What Ails Kerala's Economy: A Sectoral Exploration Author(s): P. D.

Jeromi Reviewed work(s): Source: Economic and Political Weekly, Vol. 38, No. 16 (Apr. 19-25, 2003), pp. 1584-1600 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4413463 . Accessed: 20/10/2012 09:12
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What A

Kerala's Economy: Ails Sectororal Exploration

The 'Kerala model' of development has been facing a serious crisis due to low growth, high cost, low productivity, low investment and low employment in the state economy. This paper analyses the performance of major sectors of the state economy, such as agriculture, industry and the financial sector, during the past two decades and brings out the problems they confront. The paper highlights the lack of a development strategy in Kerala for growth and employment generation.
P D JEROII which is the high level of unemployment, especially among educated youth.3 Further,in the event of some unforeseen international developments, foreign remittances from Keralites workThe Crisis of the Kerala Model' ing abroad can shrink in the future.4 It is in this context that developmental economists question the feasibility of continuation he developmental experience of Kerala has received of the 'Kerala model' of development, and the debate on 'the T r worldwide attention because of the coexistence of a high crisis of the Kerala model' continues [Franke and Chasin 1999]. At the macro level, the state faces the problems like (1) lower standardof living with low per capita income [Centre for Development Studies 1975]. In 2001, Kerala ranked first among growth of state income, (2) weak productive sectors, (3) high the major states in India in the Human Development Index level of unemployment, (4) lack of private initiative and invest[Planning Commission 2002], though the state stood only ment, (5) large number of loss-making public sector units,5 ninth in terms of per capita net state domestic product (NSDP) (6) declining prices of commercial crops, and (7) deteriorating (Table I). This paradoxical development has come to be known financial position. Though the state has been facing these probas the 'Kerala model', which illustratedthe capability of a society lems, it has not taken any significant reform measures, except with relatively low income to achieve high physical quality of the introduction of decentralisation of planning since 1996.6 life indicators like high literacy, high life expectancy and low While the Indian economy has already completed a decade of infant mortality [Franke and Chasin 1999; George 1999; economic reforms, the state has not resorted to any liberalisation Subrahmanian and Azeez 2000]. A significant aspect of the measures, perhaps overemphasising the role of public sector and 'Kerala model' is that even without having high per capita taking the view that private capital is not in the interests of the income, industrialisation and urbanisation, the state has reached state. Recently, however, attempts are being made to convey that the third stage of demographic transition and people get better the state is not averse to privatecapital andeconomic liberalisation measures will be implemented in tandem with the policies of medical care and education.2 while discussing the significance of the 'Kerala neighbouring states. In the context of economic liberalisation However, model', questions were often raised about the sustainability of measures7 and the formulation of the Tenth Five-Year Plan high standards of living with low growth of the economy. To (2002-2007), we feel that now is an opportune time to study the be precise, the state is not finding enough means to maintain developmental experience of Kerala during the past two decades high standardof living as it has become a low growth, high cost, and identify emerging issues. This paperthus reviews and analyses low productivity, low investment and low employment economy the performance of major sectors of the economy in the past two [GoK 2002a]. By now, there are enough indications to the effect decades with a view to identifying the factors that hinder the that the state cannot continue to have a high level of social economic development of the state. The study has seven sections, including the Introduction. consumption due to the slow growth of the economy, particularly in sectors like agricultureand industry,and deterioratingfinancial Section II analyses the inter-temporal variations in growth and health of the state. Apart from the issue of sustainability, there structural changes in the composition of state income. Perforis a wider social problem associated with the 'Kerala model', mance of the agricultural sector is evaluated in Section III. An

Introduction

Table 1: Human Development Index and Per Capita Income in India and Kerala HDI Kerala
India Per cent of India

1980-81 PCI Rank 1

-

Rank 9
-

HDI 0.59
0.38 55.3

1990-91 Rank PCI 1

-

Rank 13
-

HDI 0.64
0.47 36.2

2000-01 PCI Rank 1

-

Rank 9

0.50
0.30 66.7

1835
1741 5.4

5110
5365 -4.8

21046
16487 27.7

takes intoaccountthe followingfactors:(a) life of Notes: (i) Rank:Rankof Keralaamong the states in India;(ii) Estimation HumanDevelopmentIndices(HDI) rate, (c) literacyrate, (d) intensityof formaleducation,and (e) per capita realconsumptionexpenditureadjusted expectancyat age 1, (b) infantmortality NewDelhi; to The forinequality. indicesrelating 1981,1991 and2001 are takenfromthe NationalHuman Commission, DevelopmentReport2001, Planning (iii)Per CapitaIncome(PCI),at currentprices (new series), are takenfromthe EconomicSurvey2001-02, governmentof India.

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Chart1: Annual Growthof NSDP of Keralaand GDP of India

| -NSDP NSDP --10A 8 0 2_ o V'6
-4 GDP GDP|J

~~
-

'\

~
\ /

\<'a _

\
2\ .9

/& 1

II8
8 . .-.. .

... .... 9 .

v o
....

.. -K ..

.- -

.. ... a..8.

and growthand analysisof the industrialsector, its structure in investment the sectoris attempted Section IV. SectionV in examines developments the financialsectorwithreference the in to theworking banksanddevelopmental of financialinstitutions. This section also discusses the issues relatingto low creditdepositratio(CDR)in the state.Dimensionsof the fiscal crisis faced by the state are set out in Section VI. The final section summarises major the findingsof thestudyandoffersconcluding remarks.

II StateIncome8
Low Growth in 1980s and High Growth in 1990s Timeseriesdata9 since 1980-81showsthat,in mostyears,the Kerala lowergrowth thenational recorded than economy economy, especiallyin the 1980s. Duringthe 1980s, the rate of growth of NSDP was muchlower at 3.2 per cent per annumas against 5.8 per cent per annumin the case of nationalincome (GDP) of (Table2). Theperformance the statewas also poorcompared with the growthin income of neighbouring southernstates.10 The state's incomewas also highly volatile duringthe 1980s; therewas negativegrowthduringthreeyears(1981-82,1983-84 and1986-87)(Chart Themainfactorsresponsible theslow for 1). the of growth during 1980sare:(1) poorperformance agriculture andindustry, severepowershortage,and (3) return large of (2) number migrants of from the west Asia duringthe second half of the 1980s [Prakash1999]. In the 1990s, however, there was an improvementin the of performance the stateeconomy.The annualaveragegrowth incomerose to 6.3 per cent during1992-93 to 2000-01, which was identicalto the growthof nationalincome. Whatis more is striking thefactthatthe stateincomegrowthduringtheperiod waslessvolatileandhasbeengrowingatabove5 percent,except in threeyears,from 1995-96to 1997-98.Thus,therewas a sign of revivalin the growthof stateincome duringthe 1990s from a phaseof low growthduringthe 1980s (Table2 and Chart1). of Growth NSDPduring1992-93to 2000-01wascharacterised by three (1) phases,eachof threeyearsduration: firstphasefrom to 1992-93 1994-95,whentherewashigheraverage of growth 8.7 percent;(2) secondphasefrom 1995-96to 1997-98was marked by loweraverage growthof 3.4 percent;and(3) thirdphasefrom 1998-99to 2000-01 recordedhigheraveragegrowthof 6.7 per cent.Thesethreephasesof growthof NSDP were not in accordance with the growthof nationalincome.1l Duringthe first phase,the statecouldachievebettergrowthdue to (1) convertand ibility of the rupeein 1993 (migrants exporters benefited); (2) increasein migrationto the west Asia; (3)) buoyancyin climaticconditions.The slowdown exports;and(4)) favourable Economicand PoliticalWeekly April 19, 20031585

