Remittances from the Gulf countries, estimated to be over Rs1 trillion every year by state-level banks, constitute 35% of Kerala’s gross state domestic product

Nidheesh M.K. | Aug 11 2016
Remittances from Gulf countries have played a historic role 
in giving Kerala a high Human Development Index (HDI) rank. Photo: Pradeep Gaur/Mint

Kochi: Many Indian workers in the Gulf are losing their jobs due to the oil crisis and sending less money home or getting ready to return, a trend that could spell doom for Kerala and its finances, the state’s finance minister warned.

“There is going to be a very serious regional recession” towards the end of this year, Thomas Isaac said in an interview, stressing that the signs of the economic gloom have already started showing, and the growth of remittances could stop as soon as the end of the year.

That is bad news for the south Indian state, which has a debt burden of Rs.1.3 trillion and has significantly benefited from remittances made by its people who migrated to the Gulf over the past five decades.

Remittances from the Gulf countries, estimated to be more than Rs.1 trillion every year by state-level banks, constitute almost 35% of Kerala’s gross state domestic product (GSDP), according to the state budget.

About 10% of Kerala’s population of over 30 million does not live in the state. Every third house in Kerala has a man working in the Gulf, which could mean Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman, or Bahrain.

Their remittances have played a historic role in giving the state a high Human Development Index (HDI) rank, on par with that of developed nations, despite considerable unemployment and a negligible industrial base.

But that may change, warned Isaac, citing the dramatic fall in crude oil prices in recent times.

The crisis has forced many countries in the Gulf to go on an austerity drive since last year. Saudi Arabia is one of them. The cuts, in turn, hurt local construction firms that rely heavily on state contracts, forcing them to shut down and let go of thousands of employees, many from Kerala.

“After three decades of Kerala growing faster than all India average, for the last two years, Kerala has been below the national average. These are signs of things to come,” said Isaac, who was an economist at Center of Development Studies (CDS) before he became a politician.

“If you look at the growth of remittances, the last few years it has decelerated. (It is) still positive but (has) come down sharply. This year, it may be negative,” Isaac said, declining to give an estimate.

A closer look at proxy indicators for the health of the remittance economy, such as gold purchases and the real estate market, indicate Isaac’s worries are justified. “Already, real estate prices are falling. People are now afraid to invest, a kind of fear psychosis is sitting in the head of investors as well as consumers. Big consumers in Kerala are those who are based on remittances. They come and buy all sorts of stuff. Now, they are also looking forward to the bad days to come,” said Isaac.

While the state government is yet to give an estimate of the number of migrants who could return this year, chief minister Pinarayi Vijayan put out a Facebook post last week saying that of the 5,000-odd Indians reportedly stranded in Saudi Arabia right now, 700 are from the state.

Regional news channel Manorama News reported last week that of the 76 nurses stranded in Oman, 48 are from Kerala.

The Indian government also does not have an estimate of the number of people who could return from the Gulf nations, according to people familiar with the matter.

“The first thing you need to solve a problem is to put a name and number to it,” said S. Irudarayajan, an expert in remittance economy and migration at CDS.

This black hole when it comes to data is precisely why the government goes for knee-jerk reactions every time there is a crisis instead of developing a proper contingency plan, he lamented.

A Mint On Sunday story in May had analysed in detail how and why Malayalees, who have been migrating over the years to the Persian Gulf countries in search of prosperity for the last 50 years, have started returning .

An analysis of data from the State Level Bankers’ Committee (SLBC), a consortium of banks, showed the growth in deposits has almost halved in the past three years.

The growth of remittance fell from 40% in 2013 to 15% by 2014. In 2015, it grew somewhat better—by 22%—but then, as bankers point out, the slight improvement may have been due to the rupee depreciating by 4.5% in 2015.

This meant fewer people are buying land or gold, considered to be favourite acquisitions of the non-resident Keralites.

Isaac admits that such knock-on effects are “increasingly becoming a reality.”

Interestingly, the rise in the number of Gulf returnees also seem to have caused panic within the Left front government, forcing it to think of newer ways to raise money quickly and become more friendly to private investors. “We are in a slight hurry. We will not be looking at just redistribution alone anymore. We are not even going to wait for private investment. The government will raise money on its own,” Isaac said.

For instance, the state government plans to try to raise Rs.25,000 crore from the existing diaspora population in two years via chit funds, which in turn will be used to invest in projects that will create jobs, Isaac said.

It plans to tap Kerala State Financial Enterprises (KSFE), a state-owned non-banking firm that recently got clearance from the Reserve Bank to start chit business, for this initiative.

The state has also decided to put together a separate anti-recession package of Rs.12,000 crore through its own efforts, said Isaac. It is also hoping to get as much as Rs.4000 crore once the centre implements the Goods and Service Tax (GST).

But outsiders are not convinced that the efforts could avert the bigger impact of the crisis, namely unemployment.

D. Dhanuraj of Center for Public Policy Research (CPPR), a Kochi-based think tank on economic and policy affairs, said unlike past crises such as the Dubai real estate crash in 2009, the present oil crisis is going to have a long-term impact and requires long-term solutions.

“How long can you run all these rehabilitation packages? Finally, the market has to absorb these returnees,” he said.

“I don’t know whether it will be a recession or not, but it is going to be a doomsday scenario because of several reasons. One, you may not find employment immediately after returning. Two, you are used to a particular lifestyle as a Gulf Malayalee; so, you may not be able to adjust to the new reality which may lead to social tensions. And then, being a very regulated economy, even if you may want to invest in something you may not be able to do that. The question really is not about what the government will do, but what the returnee will do in a state like Kerala,” said Dhanuraj of CPPR.

This article was published in LiveMint on 11th August. Click here to read : Shrinking remittances may push Kerala into recession: Thomas Isaac

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