other trading regions of India’ (Ibid). The large proportion of Christians (19.02 percent) and Muslims (24.70 percent) in the state's population may be partly due to this historic trading and cultural contacts rather than through Muslim conquests, as in rest of the country. The symbiosis of different
religious groups and cultural streams has led to communal harmony and social stability in the state.
The historic and cultural contacts with the Arabs helped Malayalees to easily avail of employment opportunities following the oil boom in the Arab world from the 1970s.
The region was the first centre for European colonization in India following the landing of Vasco da Gama in Calicut in 1498 AD. Portuguese conquest of the region was followed by those of the Dutch and the British. However, except Malabar, the other parts of the present day Kerala viz. Travancore and Cochin
Almost all the present differences between Kerala and the rest of the country in social development can be traced at least to the last two centuries. It may be noted that the princely states of Travancore and Cochin had established very clear leads in all indicators of social development over other princely states and British India, much before independence. When social development was gathering momentum in the erstwhile Travancore and Cochin states during the 19th century and the first half of the 20th century, there was large scale economic expansion to support it. Both in Travancore and Cochin, area under cultivation especially that of cash crops like coconut, tea, coffee, spices and rubber, was constantly expanding. Many of these important crops were introduced by the Europeans in Kerala from their other colonies in Africa and Latin America.
The Europeans initiated cultivation of some of these crops under the plantation system in vast tracts of forest and hilly areas. The local population followed suit. As most of the expansion of area under crops, both cash and food crops had taken place in virgin forest land and also in land reclaimed from backwaters, the
period also saw increase in agricultural productivity. Along with agricultural production, agro-processing industries like coir and cashew also expanded . In Malabar, Basel Mission, a Swiss missionary cum trading
organization introduced modern factories using the latest available technologies in spinning and weaving and also in manufacturing of roofing tiles . Large chunk of capital invested in modern industries, together with the spurt of investment in plantation companies, enabled Travancore to overtake other major Princely States in total corporate paid-up capital.
The growth of the banking business in Travancore and Cochin was well ahead, not only of Malabar, a part of Madras Province of British India, but also of other provinces and regions. The economic expansion of Travancore state had helped its revenue raising capacity. Unlike today, revenues of the state then included income tax, excise duties and customs duties (Singh 1944). It was the continuous growth in revenue together with the state’s expenditure priorities in favour of social services and the lower cost of providing education mostly at the school level and health care mostly at the primary level that brought about the phenomenal social development in pre-independence period. Kerala’s position was higher than the national average in 1950-51 and 1955-56.
The economy started slowing down during the period 1955-56 to 1965-66, almost coinciding with the first decade of the formation of Kerala. There was slackening of growth in all sectors of the economy during this period.There has been a turnaround in the economy from 1987-88. The turnaround coincided
almost with the economic reforms in the country characterized by liberalization, privatization and globalization. Growth rate of the state income at constant prices during the period 1987-88 to 2000-01 rose to 6.0 per cent. Growth rate during the period 2000-01 to 2006-07 was higher at 8.1 per cent and was more than that for the country
The production of cereals comprising mostly of rice, the staple diet of Malayalees has been coming down due to the failure to offset the decline in area by increasing productivity. The share of Kerala in the production of coconut is now 43 percent. The share of Kerala in the production of this crop has been coming down.
During the nineteenth and the twentieth century, industries like coir and coir mattings,cashew nuts and paper products developed in Travancore. In Malabar, the manufacturing of roofing tiles and handloom products developed. There was a large growth of chemical industry during the twentieth century even before independence, taking advantage of the proximity to Cochin port, the availability of waterways to transport bulk raw materials through barges, the availability of cheap hydel power and fresh water (Thomas 2004).
The industrial units also used rivers for discharge of effluents. But the share of manufacturing sector today is less important in Kerala than in India. In the share of manufacturing in SDP, Kerala lags far behind Gujarat, Haryana, Maharashtra and the neighbouring states of Tamil Nadu and Karnataka. In fact, Kerala’s rank in the share of manufacturing is the thirteenth among the fifteen major states. A feature of Kerala’s industrial structure is the large share of unregistered units. The share of this sub sector in the state income originating from industries11 was 52.4 per cent as against 32.0 per cent for the country in 2006-07. One of the main reasons for the state’s low level of industrialization is the absence of major industrial minerals like metallic ores, coal and crude oil. Agro based industrial raw materials like cotton, jute, sugar cane and oil seeds are also not produced in the state in any large quantity. The only commercially exploitable mineral resources are ilmenite, rutile, zircon and sillimanite found along the beach shores. As for rubber, the major agricultural raw material of Kerala, most of the rubber based industrial units were located outside the state as the principal markets of tyre and other rubber goods lay outside the state. There was also very little value addition in the exports of Kerala.