of the economy during the subsequent three years could be attributedto (1) fall in prices of commercial crops, (2) collapse of share and real estate market, (3) return of migrants from the west Asia, especially UAE and Saudi Arabia, (4) acute power shortage, and (5) fall in construction activity [Prakashl999]. Factors contributing to the revival of the economy during the three years from 1998-99 to 2000-01 can be traced to (1) wage hike of state government employees (NSDP from public administration went up by 19.1 per cent during 2000-01), (2) higher income generated in the communication sector, and (3) relatively better performance of agriculture and industry, following decentralisation of planning. There has been a structuralchange in the composition of state income during the past two decades. The share of primarysector declined from 39.2 per cent in 1980-81 to 25.7 per cent in 2000-01, and thatof the secondary sector (including construction, the share of which was 8.3 per cent in Kerala as against 5.1 per cent in India) declined from 24.3 per cent to 20.9 per cent, during this period. The share of the tertiary sector correspondingly rose from 36.5 per cent in 1980-81 to 53.3 per cent in 2000-01.12 A comparison with the composition of national income reveals thatthe shareof the primarysector in Keralawas somewhat higher at 25.7 per cent in 2000-01 than 24.2 per cent in the national income. The share of the secondary sector in NSDP of Kerala, however, was significantly lower at 20.9 per cent as against 27.3 per cent in the national income. The manufacturing sector has a very low share of 11.3 per cent in state income against 17.2 per cent in the national income. On the other hand, the tertiary sector in Kerala accounted for 53.3 per cent of NSDP as against 48.5 per cent of national income in 2000-01. Data provided in Table 3 shows that while the primary sector continued to grow at a low rate of 2.3 per cent during the 1980s and 1990s, other two sectors recorded higher growth during the 1990s than in the 1980s. The rate of growth of secondary sector more than doubled from 3.3 per cent during the 1980s to 7.6 per cent during the 1990s (mainly on account of significant Table 2: Annual Average Growth of State Income and National Income
(Inper cent) Period NSDP 1980-81 to 2000-01 (i) 1980-81 to 1990-91 (ii) 1992-93 to 2000-01* Note: 4.4 3.2 6.3 Kerala SPCI 3.2 1.8 4.9 India GDP 5.8 5.8 6.3 NPCI 3.5 3.4 4.4

*: The year 1991-92 has been excludedfromthe analysis, as itwas an outlier. Sources: (1) Economic Review, various issues, state Planning Board, Thiruvananthapuram. of of (2) Department Economicsand Statistics,Government Kerala.

Table 3: Annual Average Growth Rate of Sectors of Kerala Economy

(Inper cent) Period Primary Secondary@ Tertiary Growth Share Growth Share Growth Share Rate in NSDP Rate in NSDP Rate in NSDP 2.3 2.3 2.3 33.8 36.9 29.8 5.1 3.3 7.6 23.0 23.8 21.8 5.9 4.3 8.3 43.2 39.3 48.4

1980-81 to 2000-01 (i) 1980-81 to 1990-91 (ii) 1992-93 to 2000-01

Note: @ Including construction. Sources: (1) Economic Review, various issues, state Planning Board, Thiruvananthapuram. of of (2) Department Economicsand Statistics,Government Kerala.

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Chart2: Annual Growth of AgriculturalIncome

15.0 10.0
.) 5.0

0.0-,
-5 -5.0 -10.0 181-82 --983 1985-8/987-88

,
1989-90 1991-92 1993-94 1995-96 19 78 1999-00

(2) export prospects of commercial crops, (3) increase in number of absentee land owners (perennial commercial crops are more suited for absentee land owners as they do not need constant care), (4) inter-crop variations in land prices - higher price for lands with commercial crops, and (5) shortage of agricultural labourers, specifically for field crops like rice [Thomas 1999]. However, in recent years, farmers seem to be losing interest in cultivation of coconut and rubber due to substantial fall in their prices and widespread disease in coconut trees.

Growth of Agricultural Income

growth in construction activity which rose from 1.9 per cent in 1980s to 10.2 per cent). There was only a marginal improvement in the growth of manufacturing from 4.6 per cent in the 1980s to 5.9 per cent in 1990s. The slowdown in the rate of growth of NSDP during the three-year period from 1995-96 to 199798 was mainly on account of decline/marginal growth of both primaryand secondary sectors. However, during the subsequent three years, growth of both sectors improved. As per the old series data with base year 1980-81, during the last two decades, till 1998-99, the level of state per capita income (SPCI) was lower than the national per capita income (NPCI). However, as per the new series with base year 1993-94, SPCI was higher than NPCI during five out of eight years from 199394 to 2000-01. The gap between SPCI and NPCI was much wider during the 1980s. In 2000-01, SPCI at constant prices, at Rs 10,712, was 4.5 per cent higher than NPCI at Rs 10,254 (quick estimate). SPCI recorded higher growth during the 1990s at 4.9 per cent per annum as against 1.8 per cent during the 1980s. Further,growth was higher than the growth of NPCI (4.4 per cent) (Table 2). The deceleration in the rate of growth of population in the state could be one of the major factors leading to the improvement in SPCI. As per the Census of India, 2001, the annual exponential growth of Kerala's population was the lowest in India at 0.94 per cent during the 1990s as against 1.93 per cent all-India (during the 1980s, the respective rates of growth were 1.34 per cent and 2.14 per cent). According to the findings of studies, agricultural sector in Kerala stagnated from the mid-1970s to mid-1980s; second half of the 1980s was a revival phase which was followed by poor growth during the first half of the 1990s [Kannan and Pushpangadan 1988, Thomas 1999]. However, a close look at the data on income generated in the agricultural sector during the past two decades reveals a slightly different story. There had been considerable fluctuation in the annual growth of income generated in the agricultural sector in the 1980s. During the 1980s, the rate of growth of 3.4 per cent, modest in itself, declined to 2.5 per cent during the 1990s. The rate of growth was either marginal or negative during the four-year period from 1995-96 to 1998-99. However, during 1999-2000 and 2000-01, agricultural income grew by 3.7 per cent. Thus, it is evident that agricultural income continued to display volatility during the 1990s with lower growth (Chart 2). During the last two decades, foodgrain production in the state has been declining year after year. Total foodgrain production in 2000-01 was 40.5 per cent lower than the production 20 years ago, in 1980-81. During the 1980s, foodgrain production declined by 1.9 per cent per annum and the rate of decline was even higher during the 1990s at 2.8 per cent (Table 5). The share of Keralain all-India foodgrain productionconsequently declined from 1 per cent in 1980-81 to just 0.4 per cent in 2000-01. Rice production accounts for 97 per cent of total foodgrain production in the state. Though rice is a major staple food, its production has been on the decline: (-)2 per cent per annum in the 1980s and (-)2.9 per cent per annum in the 1990s (Table 5 and Chart 3). Rice production at 7,51,000 tonnes in 2000-01 was 41 per cent lower than production in 1980-81. As a result, the share of Kerala in all-India rice production declined from 2.4 per cent in 1980-81 to 0.9 per cent in 2000-01. With the fall in production, Kerala increasingly depends on other states for rice consumption to the extent of almost three-fourthsof requirement [Kannan 2000]. Table 4: Share of Area under MajorCrops in Total Cropped Area
(Per cent)
Crop Rice Coconut Rubber Pepper Cardamom Cashew nut Tapioca Coffee Tea 1980-81 27.8 22.6 8.2 3.7 2.0 4.9 8.5 2.0 1.3 1990-91 18.5 28.8 12.7 5.6 2.2 3.8 4.9 2.5 1.1 2000-01 11.6 31.2 15.8 6.6 1.4 2.9 3.7 2.8 1.2

Ill Performance Agriculture of

Unlike other states, historically the agriculturalsector in Kerala is dominated by commercial crops like coconut, rubber, tea, coffee and spices. The state has a significant share in the export of cashew, spices, coir and coir products and marine products. As a result, the sector has been more open to market situations (both domestically and internationally).With more market orientation and better profitability of cultivation, the share of commercial crops in total area under cultivation in the state has been rising at the cost of food crops like rice and tapioca. The share of area under rice, the major foodgrain crop of Kerala, in total cropped area declined from 27.8 per cent in 1980-81 to 11.6 per cent in 2000-01. Similarly, areaundertapioca, anothermajorfood crop, declined from 8.5 per cent to 3.7 per cent, during the same period. On the other hand, the share of area under commercial crops such as coconut, rubber,pepper and coffee increased during the past two decades. Among these crops, the share of area under rubber almost doubled from 8.2 per cent in 1980-81 to 15.8 per cent in 2000-01 (Table 4). Major reasons for the changes in cropping pattern in favour of commercial crops are (1) lower profitability of food crops,

Source: Calculated based on data provided in Economic Review, various issues, State Planning Board, Thiruvananthapuram.

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Chart 3: Trends in Rice Production in Kerala

1400 1300 a 1200 I 1100 y 1000 . .........

