With the slew of initiatives under the Knowledge Economy Mission, the State through its recent Budget 2022-23, firmly established its aim in transitioning to a knowledge economy – an economy that creates, consumes and disseminates knowledge to enhance growth and development. To fully participate in the knowledge economy, a state ideally requires inclusive strategies that include, but are not limited to, adequate institutional framework, good education, strong communications infrastructure and a supportive financing environment which are open and free to assimilate and absorb the global exchange and transfers. While Kerala has a number of favourable resources existing, it has to act on many other fronts to make a successful transformation to the knowledge economy.

Knowledge economy conjures up the image of Silicon Valley which is nestled amidst the intellectual hub of San Francisco, bestriding great academic centres of Stanford, University of California and Berkeley. The adjoining presence of venture capital firms further allows for the creation of a perfectly symbiotic relationship with industry and academia. The examples from across the world revolve around world class universities, availability of venture and seed capitals, strong IPR regimes, rule of law, market competition; this presents a guiding pathway to Kerala in recognising how and where Kerala is performing below its potential.  While the State’s budget proposed a slew of schemes on improving the competencies of human resources, what received scant attention is the importance of creating institutional structures that would ensure a robust ecosystem for fostering knowledge-based economy.


Institutional structures include both formal institutions, namely the laws and rules that define the economic incentives guiding individual and organisational choices, and informal institutions, namely social arrangements and norms that influence how formal institutions operate in practice (North, 1994). With significant achievements in enhancing quality of life, education, and improving infrastructure, the State has a number of favourable conditions to nurture the transition into a knowledge economy. But in terms of creating the institutional structures that build quality workforce and foster entrepreneurship, the State has a few missing links to bridge. 

Capitalising Knowledge

Budget 2022-23 has provided impetus to the mission by allocating funds to strengthen the higher education system and stimulating a skill-ecosystem. While enhancing the quality of the State labour force is a step in the right direction, upping the education sector would only solve one part of the problem. The State’s educational achievements have made average Keralites aspirational while the State’s economy has not done much in providing them with employment opportunities that commensurate with their abilities and qualifications. The migration trends show an increase in migrant workers from other states taking low-skilled jobs while witnessing an out-migration of the domestic workforce. A surplus of labour in the context of inadequate growth to absorb labour into productive employment in the State will continue to result in underutilisation of the labour force, as has been the case so far. It fails to address the fundamental issue of high-end job creation.

There is a need for institutions and organisations to capitalise the knowledge and absorb the skills that commensurate with people’s qualifications and knowledge.  Presently, the State’s educated unemployment at 36 % among youths shows the gap in creating quality jobs that are capable of absorbing the skill set of the population. While the State has taken several policy measures to be in the country’s industrial map, the efforts to make it grow were negligible.


The knowledge-based industries in OECD economies which account for more than half of thier GDP give important lessons on what drives a knowledge-based economy. Evidence points to two factors responsible for the development of knowledge-based economy, namely, technological change and innovation drive (OECD,2001). However, innovation thrives only in freedom- the freedom to exchange, experiment, invest, fail and exit. An individual will start a business venture only in conditions of limited liability where the individual has the freedom to give up, put the firm into bankruptcy process and exit easily. There continue to be rigid features that prevent a smooth closure of industries in Kerala which can discourage entrepreneurial activity and innovations. A society that pillories entrepreneurs and turns business failure into disputes or entanglement in agencies, only limits entrepreneurship (Shah, 2019).

Since the judiciary is a long process to address the grievances and disputes, it is important for a state to promote and institutionalise world-class ADR practices.

Additionally, stringencies and rigidities in labour laws have also imposed severe costs on labour use in Kerala. The cumulative factors have contributed to economic underdevelopment characterised by low productivity, below-potential investment, and high unemployment in the State. This lack of favourable climate has triggered a continuous outflow of capital, reduced labour demand within the State and curtailed gains based on factor-abundance driven comparative advantage.

