Image source: Hindustan Times

Malayalees have been quite complacent about the achievements of ‘Kerala Model of Development’. But the COVID-19 outbreak has exposed our vulnerabilities. While acknowledging and appreciating the massive efforts of our government to minimise the damage, it is also worthwhile to do some soul-searching on the state of our economy and society.

The achievements of the ‘Kerala Model’ are too well known to be reiterated. We invested our scarce resources in human development in the 60s and 70s which paid rich dividends in the form of remittances. However, the excessive dependence on remittances has exposed Kerala economy to an economic illness called ‘Dutch disease’. This disease is manifested in the stagnation of our productive sectors. Why to waste your time and energy in agriculture or small scale industry if you can make more than double the money by working in Gulf countries? This is a crude way of expressing the meaning of the concept of ‘Dutch disease’.

‘Dutch disease’ made our people and policy makers think that Kerala is best suited for the service sector. Information Technology, Bio-Technology and Tourism Industry are touted as the sectors where Kerala’s future lies and the State has invested heavily in these sectors. The neglect of agriculture and manufacturing activity has two serious implications—the first being food security, and the second the incidence of life-style diseases. Lifestyle diseases like diabetes, blood pressure and heart disease are observed even among people in their 30s. Malayalees generally have an aversion to jobs involving physical exertion. This is one of the reasons why the State is dependent on migrant workers estimated to 25 lakh.

It may be just a coincidence that this development model has exacerbated the vulnerabilities of Kerala to COVID-19. When we look at the people diagnosed with COVID-19, we can find that most of them are either Non-Resident Keralites (NRKs) or foreign tourists. The State now finds it difficult to manage the situation with so many Keralites travelling back from countries severely affected by the pandemic. Back home, we have more people with compromised immunity to COVID-19. Heavy dependence on other states for food items further aggravates Kerala’s vulnerability. We cannot imagine a situation wherein supplies from Tamil Nadu are affected.

State finances is another source of vulnerability. Kerala has been a fiscal laggard for the last 38 years. The State has been consistently running revenue deficits since 1983–84, which indicates that revenue expenditures like paying salary and pension are met out of borrowed funds. A research by the author has shown that Kerala failed to tap the tremendous potential for public resource mobilisation offered by external remittances. During the last 60 years, the potential for public resource moblisation registered a tremendous increase, thanks to external remittances. But this is not reflected in the fiscal performance of the State. During the first 10 years of Kerala’s formation, i.e., 1957–58 to 1966–67, the State accounted for 4.45 per cent public resources mobilised by all states put together. After 40 years, i.e., during 2007–08 to 2016–17, this figure has only marginally increased to 4.5 per cent (see author’s article “Kerala’s Persistent Fiscal Stress: A Failure in Public Resource Mobilization?” Economic and Political Weekly, June 1, 2019. pp. 32–39).

A state which shirks the responsibility of mobilising public resources should have controlled public expenditure, but that is not Kerala’s cup of tea. High levels of educated unemployment which is a fall out of ‘Dutch disease’ puts pressure on successive governments to accommodate as many people as possible in the government sector. In 2017–18, Kerala spent 62.98 per cent of the total revenue receipts for salary and pension compared to our neighbour Karnataka which spent only 23.83 per cent on this count. Only 33 per cent of the borrowed funds are used for capital expenditure, the rest is used for paying salary and pension.

The Corona Package: A Damp Squib

The vulnerability of the ‘Kerala Model’ is also reflected in the Corona package announced recently by the Government of Kerala. The COVID-19 outbreak has affected all sectors of the Kerala economy. Thousands of daily wage earners have lost their daily bread. Petty traders, agriculturists, dairy, poultry and fish farmers have suffered heavy losses. One would have expected the government to come out with a package to give an impetus to economic activities across the State. But the Rs. 20,000 crore package announced by the State Government belies such expectations. Free distribution of rice and wheat through the public distribution system, the Rs. 2000 crore employment guarantee scheme to be implemented in April and May and Rs. 2000 crore loan to Kudumbashree fall under this category. There is nothing new in the timely disbursal of welfare pensions announced as part of the package. The single major component of the package is clearing the arrears amounting to Rs. 14,000 crore to contractors, individuals and families, expecting that this amount will come back to the local markets in the form of expenditure and will have some impact on the trade and transport sectors.

The package has completely ignored the class of people who try to take ownership of their life—the self-employed people in the agricultural and industrial sectors. A government whose only concern is keeping the service organisations in good shape cannot be expected to take drastic measures. What prevented the government from announcing a 20 per cent cut in salary and pensions across the board? This would have saved Rs. 10,000 crores which could have been used for providing support to those in productive sectors. But a government having an eye on the 2021 elections cannot be expected to have that kind of political will.

To summarise, in order to save the very same ‘Kerala Model’, we have got to have a fresh look at it. The COVID-19 has provided that rare opportunity to all well-meaning Malayalees.

Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.

Jose Sebastian
Jose Sebastian
Dr Jose Sebastian is Senior Fellow (Finance) with CPPR. He retired as Senior Faculty in Public Finance from Gulati Institute of Finance and Taxation and is currently Chairman and Director of Institute for Enterprise Culture & Entrepreneurship Development, Thiruvananthapuram. An expert in Public Finance and Taxation, Dr Jose Sebastian writes for Economic and Political Weekly, IUP Journal of Public Finance, Asian Economic Review, among other well-known journals and magazines. Dr Sebastian earned his PhD and Masters in Economics from the University of Kerala. Dr Sebastian has been a member of important Committees constituted by the Government of Kerala, like the Sales Tax Advisory Committee, Expert Committee on Improving Statistical System in Kerala, among others.

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