900
800
700
O 0

U c),
0
m

cLLo rLo
CO 0) 0) ,

o
0 O ,O 0 00)

CJ
0 O 00) , ,

r'"IT v
) 0

CO 0)0) m,

(D

O C00 0 0)

c00o

00
,

C0
O 0 O

While foodgrain production suffered during the last two decades, production of commercial crops was reasonably good till the first half of the 1990s. Coconut and rubber are the two major commercial crops of the state. Coconut production, which recorded an annual average growth of 4.9 per cent during the 1980s, decelerated during the 1990s to 2.2 per cent. During the first half of the 1990s growth was 4.1 per cent, which decelerated in the second half of the 1990s to 0.6 per cent. Major factors attributedto the decline of coconut production are decline in prices of coconut and large-scale damage due to root-wilt disease and widespread attack of the Mandaripest (exotic mite). In case of rubber, the performance was good during the past two decades, till 1996-97. However, there was deceleration in the rate of growth of production during the last four years (1997-98 to 2000-01). In case of tea, there was slowdown in production in the second half of the 1990s (Table 6).

Trends in Agricultural Prices

The trends in the prices of agriculturalcommodities in the state can explain why the state was more oriented towards commercial crops than food crops and also why production of commercial crops was affected towards the end of the 1990s. During the 1980s, while wholesale prices index (WPI) of non-food crops increased by 11.5 per cent per annum, prices of food crops rose only by 7.4 per cent. During the 1990s till 1996-97 prices of both food crops and non-food crops were rising at a robust rate of above 10 per cent. However, from 1997-98 to 2000-01, the rise in price was very low at a rate of around 2.5 per cent in case of both food and non-food crops. The decline was more pronounced in case of rubber and coconut (Table 7 and Chart 4). Annual loss sustained by the state due to fall in prices of major crops has been estimated at Rs 4,000 crore during 19992000 and Rs 6,645 crore during 2000-01 [GoK 2001]. One of the major reasons for the decline in prices of major agriculturalcommodities of the state was the removal of quantitative restrictions on imports [GoK 2000, 2001]. Larger import

of cheap edible oils (which are substituting coconut oil) and rubber, under the liberalised regime seems to have affected coconut and rubber cultivation. For example, import of rubber more than tripled in three years from 46,000 tonnes in 199899 to 1,60,900 tonnes in 2001-02. As a result, the share of imports in domestic consumption of rubberrose from 7.3 per cent in 199899 to 19.8 per cent in 2001-02 which resulted in lower prices. As the state could not improve the productivity of crops,13control the cost of cultivation and minimise crop damage due to diseases, its comparative advantage seems to have eroded, which is resulting in higher imports. To effectively complete with imports from abroad and also from other states in the country, measures are needed to improve productivity of crops and control rising cost of cultivation. Traditionally, Keralahas been a majorexporterof commodities such as pepper, cardamom, ginger, cashew kernels, marine products, coir and coir products, tea and coffee. The state accounted for around90 per cent of exports of coir and coir products from India, 53 per cent of the cashew kernels, 40 per cent of spices and 20 per cent of marine products.14 In case of marine product exports, Kerala's share in India (in terms of quantities) has been declining since 1989-90, from 42.6 per cent to 20 per cent in 2000-01 and rate of growth during the 1990s at 8.2 per cent was lower than 11.7 per cent recorded in case of total export of marine products from India. In case of export of cashew kernels, Kerala's share has been on the decline from 75.5 per cent in 1980-81 to 52.6 per cent in 1999-2000. Average annual growth of exports from Kerala during the 1990s was lower at 2.2 per cent as against 7.7 per cent in case of total cashew kernel exports from India. These facts show that Kerala is losing its prominent role in the export of traditional commodities. Table 5: Average Annual Growth of Foodgrains Production in Kerala
(Per cent) Period Rice Total Share in Foodgrain Share in Rice Production Production Foodgrain in India in India -1.9 -2.8 -2.4 0.8 0.5 0.7 2.0 1.2 1.6

1980-81 to 1980-90 1990-91 to 2000-01 1980-81 to 2000-01

-02. -2.9 -2.4

Source:EconomicSurvey,variousissues, Government India. of

Table 6: Growthof Production of MajorCommercial Crops

(Per cent) Period (i) 1980-81 to 1989-90 (ii) 1990-91 to 2000-01 (a) 1990-91 to 1994-95 (b) 1995-96to 2000-01 Coconut 4.9 2.2 4.1 0.6 Rubber 7.3 7.1 10.0 4.6 Tea 2.2 2.2 3.6 1.1 Pepper 11.2 0.8 -0.5 1.8

Source:Economic Review, various issues, Thiruvananthapuram.

State Planning Board,

Table 7: Average Annual Growth of WPI of Food and Non-Food Crops (Per cent) Period
(1) 1980-81 to 1989-90 (2) 1990-91 to 2000-01 (a) 1990-91 to 1996-97 (b) 1997-98 to 2000-01

Food Crops
7.4 10.3 13.6 2.7

Non-Food Crops
11.5 6.7 10.3 2.4

All Crops
9.0 8.5 11.6 1.2

Paddy
9.4 9.0 11.0 4.2

Coconut
10.0 10.6 15.2 0.0

Pepper
17.0 22.4 15.4 8.6

Rubber
7.9 5.9 14.2 -13.3

Source: Economic Review, various issues, State Planning Board, Thiruvananthapuram.

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April 19, 2003

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Chart 4: Trends in Prices of Rubber and Coconut 5500 ...--------5000

U)

500 Rubber --

--Co

- Coconut
-

------

U)

n _ (u g .~

4500 45000-

/ \

7 i\--350

4--

400

0 0o

o o
25

3500-

2000 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01

200

This analysis shows that in the agriculture sector, too much attention was paid on commercial crops due to better prices and export prospects, resulting in the neglect of food crops, especially rice cultivation. As the economy was relatively closed till recently, cultivation of commercial crops such as coconut, rubber, tea, coffee and spices were relatively profitable even without much improvement in productivity and value addition because of the protected internalmarket and prospects for exports. However, with the opening up of the economy and removal of quantitative restrictions (QRs) on imports, commercial crops seem to have been affected by imports and stiff competition in the international market.

1980s to around 10,000 by the beginning of the 1990s to around 20,000 by the end of the 1990s. Total investment made in the SSIs amounted to Rs 3,470 crore at the end of March 2001 and they provided employment for 11 lakh people. In terms of number of units, there seems to be good progress in the area of SSIs. However, it has been pointed out that the rise in the number of units is on account of two unhealthy practices, namely, (1) high level of unemployment, due to which more people are attracted to the sector 'to start something' with government support and easy credit from banks without undertakingany real activity; and (2) the target system followed for registration of as many units as possible by the government to inflate the number of SSI units [ISED 2001]. Hence, the number of units registered does not IV really reflect the actual investment and production activity. The general view is that at least around one-third of the total number Industrial Development of units is either non-existent or sick. According to official data, Kerala is proverbially an industrially backward state in the there were only 5,065 sick units in the state, which forms only country, with low manufacturingactivity. The state has only 589 2.1 per cent of the total number of units in 2000-01 (Table 8). medium and large industries, prominent among them being in The share of the number of SSIs in Kerala in the total SSIs the public sector. The number of state-level public sector units in India rose from 3.8 per cent in 1990-91 to 7.1 per cent in (SLPSUs) stands at 111. Besides, there were 19 central sector 2000-01. However, in terms of production, Kerala's share rose units. The state is still known for traditional industries like only marginally from 1.5 per cent to 1.7 per cent during this handloom, coir, cashew, handicrafts and beedi which provide period. It could, therefore, be inferred that: (1) there is some large-scale employment, especially to women. Most of these exaggeration in the total number of SSIs reported; and (2) SSI traditional industries are working on a cooperative basis with units in Kerala are relatively smaller units. It seems that the state support. These traditional industries are facing problems entrepreneurs are choosing the tiniest projects, perhaps due to due to low productivity, low investment, poor management and labour problems in the state. Hence average employment per unit scarcity of raw materials. Employment generation has been the in the state at 4.6 persons was lower than the all-India average primaryobjective of these industries and as such often they were of 5.5 persons. Similarly, average value of production per unit not commercially viable. In this context, the results of the Fourth in Kerala was only one-fourth of average production at the allEconomic Census, 1998, relating to the unorganised sector India level (in 2000-01, average production was Rs 4.6 lakh per (covering many of the above mentioned traditional industries) unit in Kerala against Rs 19.2 lakh per unit at the all-India level. reveal that the rate of growth of enterprises15in Kerala declined According to the latest Annual survey of Industries (ASI) for from 3.49 per cent during the 1980s to 3.07 per cent during the 1999-2000, the share of Kerala in value added in the factory 1990s (till 1998). Similarly, the growth rate of workers engaged sector18 in India was just 2.3 per cent and the state ranked 13th in enterprises decelerated from 2.98 per cent to 1.99 per cent, in the country. In fact, the share of the state declined from respectively, duringthis period [EPWResearch Foundation2002]. Only recently, the state could attract knowledge intensive indusTable 8: ImportantParameters of Development tries such as software development, information technology, IT of SSls in Kerala enabled serviesl6 and telecommunication. Year New Units TotalNo Investment Production Total No of

