The COVID-19 pandemic has ushered many economies towards ‘Big Government’, triggering a populist surge with large expenditure and borrowing, coupled with unprecedented power to meet contingencies. With Kerala, this has been a decadal trend regardless of the political parties coming in power.  While Kerala’s governance in times of pandemic was laudable and globally recognised for its swift community-driven actions to sustain livelihoods and health of its populace, the pandemic also provided a greater impetus for the State to engage and relay populism in spheres unrequired of them. The recent announcement of the Kerala government on the launch of a Over the Top (OTT) streaming platform opens up an important question in this regard – to what extent should the State play a role in providing economic services? It may be logically consistent for the State to serve in areas where the private sector is unlikely to enter but beyond reasoning, Kerala government has been increasingly involved in activities where there is little to no role for the government to play. This growing size is not just evident in the increasing share of economic services in the expenditure budget but also in the changes that the society has been undergoing since many decades taking the form of unemployment, out-migration and slow investments among others. These are manifestations of the State’s structural issues needing corrective actions.

The walking dead

Kerala has the largest share of Public Sector Undertakings (PSUs) in India. Including state welfare boards and statutory corporations, the figure of state backed institutions stands at 140. Although many PSUs stare at heavy losses, the government has continued to spend crores of rupees every year to sustain them. According to the CAG report on PSUs for the year ending in March 2020, the State Government invested ₹38,428.09 crore in these PSUs at the end of March 2019. To help us put this in context, the biggest public issues of 2021 such as Paytm (₹18,300 crore), Zomato (₹9,375 crore), Star Health & Allied Insurance (₹6,018 crore), PolicyBazaar (₹5,625 crore), etc. totalled almost the same as the taxpayer’s money invested by the Kerala government in loss-making PSUs. One has to consider the efficiency, efficacy and the potential of such investments in PSUs in comparison to the listed companies above. Meanwhile, the same amount could have covered 10 years of the cost of schemes under State’s health and family welfare.

Despite a large-scale support, in 2018-19, 59 working PSUs incurred a loss of ₹3,656.97 crore. Non-planned expenditure constitutes a higher share in the total expenditure to PSUs, which is to say that the expenditure has been directed towards areas that give no returns. This is reflective of the inefficiency riddled in the operations of most PSUs. The rationale to establish state-run units using taxpayer’s money can be justified only if it leads to greater capital investment and economic opportunities than would have ensued without government intervention. There is no empirical evidence to prove that the large number of PSUs in the state has led to a commensurate increase in capital investment and economic opportunities. On the contrary, it has only induced more strain on the state exchequer, evident from the prolonged fiscal crisis the State is facing.

The situation of State-run traditional industries shows trends of firms with increasing liabilities and rising government assistance to float their working capital. Such failing firms would have exited the market long ago if the market had been more competitive and allowed for an efficient allocation of resources.  A policy framework that encourages artificially sustaining failed firms inflicts damage to the healthy firms in the industry by driving up their costs of inputs, reducing the profitability and limiting the potential to expand their operations. This has been crushing the entrepreneurial spirit in the State. What we need is a more progressive outlook that appreciates the life-cycle of firms’ birth, maturity and dying out. 

Effect of Size on Unemployment

Governments can affect the economy in a number of ways. Approximately 48% of Kerala’s total workforce in the organised sector are employed in the public sector. When wages in the public sector are found attractive due to its security aspects and the probability of finding a job is sufficiently high, the unemployed masses prefer to wait longer to find a public sector job. People are willing to spend most of their life studying for examinations that offer entry into the state services that most may never crack. It is a colossal loss of many years of productive labour and is reflective of how the State by design pushes people out of the workforce. Lack of opportunities and varieties in the job market has led to higher migration from the state for some time now. Yet high unemployment rate in the State is often cited as the reason for starting new PSUs and departments in the State but these measures have only increased the size of the Government.

In the process, the private sector employment gets crowded out due to the sheer size of public sector employment, thereby creating more unemployment. The unemployment situation is so grim that out of 14,019 unemployed persons ending life, the majority, 14 percent, were from Kerala as reported by the National Crime Records Bureau in 2019. The State’s educational achievements have made average Keralites aspirational while the State’s economy has fared badly in providing them with employment opportunities that commensurate with their abilities and qualifications.

Cost of governance

The total expenditure of Kerala has been escalating over the years. The budgeted expenditure for 2021-22 stood at Rs 1.59 lakh crore, of which expenditure on revenue accounts amounted to Rs 1.45 lakh crore (91 per cent), leaving only 0.14 lakh crore for capital expenditure and growth recovery.  Capital expenditure claims less than 9 percent share in the total expenditure of the Kerala Government. It signifies that the cost of governance in Kerala is very high.

The governments could be big or small depending on the ideology of the ruling dispensation, the enormous security and the defence tasks at hand as well as the maturity of the republic.  How much trust the governed and the government enjoy with each other is a vital element that would influence the size of the government. If the ideology is trying to maximise the role of the state and not to maximise the individual freedom, the result would be endemic and parasitic of having a bigger government in every walk of life.

Kerala has chosen a welfare model of development. But welfarism was largely pushed by the comfort zones of remittance for decades. The industrial outputs have been very low compared to the service sector that dominate the state GDP. The service sector has dominated in the sectors like hospitality, IT, transport etc. which has less government intervention. Every time the role of the state started dwindling, the government pushed for its larger space and dominance and countered the dominance of the private sector. Given the political economy and the traditions of the political parties of the state, this was an inevitable cause. They formed more PSUs, welfare boards, government departments justifying the cause by fitting them into the larger framework of paternal  governance and welfarism each time. Unfortunately, the idea of markets and the profits are looked at with suspicion and being exploitative in nature. The missing links of rational thinking clubbed with internalised isomorphic mimicries[1] are the main reasons for the ever-increasing size of the State, permeating even in areas with established markets.

As the government goes beyond its core functions, it will adversely affect the growth of the economy. Especially now when the State is faced with fiscal constraints, there is an urgent need to course correct from being a provider of services whose market is already established to being an entity that focuses on governance alone.

Dr D Dhanuraj is Chairman and Nissy Solomon Hon. Trustee (Research and Programs) at Centre for Public Policy Research. Views expressed by the author are personal and need not reflect or represent the views of the Centre for Public Policy Research.

Featured Image Source: onmanorama

[1] The tendency to mimic the processes or models of other governments.

Chairman at Centre for Public Policy Research | + posts

Dr Dhanuraj is the Chairman of CPPR. His core areas of expertise are in international relations, urbanisation, urban transport & infrastructure, education, health, livelihood, law, and election analysis. He can be contacted by email at [email protected] or on Twitter @dhanuraj.

D Dhanuraj
D Dhanuraj
Dr Dhanuraj is the Chairman of CPPR. His core areas of expertise are in international relations, urbanisation, urban transport & infrastructure, education, health, livelihood, law, and election analysis. He can be contacted by email at [email protected] or on Twitter @dhanuraj.

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