A panacea to many malices confronted by the state lies in giving individual freedom. When the state gets in the way of deciding what an individual should do or have, it disrupts many inventions. Therefore, the interventions in the name of welfare need to be seen with scepticism because the greater the state promises, the greater are the restrictions on individual freedom. In the process, an average individual gets caught in the web of rules and regulations, restrictions that bind them further from pursuing any act of innovation.


Building Institutional Regime and incentives.

The economic importance of large firms cannot be neglected in a knowledge economy as it brings economies of scale that usher innovation and technology, offer training and adopt international standards of quality. In this context, it is interesting to note the composition of medium, small and micro enterprises (MSME) in Kerala. The State has around 23.79 lakh units of which 23.58 are micro-enterprises (99 percent), generating employment for approximately 44.64 lakh people. On average, the per unit employment in MSME is less than 2 in Kerala. The skewed trend towards micro-enterprises shows that enterprises identify potential growth traps where the benefits arising out of growth opportunities are offset by the costs incurred for compliance with multiple laws . The small size of economic activity makes banks wary of lending owing to its unviability of advancing loans to micro-enterprises.

To have a financial system that supports business and entrepreneurship, there needs to be a regulatory environment which encourages micro and small firms to expand their operations to large scale while ensuring a socially responsible check. The narrative by the government has always been pro-labour while forgetting the factor markets that enable the ecosystems for the investors. The principle guiding this approach has only resulted in suboptimal entrepreneurial activity and limited employment opportunities, thereby rendering it a losing ground for both parties; the employer and the employee.

Start-ups Status

Building entrepreneurship is key to tackling the growing demand for jobs. As per the Nasscom report on start-ups, Kerala was listed in the top performer category- a category that recognizes states which have displayed leadership and taken strategic initiatives to strengthen entrepreneurship ecosystems within their jurisdictions. Over the years, Kerala has made serious attempts to nurture entrepreneurs via seed funding, early mentoring, global investors meet, etc. through its nodal agency Kerala Start-up Mission (KUSUM). However, the vision for scalability has been missing from its endeavours. This is evident from the fact that no firms from Kerala feature in the unicorn list after all the years of the investments done by the government. The need for long-term mentorship and venture capital firms that specialise in late-stage investing needs more traction in the State.

With technological advancement happening at an all time high, innovation is not a matter of choice but a necessity to survive. With commendable social indicators and educated masses to our benefit, there is immense potential untapped in the State of Kerala. But to effectively capitalise on its potential, the State needs to bridge the missing links present in its institutional structures. Knowledge growth and development is a global process. It requires open borders, free flow of manpower and collaborative approaches, improvements in the institutional structures where the knowledge seekers have easy access to the resources cutting across boundaries.


Ms Aishwarya Santhosh, Research Intern contributed to this Article.

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.

Image Source : Indiaahead.com

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Nissy Solomon is Senior Research Associate at CPPR Centre for Comparative Studies. Prior to her venture into the public policy domain, she had worked as a Geographic Information Systems (GIS) Analyst with Nokia-Heremaps. Her postgraduate research explored the interface of GIS in Indian healthcare planning. She is broadly interested in Public Policy, Economic Development and Spatial Analysis for policymaking. She has an MA in Economics (University of Bombay) and an MA in Public Policy (National Law School of India University, Bangalore). She can be contacted by email at [email protected]

Nissy Solomon
Nissy Solomon
Nissy Solomon is Senior Research Associate at CPPR Centre for Comparative Studies. Prior to her venture into the public policy domain, she had worked as a Geographic Information Systems (GIS) Analyst with Nokia-Heremaps. Her postgraduate research explored the interface of GIS in Indian healthcare planning. She is broadly interested in Public Policy, Economic Development and Spatial Analysis for policymaking. She has an MA in Economics (University of Bombay) and an MA in Public Policy (National Law School of India University, Bangalore). She can be contacted by email at [email protected]
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