Small Scale Industries17

As per official data, there was a consistent rise in the total numberof SSI units in the state from 18,954 in 1980-81 to 73,522 in 1990-91 and further to 2.4 lakh in 2000-01. The number of new units registered in a year rose from around 3,000 in the early
1980-81 1991-92 2000-01

Regist (No) of Units (Rs Lakh) 2,980 10,918 20,073 18,954 86.386 84,440 2,39,896 3,47,061

(Lakh) Employment Sick Units 2,58,500 4,97,992 10,99,825 11,14,495

5,065

Source: Economic Review, various issues, State Planning Board, Thiruvananthapuram.

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Chart5: Kerala's Share in Net Value Added and Capital Invested in Factory Sector in India
3.5 . . . . . . . ... ..

3.0 -

A\

~-- Net Value Added

-ah- CapitalInvested -

2.0 12.5

Around three-fourthsof the SLPSUs are more than 20 years old. Total paid-up capital of 109 SLPSUs was Rs 3,305.8 crore as on March 31, 2001. Outstanding term loans of SLPSUs were Rs 7,120.4 crore, of which the share of statutory corporation was 92 per cent. The debt-equity ratio of working companies was 0.70:1. In case of non-working companies, this ratio was higher at 0.75:1. Statutory corporations had relatively higher amounts of outstanding term loans and hence, their debt-equity ratio was very high at 1.73:1. Data presented in Table 11 shows that 109 SLPSUs in the state made a net loss of Rs 61.5 crore. However, if we net out subsidy received by some of the SLPSUs from the government, the net
Table 9: Principal Characteristics Characteristics of Factory Sector in Kerala Annual Annual Average Average Growth- Growth1980s 1990s 1.2 3.1 1.2 7.6 3.6 5.3 3.6 3.5

1980-81 1983-84 1986-87 1989-90 1992-93 1995-96 1998-99

3.3 per cent in 1980-81 to 2.4 per cent in 1990-91 and further to 2.3 per cent in 1999-2000. Similarly, the share of Kerala in capital invested in the factory sector declined from 2.9 per cent in 1980-81 to 1.8 per cent in 1999-2000 (Table 9 and Chart 5). Though Kerala's share in capital invested in the factory sector in India was very low (1.8 per cent), in case of total number of workers, its share was higher at 3.7 per cent, suggesting that the factory sector in Kerala is more labour intensive. The structureof manufacturingsector in the state is weak with dominance of industries based on agriculture/forestryand chemicals. In the two-digit industry-group classification of manufacturingin Kerala,three industrygroups, namely, (1) food products, (2) basic chemicals, and (3) rubber,plastic and petroleum together accounted for aroundthree-fifths of the total value added in 199798. At the all-India level, the share of these three industry groups in total value added was only 34.1 per cent. On the other hand, industry groups like metal and alloy, machinery and equipment and transportequipment have a very low share in Kerala at 14.9 percent as against 38.5 percent at the all-India level. The structure of the industrial base of Kerala could be considered as lopsided or less diversified as it is still dominated by less prominent industrygroupsand lacks capitalgoods production[Subrahmanian and Azeez 2000]. The performance of the factory sector in terms of output has not been impressive during the last two decades. The net value added (at constant prices) in the factory sector in Kerala recorded lower annual growth of 5.5 per cent from 1980-81 to 1999-00 as against 6.7 per cent all-India and higher growth rates recorded in the neighbouring states. While net value added at the all-India level rose by 6.6 per cent per annum in the 1990s, there was deceleration in the rate of growth in Kerala to 3.5 per cent from 7.6 per cent in the 1980s (Table 10).

1980-81 1990-91 1999-2000

No of factories Per cent of all-India Capitalinvested (Rs lakh)* Per cent of all-India Total of persons No engaged Per cent of all-India Net value added (Rs lakh)* Per cent of all-India Note:

3049 3.2 136464 2.9 281630 3.6 39063 3.3

3484 3.2 380909 2.0 274028 3.3 122207 2.4

4845 3.7 991837 1.8 303286 3.7 362980 2.3

*: Average annual growth rates are based on data at constant prices. Sources: (i) AnnualSurveyof Industries 1973-74 to 1997-98, EPWResearch 2002. Foundation, Mumbai, CSO, New Delhi. (ii) AnnualSurveyof Industries, Table 10: Average Annual Growth of Net Value Added in Factory Sector* (Per cent) 1980-81 to 1989-90 1990-91 to 1999-2000 3.5 5.3 7.4 9.2 6.6 1980-81 to 1999-2000 5.5 6.6 7.2 8.6 6.7

Kerala TamilNadu Karnataka Andhra Pradesh All-India

7.6 8.0 7.0 8.1 6.8

Note: *: Based on net value added at constant prices. Sources: (i) AnnualSurveyof Industries 1973-74 to 1997-98, EPWResearch 2002 Foundation, Mumbai, CSO, New Delhi. (ii) AnnualSurveyof Industries, Table 11: Aggregate Profit/Loss of PSUs* (Rs crore) Category Net Profit/Accumulated Capital Net Profit/ Loss Profit/Loss Employed Loss Per Cent of Capital -834.9 -66.8 -668.4 -1590.1 2126.1 -10.5 6584.6 8700.2 2.4 -1.6 -0.7(-4.5)

Performance of State-Level PSUs

Kerala has the largest number of SLPSUs in India: 111 out of 1,071 public sector units (10.4 per cent) [GoK 2002b].19 The high number of SLPSUs is also evident from the fact that while India has one PSU for every 9.5 lakh people, Kerala has one SLPSU for 3.3 lakh people. The report of the Comptroller and Auditor General of India [GoK 2002c] contains information on the working of 109 SLPSUs consisting of 104 government companies (of which 91 were working and 13 were non-working20)andfive statutorycorporations. A classification of SLPSUs according to the year of their inception revealed that around 80 per cent of them were startedduring the 1960s, 1970s and 1980s.

companies (91) +50.6 Working Non-working companies(13) -8.5 Statutory corporations (5) -103.6 AllPSUS (109) -61.5@

Notes: *: The data are based on the latest finalised accounts available to pertaining different years. Hence totalprofit/loss, thoughrelatedto all SLPSUs, is not related to a single year (on account of delay in accounts). finalising @:Totalloss of all SLPSUs willbe Rs 393.9 crore, if Rs 288.3 crore actual loss incurredby KSEB are taken into account instead of of reportedprofit Rs 44.1 crore. Source: Reportof the Comptroller Auditor and Generalof India,Commercial, Government Kerala,2002. of

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Chart6: Share of Non-Resident Deposits in Total Deposits

50

45
40

O 35
30 -

25 20
Co C)

10

C c00 C:)

r,( O CO

00 C 00 C O) OC)

C
) O a)0 O)

C c m

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C) C

) 0)0

) LO
) m

r
C) C

.
)

C 00 "o
a) C)