Till the 1990s, prime importance was given to public sector in the industrialization of the country. Most of the public sector industrial units were started by the central government. But Kerala had received only a small share in central government’s investment in industrial units. This is yet another reason cited for the relatively limited development of 12 industries in Kerala. The share of central government investment in fixed capital of public sector industrial units in the state is only 2.4 percent of the total investments as against 17.8 percent in Maharashtra, 7.6 percent in Tamil Nadu and 6.9 percent in Andhra Pradesh. This share has been coming down steadily (GoK 2009). In fact, after independence, the major industries which came up in the central government sector were a pesticide unit, a news print unit and a ship building unit. There are other possible reasons for the industrial backwardness of Kerala during the era of economic planning in India. The emphasis on basic and heavy industries like iron and steel machinery, chemicals and petroleum refining in the early decades of the planning era in India led to the state without raw materials for these industries lagging behind other states in industrial investment both in the public and private sector. The import substitution based economic development strategy followed by the country till the 1990s retarded the industrial development of Kerala situated far away from the major input and the output markets in the country. With the adoption of this strategy, the geographic location of the state which was an advantage for an export oriented state historically turned out to be its disadvantage. The central government’s export import policy
supporting largely manufactured export through larger subsidies and import entitlements and duty drawback schemes did not benefit Kerala which was exporting mostly agricultural products or agro based industrial products with little or no import content. Even the exchange rate policy of keeping an over valued fixed exchange rate till the 1990s affected the rupee value realization of its exports as well as its non-resident
Malayalees (NRMs) remittances (Thottathil 1988; George and Remya, 2010). Construction, a sub sector of the secondary sector has been booming in recent periods. The share of this sector in the state income of Kerala was 12.4 percent as against 8.1 percent for India in 2004-05. This sector accounted for 11.8 percent of its employment in the state as against 6.1 per cent for the country.
The tertiary sector is the most important sector accounting for 62.5 percent of the state income and 40.4 percent of the employment in 2004-05. There are several reasons adduced for the growth of the tertiary as also the construction sectors. One major factor is the large scale remittances received from Non
Resident Malayalees (NRMs). These have boosted consumption in the state. The state which ranks only fourth in per capita NSDP ranked first in per capita consumer expenditure in 2004-05. The NRM remittances helped the growth of trade, hotels and restaurants, transport, finance and real estate sectors. This has also led to the growth of education and health sectors. The growth in employment in education and health services is linked to the large-scale expansion of private sector in school and higher education as also in health sector. The expansion of these sectors is a result, partly of the increased demand from NRMs for these services even at higher cost. Tourism is another growth sector of Kerala which contributed to the expansion of service sectors particularly hotel, transport and finance sub sectors. Kerala is emerging as one of the important destinations for tourists coming to India.12 Share of Kerala in the number of foreign tourists arriving in India has been growing steadily to reach 11.2 percent in 2008.
The foreign exchange earnings from tourists coming to Kerala are estimated to be six percent of the total earnings received by the country. The flow of domestic tourists has also been increasing. The total revenue, both direct and indirect, generated from tourism is estimated at Rs. 13130 crores in 2008 (GoK 2009).
Weaknesses of Kerala Economy
Unemployment
The chronic unemployment problem has been the bane of the state eclipsing all its other achievements.A major weakness (and potential strength) of Kerala economy is its extreme dependence on outside the state and outside the country, both for employment and for remittances.
Deteriorating Fiscal Position
Deteriorating fiscal position is another major weakness of the state economy . The average Gross Fiscal Deficit of the state during 2005-08 was 3.3 per cent of Kerala’s SDP as against 1.9 per cent for all states. The problem of deficit in Kerala is more in the revenue account. Under the Constitution of India, the power to tax many of the fast growing services like finance and communication is vested with the federal government and not with the state governments. The weak revenue position of the state has led to its borrowing on a large scale to meet even government’s current consumption. The fiscal crisis has placed a limit to the development in the social sectors. Cracks are already visible in the large edifice of government’s social service infrastructure like education, health care, social security and food security.
Second Generation Problems
It was seen earlier that many of Kerala’s achievements are comparable to those of developed countries. But these successes have also brought in its wake some of the problems of the developed countries. Unlike these countries, the state does not have the financial ability or the economic strength to tackle them all by itself. The federal agencies had added to the financial debility of the state by denying it adequate funds as
they are still preoccupied with the first generation problems in education, health care and social security in other parts of the country and to meet the country’s international commitment to meet the Millennium Development Goals (MDGs). Kerala’s unique ‘second-generation problems’ resulting from its very success in attaining higher levels of social development, therefore, receive scant attention from the federal agencies.
Ageing
The large graying population of the state has several implications in relation to health needs, service pension requirements of the government and social security system. The share of elderly in the age group 60 and above in the population of both Kerala and India showed an increasing trend during 1981-2001. The share of the elderly in the total population was always higher in Kerala than in the country. This share is increasing very fast in Kerala unlike in the country, where it is increasing only marginally.
The changing demographic profile is also likely to increase the demand for expenditure on health services. The increasing proportion of the aged in the state’s population is changing the disease profile. A new category of diseases comprising degenerative and neo-plastic diseases like hyper-tension, diabetics, cardiovascular diseases, neurological disorders and cancer have emerged in the state. These diseases of the old age call for higher investment in diagnostic equipment, hospitalization, treatment, recovery and rehabilitation. At a time when the expenditure requirements on health are rising, the state is finding it increasingly difficult to meet these requirements partly due to fiscal crisis. As a result, the quality of services in the government health services has been coming down. Consequently, there has been an increase in the demand for private medical care services offered mostly on commercial terms.
