What Accounts for Kerala’s Spectacular Economic Success and Failures

While Kerala benefits from emigrants working in the Middle East, unemployment among educated women is high says K.P. Kannan

(Photo: courtesy Keralatourism.org)

November 16, 2024

By K. P. Kannan*

Since the mid-1970s, the achievements in human development in Kerala are widely recognized, by policy makers and researchers, as the Kerala Model of Development. The achievements in the South-Western Indian state are notable because they came about even with a very low per capita income.

Initially, Kerala saw high human development with low economic growth. But later, it was evident that high human development can in turn propel high economic growth. Even with such a change, the Kerala Model continues to attract praise as well as criticism.

In 2022, according to a United Nations report, Kerala was ranked 89^th in human development, similar to Brazil, while India was ranked 134^th,.

It is in this context that I examined Kerala’s development performance for the past six decades, starting in 1960. What I found can be summed up as “spectacular successes along with spectacular failures.”

Kerala passed through two distinct phases. The first phase of 26 years, 1960-86, was characterised by high human development – universal literacy, longer life spans - but amidst low economic growth and high levels of poverty and unemployment. Kerala’s overall performance was poorer than that of India.

During the second phase of 32 years, starting in 1987-88, human development continued to remain high, population growth was low, and, while economic growth picked up, unemployment, mostly among the educated youth, remained high.

How did this happen? During the first phase, the state’s agrarian economy was stagnant despite the Kerala government’s efforts to revive it. Much of the government spending aimed at boosting agricultural productivity had no impact. The industrial sector too was stagnant due to frequent labour disputes and various campaigns led by political parties. It was growth in services that saved Kerala’s economy from a total collapse.

During the second phase, the state’s economy turned around due to rising foreign remittances, sent home to their families, by Keralites mostly working in Saudi Arabia and other Middle East countries. Since the mid-1980s, foreign remittances rose from ten percent of the state’s income to a quarter, by 2000; now it stands at a fifth of the state’s income. This is due to about ten percent of Kerala’s 35 million population being employed in the Middle East.   

During the last four years, foreign remittances to Kerala rose 84 percent, from US$14 billion to $26 billion. The increase in Rupee terms was much higher at 105 percent due to the depreciation of the Indian currency. Kerala never had it so good, I must say.

For the past 40 years, the rising remittances created a multiplier effect, driving Kerala’s economy to a higher growth path. This was due to rapid growth in construction and in the services sector, led by real estate (especially residential), banking and finance, trading, tourism and privately owned higher education and health care institutions.  

As a result, Kerala is no longer an overwhelmingly poor state as it was in the 1960s and 19 70s. Its per capita income is the 7^th highest among the 28 Indian States. More important, since 1994, it ranks first among the states in India in terms of consumption expenditure.  

If the foreign remittance income is included, Kerala now qualifies to be included in the upper middle-income category, as per the World Bank classification, with a per capita annual income of around US$4,170, or purchasing power parity of $15,500.

(Photo: courtesy Keralatourism.org)

For the last 35 years, foreign remittance income and its multiplier effect has kept the Kerala economy consistently growing around 6 percent per annum, though with rising income inequality.

The state’s poverty level, measured in multidimensional terms, is just below one percent. The poor are not so poor, unlike in most other Indian states, because the wages for manual labourers in Kerala are 2.5 to 3 times higher than the national average. In fact, Kerala attracts a lot of young male workers from Bihar, West Bengal, and other Indian states. Also, in addition to free education, the poor families in Kerala benefit from government financial support for food, childcare, health care, and elder care.

Well over half the households in the state are in good financial shape. This is evident from the report of the Kerala Migration Survey, 2023: an overwhelming majority of households enjoy consumer durables such as television sets (82 percent), refrigerators (73 percent), smart mobile phones (77 percent) and two-wheeler vehicles (56 percent). Nearly a third of households have at least one car while four in ten households have washing machines. Great news except that one does not quite understand where the taxes collected on these items are going.

Indeed, a spectacular failure of the Kerala Model is the declining efficiency in revenue collection (tax and non-tax) by the state government. There is widespread corruption, nepotism, and various other forms of rent-seeking, whether the state is ruled by a coalition of leftist or centrist political parties.

While the private economy is flourishing, the state government has been in debt for more than 30 years. The government budget runs a perpetual deficit with more than 40 percent of the total revenue collected going towards debt interest payments and to cover pensions of state employees.

In fact, two-thirds of the state government’s annual borrowings are set aside to cover the revenue deficit, which results in Kerala having the lowest capital expenditure, including for infrastructure and other development projects, among all Indian states. The lack of strong action by the Kerala government to collect tax and other revenues is a major problem.

Kerala’s other spectacular failures include: accumulated losses in state government-run enterprises, and waste of scarce capital and other resources due to enormous time and cost overruns while implementing capital projects.

The state’s failures in economic governance stands in stark contrast to the people’s success – partly aided by the state’s emphasis on free education – in achieving high levels of human and social development and in raising incomes through emigrant work, especially in the Middle East.

In this scenario of numerous flourishing households, funded by foreign remittances of family members, and a financially crippled state government, the rising numbers of educated unemployed is another spectacular failure of the Kerala Model. The level of educated unemployment in Kerala is the highest among all Indian states.

Most Keralite youths, given their education, seek white-collar jobs, preferably in the Middle East. However, it is mostly men who benefit from labour demand in the Middle East; 80 percent of Keralite emigrants employed there are men.

In 2020, according to my estimates, there were 1.5 million men and women in Kerala, with at least a college degree, who could not find a job. This includes 350,000 with at least a post-graduate degree. These unemployed represent four out of ten of the working age (15-59 years) population with at least a college degree in the state.

More disturbing, from a gender perspective, roughly four out of five of these unemployed youths are women. This perhaps sums up the Kerala Model’s mixed achievement in a state with otherwise laudable empowerment of women.

There is no doubt that Kerala’s high economic growth trajectory, with high human development, rests heavily on the remittances of its educated emigrant labour in the Middle East countries. If the demand for this labour declines, it could certainly affect Kerala adversely. Alternatively, if the economic diversification away from oil and gas exports continue to expand in the Middle East countries, their demand for Kerala’s educated labour might continue.

Irrespective of what happens to the economies in the Middle East, policy makers in Kerala face a crucial question: how to pursue a growth/development path which is not so heavily dependant on foreign remittances?

 

*K.P.Kannan is an Honorary Fellow at the Centre for Development Studies, Thiruvananthapuram, Kerala, India, where he earlier was a Fellow and Director.