.0
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(\J

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oC) O O 00 O

loss will rise further. For example, the Kerala State Electricity Board (KSEB) reporteda net profit of Rs 44.1 crore during 19992000 after treating the subsidy received from the government as its revenue. If we net out subsidy received, the balance sheet of KSEB will show a loss of Rs 288.3 crore, instead of profit reported. The SLPSUs that are working (91 companies) made a net profit of Rs 50.6 crore. However, they have an accumulated loss of Rs 834.9 crore. Loss incurred by two statutory corporations, namely, KSEB and Kerala State Road Transport Corporation(KSRTC) wiped out the entire profit made by companies and resulted in a net loss. Accumulated losses of all SLPSUs has been estimated at Rs 1,590.1 crore. Net loss as a percentage of capital employed was -0.7 per cent (it would rise further to -4.5 per cent if losses incurred by the KSEB are also taken into account). In case of working companies, net profit as a percentage of capital employed was relatively better at 2.4. Though SLPSUs continued to incur losses and their paid-up capital eroded, the state government has been providing funds to them in the form of equity capital, loans and grants/subsidy. During 2000-01, total budgetary outgo to SLPSUs was Rs 210.9 crore. In recent years, there has been a gradual reduction in budgetaryoutgo to SLPSUs. While budget outgo as equity capital

and grants/subsidy remained almost steady, loans given from the budget have recorded a substantial decline, from Rs 207.6 crore in 1998-99 to Rs 61.4 crore in 2000-01. Government support to SLPSUs continues at it provides employment for 1.26 lakh persons. One of the major weaknesses of the industrial sector in Kerala is the lack of investment. It appeared that the state could not benefit much from the liberalisation policies followed by the government of India, as evident from the very low level of investmentmade in the industrialsector. During the 1990s, (from August 1991 to January 2002), Kerala's share in total number of investment proposals industrial entrepreneur memorandums (IEM) and letter of intents (LoI)) in the country was just 1.1 per cent and its share in proposed investment and employment was just 1 per cent (Table 12). Investment involved in 75 IEMs implemented in the state (out of 452 IEM proposals) during the past decade was only Rs 1,005 crore, which formed a meagre 0.6 per cent of total investments made at the all-India level. In case of foreign direct investment (FDI), the state's share in amount approved during the 1990s was even poorer at 0.6 per cent. The position presented in Table 11 reveals thatKeralastands nowhere near the neighbouring states in attracting investment, both domestic and external. The reasons for the industrial backwardness and low level of investment in the state could be attributedto a host of factors like (1) high cost of production mainly on account of higher labour charges, (2) scarcity of land and its high cost, (3) psychological fear ('psych cost', as some call it) of entrepreneursdue to labour unrest, (4) acute shortage of power and (5) lack of infrastructure facilities. Even though many attempts have been made to project the impression that there were no labour problems in the state, by the government in particular, the fact remains that to a great extent, the attitude of the labour force discourages economic activity in the state [Subrahamanian and Pillai 1986, Thampi

Table 12: Kerala's Share in Incustrial Investment Proposals and FDI (August1991 to January2002) States No Kerala TamilNadu Karnataka Andhra Pradesh All-India 513 4569 1929 3321 48138 IEM+LOI Per Cent Share 1.1 9.5 4.0 6.9 100.0 Proposed Investment Per Cent Rs Crore Share 10509 67840 53610 116504 1066534 1.0 6.4 5.1 10.9 100.0 ProposedEmployment Per Cent Nos Share 85954 734899 345970 562669 8629068 1.0 8.5 4.0 6.5 100.0 Amountof FDIApproved Rs Million Per Cent Share 15223 231002 212938 126779 2747149 0.6 8.4 7.8 4.6 100.0

Source:SIANews Letter,Ministry Industry, of of Government India,New Delhi. Table 13: Major Indicators of Commercial Banking Development in Kerala Indicators Major India No of branches banks (Rs crore) Deposits of commercial banks (Rs crore) Creditsof commercial Depositper branch(Rs lakh) Creditper branch(Rs lakh) Per capitadeposits (Rs)# Per capitacredit(Rs)# per Avg population bankbranch(no)# Deposits as per cent of nationalincome 8,262 4,646 3,599 56 44 88 68 64,000 15.5 June 1969 Kerala 601 153 105 25 17 73 50 34,000 _ Per Cent Share 7.3 3.3 2.9 44.6 38.6 83.0 73.5 _ _53.0 India 66,276 1097,049 6,83,591 1,655 1,031 10,682 6,656 15,496 March 2002 Kerala 3,318 51,656 22,062 1,557 665 16,224 6,929 9,596 65.7* Per Cent Share 5.0 4.7 3.2 94.1 64.5 151.9 104.1

Notes*: Relatingto March in 2001. #: Based on population 2001. Sources: 1 Basic StatisticalReturnsof Scheduled Commercial Banks in India,March 2001, RBI,January2002. 2 BankingStatistics,Quarterly Handout- March 2002, RBI. 3 State Level Bankers'Committee(SLBC),CanaraBank,Thiruvananthapuram.

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Chart7: Trends in C-D Ratio in Keralaand India

87
70_
60 55 a 6060

81-A 9

1939

The growth of NRDs was significantly higher than the growth of domestic deposits, especially during the 1990s (Table 14 and Chart 6).

Low Credit-Deposit Ratio

\\ . I

50-_
45

India _-

Kerala

40
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

1999, Harilal and Joseph 2000, Subrahmanianand Azeez 2000]. It may be true that wage rate in organised industries in Kerala is comparable to that in other states in India. However, wage rate among head load workers,21agricultural labourers, carpenters, mason workers, causal labourers, among others are high in the state. The problem is not that the labour force is more organised but that they are more aware of their rights than their duties, even among the unorganised labourers. However, there has been considerable reduction in the number of industrial disputes pending and mandays lost in recent years, giving credence to the view that Kerala's negative image on the labour front is more perceived than real.22

Financial of Sector:Operations Commercial Banks AlFIs and

In spite of the strong presence of many parallel institutions such as non-banking finance companies (NBFCs), cooperative banks and private financiers, the operations of commercial banks in the state have expanded substantially over the years. Of the 51 commercial banks doing business in the state, with a network of 3,318 branches, seven are Kerala-based banks (State Bank of Travancore+ six old private sector banks). At the end of March 2002, Kerala accounted for 5 per cent of the total number of bank offices, 4.7 per cent of deposits and 3.2 per cent of credit disbursed by commercial banks in the country. Despite high density of population,23the average population per bank branch in Kerala was significantly lower at 9,596 as against 15,496 at the all-India level, which indicates banking network in the state is widely spread out (Table 13). The activities of commercial banks in Kerala are more focused on deposit mobilisation than on credit expansion as is evident from the following factors: First, Kerala has a lower share in advances than share in deposits at the national level. Second, percapitadeposit in the state was substantially higher at Rs 16,224 as against Rs 10,682 at the all-India level and also outstanding deposits as per cent of NSDP, at current prices, in Kerala at 65.7 per cent were higher than the relevant proportion at the all-India level at 53 per cent (Table 13). Third, the average annual growth of advances has always been lower than the growth of deposits, especially during the first half of the 1990s (Table 14). One peculiar feature of deposits mobilised by the banks in Kerala is the dominance of non-resident deposits (NRD). The share of NRDs in total deposits in the state has been constantly rising over the years from 27.4 per cent during the second half of the 1980s to 35.5 per cent during the first half of the 1990s and furtherto 45.1 per cent during the second half of the 1990s.

The low level of credit-deposit ratio (CDR)24 in Kerala has been a subject of intense debate among bankers, government officials, academics and at various public fora. At the outset, it may be noted that the low level of CDR in the state is not a new phenomenon, as during the last three decades only on six occasions did the state have marginally higher CDR than that at the all-India level. In recent times, what is most striking is not the level of CDR being below the national average, but the widening gap between the ratio in the state in comparison with all-India level. Till 1991, the fall in the ratio in the state was more or less in tune with the declining trend at the all-India level, mainly due to the rise in statutoryreserve requirementsof banks. However, since then, the CDR in the state has been declining fasterthanthe decline/steady level at the all-India level, especially after 1994. From 1995 to 2002 (till March), on average, CDR in Kerala was 13.2 percentage points lower than the ratio at the all-India level. The latest available data pertainingto March 2002 revealed that the CDR in the state was 19.6 percentage points lower than the all-India level (Chart 7). If non-resident deposits (NRDs) are excluded from the total deposits in the state, the CDR rises to around 70-80 per cent (Table 15). Here it would not be out of place to make a comparison with CDR in the southern states. Over the years, the southern region has been having the highest level of CDR among the different regions in India. The latest data revealed that the CDR in Kerala Table 14 : Annual Average Growth of Deposits and Advances of Commercial Banks
(Per cent)
Period 1985-1990 1991-1995 1996-2002* 1985-2002* Total Deposits 13.9 21.4 16.8 17.3 NRD 19.4 28.5 20.4 22.5 Domestic NRD Per Cent of Total Deposits Deposits 12.0 18.1 14.5 14.8 27.4 35.5 45.1 36.6 Advances 13.6 13.7 16.1 14.6

Notes: * Till the end of March 2002; NRD - Non-resident deposits.