Changing Profile of Employment Seekers
Yet another second generation problem is the change in character of the unemployment in the state. Higher levels of education have changed the character of unemployment in the State to that of educated unemployed, as seen earlier. Eighty four per cent of the unemployed registered on the government’s employment exchanges are matriculates and above. This makes most of the federal government schemes for employment creation, targeted mainly at the unskilled manual workers, inappropriate for the unemployed of the state.
Degradation of the Environment
The state is now confronted with major problems on the environmental front. Today, ‘Kerala faces a major environmental crisis from severe deforestation in Western Ghat Mountains, leading to soil erosion there and water logging in low land areas. Polluted rivers and foreign hi-tech offshore fishing operations are reducing the fish catch’ .
According to the Comprehensive Environmental Pollution Index (CEPI) for 88 industrial areas in the country, the index for the Greater Cochin Area is 75. It ranks 24 in terms of this index. It is declared as a ‘critically polluted area’ .
Potential for Growth
Kerala has the potential for a much faster economic growth as a number of factors are now turning favourable to its growth. The shifting from the fixed exchange rate system to the floating exchange rate system, though the floating is still being managed by the Reserve Bank of India, has turned out to be its advantage since 1991. The geographical position of Kerala far from the input and output markets which was a disadvantage when Indian economy was a closed economy following an import substitution development
strategy. But the location of the state is turning to be an advantage for it, with the opening of the Indian economy. Kerala’s geographical location close to the international shipping route has become a great advantage, especially now since two container terminals, one in Cochin (to be commissioned already) and the other in Vizhinjam near Thiruvananthapuram (the work is being initiated) are going to be located in the state’s coast. Cochin today is the only place in India where South Africa Far East (SAFE) submarine optic fibre cables land. South East Asia - Middle East - Western Europe Cable network (SEA) is also landing at Cochin. Cochin is emerging as a gateway which now handles 70 per cent of India’s data traffic. Cochin has a 15 GBPS VSNL International Gateway Exchange (www.infoparkkochi.com). The Kerala circle of BSNL has the second largest basic service network out of the 24 telecom circles in India (http://www.bsnl.co.in)
Kerala already has the physical, financial and communication infrastructure. In fact, it ranks first in the index of infrastructure among the states in India (GoI 2004). Kerala has the highest tele-density of 15.4 per 100 population (www.itmission.kerala.gov.in). It also 20has relatively well developed social infrastructure for education and health care. All that is now required is investments to upgrade the quality and to modernize the services.
Another positive factor for Kerala today is that it enjoys comparatively more social stability and absence of communal and caste conflicts due to the cultural synthesis which dates back to its early history and the social reform movements in the last two centuries. The bad reputation of the state as a place of disturbed labour relations is now changing as strikes and lock outs which were quite frequent in Kerala in the 1960s and the 1970s have now come down considerably. There is much scope for value addition to its export of both agricultural and traditional industrial products of Kerala. The rich bio-diversity of state and the traditional knowledge regarding the many uses of Kerala’s flora and fauna offers potential for development of biotechnology provided the research capacity in this area is enhanced considerably.
As noted earlier, Kerala economy had developed strong linkages with international markets historically. The large scale emigration of people had strengthened these linkages. With the opening up of Indian economy, it is expected that this state with its historic trading and cultural links with the outside world will be able to profit from the new opportunities. The non resident Malayalees had got opportunities for getting exposed to global markets, culture, modern technology and management skills. But this exposure is not yet leading to any significant transfer of such technology and management skills to the Kerala economy. Migration has also led to large scale inflow of funds to the state. But, instead of being invested in the state, they are being increasingly diverted to other states through financial intermediaries. Much of the migrants’ remittances seem to be spent on conspicuous consumption in the absence of other investment outlets. The state has the great potential to convert the NRMs into its most important asset as was done by countries like China and Ireland.
If Kerala has to convert its above discussed advantages into opportunities, it has got to meet some pre-conditions. Firstly, it has to improve the quality of governance and speed up the government’s decision making process. Secondly, a qualitative change is required in the attitude of the political parties, public, civil society groups and the media. Dreze and Sen, great admirers of Kerala development themselves have pointed out the major short-comings of the state ‘The political economy of incentives is of crucial importance in translating the potential for economic expansion, implicit in human development, into the reality of actual achievement in the economic sphere’ (Dreze and Sen 1996). Again, ‘The political climate has also tended to encourage economic policies that are extremely hostile to the market mechanism, even in areas where this hostility and the excessive reliance on government regulation that goes with it- is quite counter productive’ (Dreze and Sen 1995). Further, they argue that ‘Kerala has suffered from what were until recently fairly anti-market policies, with deep suspicion of market-based economic expansion without control. So its human resources have not been as well used in spreading economic growth as they could have been with a more complementary economic strategy, which is now being attempted in the country’ (Sen 1999). The above
shortcomings pointed out by Sen and Dreze may explain why Kerala’s social development failed to trigger off economic growth as had happened in most other countries
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