Table 15: C - D Ratio in Indiaand Kerala

(Per cent)
Year 1969 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002* India 77.5 73.0 67.0 66.0 65.0 55.6 57.3 56.8 55.3 54.8 56.0 58.5 62.3 Kerala 69.0 72.0 68.0 64.0 62.0 45.2 46.9 45.7 44.7 41.8 41.7 42.8 42.7 Per Cent Point Difference -8.5 -1.0 +1.0 -2.0 -3.0 -10.4 -10.4 -11.1 -10.6 13.0 -14.9 -15.7 -19.6 C-D Ratio Excluding NRD-Kerala

87.6 74.0 74.0 79.0 83.0 75.0 84.0 81.6 81.3

Note: * At end March. Sources: 1 Report on 'Trend and Progress of Banking in India', various issues, RBI. 2 SLBC, Canara Bank, Thiruvananthapuram.

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was 43.1 per cent in 2001 (as per sanction) as against 90.6 per cent in Tamil Nadu, 63.3 per cent in Andhra Pradesh and 59.3 per cent in Karnataka. The average CDR during the six-year period from 1995 to 2000 in Kerala was 44.3 per cent as against 89.5 per cent in Tamil Nadu, 72.8 per cent in Andhra Pradesh, and 68.6 per cent in Karnataka (Table 16). The investments made by the banks could compensate for the low level of advances. But the evidence showed that banks in Kerala have not been investing large funds in government securities, bonds, or equities. The credit + investment-deposit ratio (CIDR)25in the state was lower at 50.4 per cent in 2000 as against 63.6 per cent at the all-India level and 77.5 per cent for the southern region as a whole. In Tamil Nadu, the average CIDR during 1995 to 2000 was more than 100 per cent. However, CIDR in Kerala was even lower than the CDR at the all-India level, clearly showing that bank investment has not compensated for the lower level of advances in the state (Table 17). From the above facts, it may not be inappropriate to infer that deposits mobilised from Kerala are not fully ploughed back into the economy in the form of advances and investment. Perhaps banks are utilising the deposits mobilised from Kerala for making advances in neighbouring states. Inter bank-group variation in CDRs in the state was also observed. While the State Bank group and regional rural banks (RRBs) had betterCDRs, nationalised banks, private sector banks and foreign banks, with a combined share of 65 per cent of total bank branches and an equal percentage share in deposits, had lower CDR than the state average. Among the various groups of banks, what is intriguing is the performance of nationalised banks, with 1,049 branches and a deposit share of 35.4 per cent. The CDR of nationalised banks was 1.9 percentage points lower than the state average. However, nationalised banks, to some extent, compensated their low level of deployment of credit by making investments. Hence, their CIDR was relatively higher at 48 per cent, but it was lower than the state average. Private sector banks are lagging behind in both credit disbursement and investment as reflected in their lower CDR and CIDR (38.3 per cent and 41.1 per cent, respectively, in March 2002) (Table 18). It is noteworthy that none of the major banks operating in Kerala has CDR more than the national average of 62.3 per cent in March 2002. Often a question is raised whether the predominance of nonresident deposits caused the lower CDR. Table 19 provides data on the share of non-resident deposits by major banks and their respective CDRs. The table reveal that four banks, namely, SBT, Federal Bank, State Bank of India and Canara Bank, together accounted for 63.2 per cent of NRD in the state. All four banks have CDR and CIDR greater than/closer to the state average. In other words, banks which are raising higher NRDs extended

more credit-than other banks. Hence, it may not be possible to correlate a larger inflow of NRDs and the low level of CDRs in the state. In the context of declining CDR in the state, the Reserve Bank constituted a task force (TF) on credit-deposit ratio in Kerala in 1993 to examine the issue and offer suggestions for its improvement.26The TF noted that the banking system in Kerala was not able to cater to the developmental needs of commodity producing sectors due to important institutional and organisational constraints which are peculiar to Kerala. Low credit absorption capacity of Kerala's industrialeconomy was cited as a significant factor responsible for falling CDR. Poor industrial infrastructure, inadequate power and labour unrest have failed to attract industries in Kerala. The TF suggested a number of measures to improve the CDR to 60 per cent by 2000-01.27 After the submission of the report, a monitoring committee was formed to implement various suggestions. During the initial years, banks have taken some measures for improving the credit flow, especially to the small-scale sector, but subsequently there was no serious follow-up of the recommendations. Hence there was no noticeable impact on the ratio. The low level of credit deployment in the state can be on account of the following factors: - Lack of development strategy: An objective assessment of economic policies followed by the state over the last four decades
Table 17: C+l- D Ratio of Commercial Banks in Southern States (Per cent) Region/States 1995 I All-India IISouthernregion (i) AndhraPradesh (ii)Karnataka (iii)TamilNadu (iv)Kerala 65.3 80.9 88.4 74.1 97.2 56.4 As per Utilisation Average 1996 1997 1998 1999 2000 1995to 2000 69.0 65.4 63.6 85.1 84.9 81.3 94.9 90.0 84.7 79.1 79.5 77.4 104.2 106.3 100.7 55.3 56.0 55.2 62.5 77.8 82.5 73.8 97.7 50.8 63.6 77.5 78.4 72.1 94.5 50.4 64.9 81.3 86.5 76.0 100.1 54.1

Source: Reporton Trendand Progress of Bankingin India,various issues, Reserve Bankof India. Table 18: Bank Groupwise C-D Ratio in Kerala, March 2002 No of No of PerCent PerCent C-D C+1Banks Branches Shareof Shareof Ratio Deposit Ratio DepositsAdvances (Per Cent) (PerCent) State Bankgroup Nationalised banks Private banks banks Foreign RRBs Total 6 19 21 3 2 51 803 1049 1116 3 347 3318 35.0 35.4 33.8 0.8 2.1 100 36.0 32.8 29.4 0.4 5.1 100 45.3 40.8 38.3 24.9 108.7 42.7 53.6 48.0 41.1 28.9 117.4 48.8

Source:State Level Bankers'Committee,CanaraBank,Kerala.

Table 16: C-D Ratio of Commercial Banks in Southern States (Per cent) Region/States 1995 I All-India IISouthernRegion (i) AndhraPradesh (ii)Karnataka (iii)TamilNadu (iv) Kerala 55.6 69.9 74.6 65.1 68.8 45.2 1996 57.3 76.1 77.6 71.5 100.3 46.9 As per Utilisation 1997 1998 56.8 75.3 77.4 72.2 97.3 45.7 55.3 72.0 72.4 70.3 92.6 44.7 1999 54.8 68.7 69.1 66.7 90.3 41.8 2000 56.0 66.8 65.5 65.5 87.5 41.7 As per Sanction 2001 58.5 65.8 63.3 59.3 90.6 43.1 Average 1995 to 2000 56.0 71.5 72.8 68.6 89.5 44.3

Note:@ As per data providedby SLBC,the CD Ratioin December2000 was 43.6 per cent Source:Reporton Trendand Progress of Bankingin India,variousissues, Reserve Bankof India.

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revealed thatKeralawas more preoccupied with welfare-oriented programmes and there was no concrete strategy for the growth of the economy by identifying the areas in which the state has a comparative advantage over other states and regions in the country. - Low credit absorption capacity due to weak productive sectors: It is often said that the credit absorption capacity of the productive sectors is limited. Here, what one should note is that absorptioncapacity is limited due to the inadequate development of the productive sectors and not because the sectors have already reached high level of development. This is evident from the very low share of agriculture and industry in total advances of commercial banks in the state as compared with the all-India share of these sectors. Particularly, the share of industry sector was very low at 25.2 per cent of total credit in Kerala, was as against 43.9 per cent at the all-India level in 2001 (RBI, 2001). - Investment climate: Policies and programmes to proactively encourage private capital were absent. - Labour problems: The perceived militancy of labour force discouraged private investment. - Weak infrastructure: The condition of infrastructure in the state is very poor, with bad roads, severe power shortage and insufficient transport and communication facilities. - Lack of professional skills and risk aversion of the people: Keralites are skilled people but they are not often rated as good professionals when it comes to management. Further,in general, the people tend to avoid taking risk involved in starting new ventures, and hence they prefer to have office-oriented jobs. - Limited geographical area available for large-scale industries: Due to high density of population and diversion of available land for construction of houses, there is hardly any area available for starting large-scale industries. In fact, since 1975 no largescale industry has started in the state. - Continuance of colonial pattern of export: The state is exporting cash crops like spices, rubber, marine products, tea and coffee, without much processing. Even now a major share of these commodities are exported in raw form, thereby limiting the scope for value addition, creation of employment and the scope for credit deployment. - Reluctance of banks to extend credit: There is an impression thatbanks aretaking too much precaution while sanctioning loans and, at times this leads to rejection of loan application even for genuine credit requirements of viable projects. The very fact that private financiers (money lenders, known as 'blade companies' in Kerala) are thriving in the state28 is an indication that the formal banking system is not able to meet the credit requirements of a section of society that needs credit for retail trade, personal consumption, medical expenditure and social functions. The formal banking system should strive to gamer the business done by private financiers. Given the profile of customers (having no assets or collateral) and their credit requirements, the best suited arrangement to link them to the banking system would be the promotion of self-help groups (SHGs) throughoutthe state. It is gratifying to note that as a part of participatoryplanning for development there has been sizeable increase in the formation of SHGs in the state since 1997 [John and Chathukulam 2002]. As the level of deployment of credit is intrinsically linked with the economic activities in the state, it is essential to have a clear vision on the economic development the state wants to achieve. Along with vision, the state needs to evolve specific strategies

based on its given resource base. Due to limited geographical area and high density of population with a highly fragmented land space, the scope for large-scale cultivation and setting up big industries is very limited in the state. However, unlike many other states, Kerala has two specific advantages, namely, (1) highly educated and skilled manpower and (2) beautiful landscape throughout the length and breadth of the state. Hence, the state has to choose a development path which can develop and utilise the skilled manpower in knowledge-intensive industries. Unfortunately, there are not many highly reputed training and research centres in science, technology and management in the state. If private sector is encouraged to get involved in developing infrastructurefor professional education, banks can expand their advance in such areas. Further,the state has to encourage knowledge-intensive hi-tech industries. The situation calls for encouragement of industries belonging to information technology, software development, and bio-technology, so that the skilled manpower can be effectively used. Banks can play an increasing role in financing such activities. Similarly, the tourism sector needs considerable amount of investment for developing world class tourist cites and also for provision of better infrastructure. Given the limited resources of the public sector, the private sector can be encouraged in these sectors, which, in turn will provide
Table 19: Share of Major Banks in Non-Resident Deposits and C-D Ratio, March 2002 Name of Bank No of Branches Per Cent C-D Ratio C+I-DRatio Share of (Per Cent) (Per Cent) TotalNRD in Kerala 22.9 14.3 13.2 12.8 100.0 46.1 44.5 42.6 42.5 42.7 52.1 47.9 55.4 52.9 48.8

State Bankof Travancore 556 The FederalBank 301 State Bankof India 228 CanaraBank 238 State total 3318

Source: State LevelBankers' CanaraBank,Thiruvananthapuram. Committee, Table 20: Financial Assistance Disbursed by AlFIs in Kerala 2000-01 (Rs crore) Institution Amount (Rs) IDBI IFCI ICICI IIBI IDFC SIDBI NABARD* EXIM Bank** Total 177.0 20.0 104.5 48.6 259.6 110.3 4.0 934.0 2000-01 Per Cent Share of Kerala 1.1 0.9 0.3 2.8 8.3 10.8 0.8 1.3 Cumulative Disbursed TillMarch 2001 @ Amount Per cent Share of (Rs) Kerala 2287.6 344.0 1056.2 123.4 30.0 1987.8 648.6 60.9 7100.2 1.6 0.8 0.7 1.4 1.7 5.9 11.7 1.8 1.5

Notes: @ Since the inception of the respective institutions. * Non-farm assistance (outside SGSY). ** Forsetting up of EOUs. Source: Reporton DevelopmentBankingin India,variousissues, IDBI. Table 21: Per Capita Assistance (Rs crore) Item 1996-97 1997-98 200.5 542.3 37.0 Disbursed by AIFls 1998-99 1999-00 2000-01 217.2 567.2 38.3 274.5 656.8 41.8 293.3 682.4 43.0

Kerala 223.2 All-India 424.6 Keralaper cent all-India 52.6

Source: Reporton DevelopmentBankingin India,variousissues, IDBI.

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opportunities for banks to expand their lending within the state. In these emerging areas, either there are no clear guidelines for banks for financing or they have not entered the field on their own initiative. The role of the service sector has been continuously on the rise in the state economy and it now contributes more than one half of the state's income. However, the share of advances to this sector is not rising in tune with the growth of the sector. It is quite possible that some of the activities may not be undertaken for want of finance. The banks need to explore the possibility of financing viable projects in service sectors like hospitals, transport services, retail network, and other professional services. In the overall interests of the state and also of the bank, the banks need to be more pragmatic and a loan assessment has to be made more realistically by considering regional aspects so that genuine credit requirementsof the public could be fulfilled.

Credit Disbursement

by Financial Institutions

Over the years, the share of Kerala in total disbursement of credit by the all-India financial institutions (AIFIs)29 has been abysmally low. The data from 1995-96 to 2000-01 showed that the combined share of all AIFIs in credit disbursement in Kerala was only around 1.5 per cent (average). Institutionwise, in 200001 the share was particularly low in case of IDBI (1.1 per cent), IFCI (0.9 per cent) and ICICI (0.3 per cent). Among the leading AIFIs, only in case of Nabardand Sidbi the shares were relatively better at 10.8 per cent and 8.3 per cent, respectively (Table 20). A better picture of the level of activities of AIFIs in Kerala is provided by the per capita assistance disbursed by these institutions in Kerala vis-a-vis all-India levels. During the past five years, per capita assistance disbursed in Kerala was less than half of the per capita assistance disbursed at the all-India level, except in 1996-97. In Kerala, the per capita assistance of these institutions stood at Rs 293.3, as against Rs 682.4 at the all-India level in 2000-01 (Table 21). The state is in dire need of more investment in infrastructure, especially in rural infrastructure.However, the disbursement of loans in Keralaunder the Rural Infrastructure Development Fund (RIDF) of Nabard was very low and it has been declining over the years. The share of Kerala in RIDF (RIDF-I from 1995-96 to RIDF-VI in 2000-01), at the end of March 2001, was just 3 per cent. Kerala had a respectable share of 4.9 per cent in total disbursementof loans under RIDF-I. However, the state's share continuously declined in the subsequent tranches of RIDF and it was just 1.1 per cent in case of disbursement under RIDF-VI. Here, it is worthwhile to note that Nabard has been sanctioning higher allocation under RIDF to the state. However, the state was not able to avail of more funds as the loans already taken were not utilised in time and as per norms laid down by Nabard.

government was not able to pay cash on cheques issued or make payments on items already included in the budget. The government was not able to maintain its expenditure for the provision of social welfare, in which the state was a role model. The problem emerged in the form of alarming growth of revenue and fiscal deficits, substantial rise in public debt, increasing reliance on borrowed money for meeting current expenditure and drastic decline in capital expenditure. In this context, this section analyses various dimensions of the fiscal crisis. What the state has been experiencing in recent times is the classic problem in public finance: lower growth of revenue and higher growth of expenditure. Total revenue receipt as a per cent of NSDP has been on the decline in recent years. The proportion was lower at 12.8 per cent in 2000-01 as against 19.7 per cent in 1990-91 and 16.8 per cent in 1980-81. Revenue receipts recorded lower rate of growth during 1996-2000 at 10.1 per cent as against 17.7 per cent during 1991-1995. Over the years, there has been increasing dependence of the state on its own tax collection, primarilydue to decline in receipts and transfersfrom the government of India.30The share of own tax revenue of the state, in total revenue receipts of the state, has increased from an average of 45.5 per cent during the 1970s to aroundtwo-thirds in the 1990s. However, own tax revenue of the state recorded deceleration in growth during 1996-2000 to 11.3 per cent from 20.2 per cent during 1991-95 (Table 22). Its proportion to state domestic product (SDP) declined from 11.9 per cent in 1993-94 to 8 per cent in 2000-01. Reasons for the lack of buoyancy in tax collection can be traced to lower growth of agriculture and
Table 22: Rate of Growth of Major Fiscal Variables of Kerala (Per cent) Variable Revenuereceipts i) Owntax revenue ii)Ownnon-taxrevenue Revenueexpenditure Capital expenditure Revenuedeficit Grossfiscaldeficit Interest Pension Salaries Public debt 1991-95 17.7 20.2 18.0 15.6 14.9 -0.5 11.6 24.6 17.8 17.8 16.5 1996-00 10.1 11.3 -0.2 18.8@ 3.6 73.4@ 37.6 @ 20.6 26.6 19.0 21.0

Note: @ from1996-97 to 1999-2000. Source:WhitePaperon State Finances, Government Kerala,June 2001. of Table 23: Revenue Deficit, Fiscal Deficit and Public Debt of Kerala (Rs crore) Year Revenue Deficit Gross Fiscal Deficit* TotalLiabilities@ Rs Per Cent Rs Per Cent Rs Per Cent of GFD of NSDP of NSDP 27.2 74.2 422.0 402.8 3147.1 1886.4 2200.3 15.2(0.7) 23.0(1.1) 52.8 (3.5) 30.9(1.1) 81.2(4.6) 67.0 74.5 179.0 322.3 798.6 1302.9 3877.8 2812.5 2953.0 4.7 5.0 6.6 3.7 5.7 1041.6 2319.5 4716.8 10113.5 25721.5 27.3 35.7 38.7 28.6 37.7 -

VI Dimensions FiscalCrisis of
During the past two decades, the state has been facing fiscal problems. The problem, however, have aggravated recently as the government was unable to clear its bills and payment to the public has been held up for want of money. According to the white paper on state finances (WPSF) [GoK 2001], since August 1997, the state government never had any cash surplus. The

1980-81 1985-86 1990-91 1995-96 2000-01 2001-02(RE) 2002-03(BE)

Notes: RE:revisedestimate, BE:budgetestimate. @:Totalliabilities= public debt+other liabilities, *GFDconsists of revenuedeficit+ capitalexpenditure net loansand + advances. Figuresin bracketsare percentage to NSDP. Sources: 1 Budgetdocumentsof Government Kerala. of 2 Reportof the Comptroller Auditor and Generalof India, Civil,March 2002.

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Chart 8: Fiscal Deficit and Public Debt as Per Cent of NSDP 8 40

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industry, fall in prices of commodities, especially rubber and coconut (which affected sales tax and agricultural income tax collection), inability of the state government to tax the rising service sector and failure on the part of the government to tone up the tax collection machinery. Large arrears in tax collection and loan recoveries (loans provided by the state) have aggravated the fiscal problem [Joseph 2002]. On the other hand, revenue expenditure rose notably by 18.8 per cent during 1996-99 from 15.6 per cent during 1991-95. As a result, revenue expenditure as a percentage of NSDP was higher at 19.7 per cent in 1999-2000 as against 16.5 per cent in 199596, while total revenue as a percentage of NSDP stood at 12.8 per cent. Revenue expenditure formed around 93 per cent of total expenditure of the government in 2000-01. Further, salaries, pension and interest formed around 71 per cent of revenue expenditure of the state in 1999-2000 as against 56.4 per cent in 1980-81. During the second half of the 1990s, growth of pension and salarypayment recorded higher growth. Since nearly three-fourths of revenue expenditure is committed for payment of salary, pension and interest, there is not much scope for reducing revenue expenditure. During 2000-01 and 2001-02, the government managed to have lower revenue expenditure mainly by imposing restrictions on treasury payments and postponing some of the non-essential expenditure. Since the government has to honour the commitment made in the previous years, revenue expenditure during 2002-03 is budgeted to rise by 17.2 per cent. Revenue deficit has recorded substantial rise during the 1990s, especially from 1995-96 onwards. During the four-year period from 1996-97 to 1999-2000, the average rateof growth of revenue deficit was 73.4 per cent. Revenue deficit as a per cent of NSDP rose sharply from 1.1 per cent in 1995-96 to 4.6 per cent in 2000-01 (Table 22). Though revenue deficit recorded a decline during the subsequent two years (due to restrictions on treasury payments and postponement of expenditure), according to the budget for 2002-03, revenue deficit will rise by 16.6 per cent. Along with the rise in revenue deficit, there was significant rise in gross fiscal deficit (GFD) by 37.6 per cent during 1996-97 to 1999-2000 from 11.6 per cent during 1991-92 to 1995-96 (Table 22). The GFD, which is a measure of the amount that the state needs to borrow, was incurredlargely to finance revenue expenditure in the form of payment of salary and pension. This is evident from the rising share of revenue deficit in GFD. The share rose from 15.2 per cent in 1980-81 to 52.8 per cent in

1990-91 and further to 74.5 per cent in 2002-03 (BE). Another dimension of the rising fiscal deficit is provided by the ratio of GFD to NSDP. Ideally, the proportion should be around 3 per cent. However, this ratio has been on the rise in the second half of the 1990s and it stood at 5.7 per cent in 2000-01 (Table 23 and Chart 8). Decomposition of the GFD reveals a disturbingtrend.The share of capital outlay in the GFD of Kerala was only 21 per cent in 2001-02 (BE) as against 42.2 per cent in case of all the states in India (RBI 2002). It means that most of the borrowings, around 73 per cent, were utilised for meeting revenue expenditure. Another undesirable trend was the high level of borrowings from the public account (account of state government maintained in state treasuries31) to finance the GFD. When loans from the central government and market borrowings are not sufficient to finance the GFD, borrowingsfrom the public accounts areresorted to. In Kerala, the share of public account borrowing in financing GFD stood at the highest level of 35 per cent in 2000-01 (it was even higher at 63.3 per cent in 1999-2000) as against the average of 21.9 per cent in case of 15 major states in India [RBI 2002]. As deposits to the public accounts are mostly made by stateowned enterprises and cooperatives, under the direction of the government, borrowing from public account to finance GFD will in turn affect the financial position of state-owned enterprises. Outstanding liabilities of the state government include internal Table 25: Number of Days WMAand OD Availed by Kerala
Financial Year 1997-98 1998-99 1999-00 2000-01 WMA No of Days 41 174 204 213 OverdraftNo of Days 0 33 85 150

Source:Reportof the Comptroller Auditor and Generalof India,Civil,various of issues, Government Kerala.

Table 24: Net Funds Available as Per Cent of Fresh Borrowings*

Item 1996-97 1997-98 1998-99 1999-2000 2000-01 1 Internal 27 24 debt 12 3 16 2 Loansand advances -22 11 -23 6 -110 3 Otherliabilities 12 12 11 16 10 Total 10 10 11 13 9 * Net funds=debt Note: + receiptsduringthe year - debt servicing(principal interestpayments). Source:Report theComptrollerand of Auditor of General India, March 2002. Civil,

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debt, other liabilities and loans and advances from the central decentralisation of planning), which was classified as government. There was significant change in the composition revenue expenditure, though some portion it has been spent for of total liabilities. While the share of loans from central gov- capital-related works. Due to the financial crisis, the government has been resorting ernment declined, there was substantial rise in the share of other liabilities from 38.6 per cent in 1996-97 to 53.3 per cent in 2000- to ad hoc resource mobilisation through costly short-term bor01. The share of internaldebt increased from 24 per cent in 1996- rowings from cooperative institutions, welfare agencies and other 97 to 29.7 per cent in 2000-01. During 1996-97 to 2000-01, total institutions. Further, the state government has been almost liabilities recorded an average growth of 23 per cent as against continuously availing of ways and means advances (WMA) and 16.5 per cent growth during 1991-95. Thus, total liabilities more very often taking overdraft (OD) from the Reserve Bank.32 In than doubled in the five-year period from Rs12,368.8 crore in recent years, there was a consistent rise in the number of days 1996-97 to Rs 25,721.5 crore in 2000-01. Among the components on which the state government was on WMA and OD (Table 25). of total liabilities, there was some moderation in the growth of During 2000-01, WMA was taken on 213 days (almost 3/5th of loans and advances from the central government. However, the year and OD was taken on 150 days (almost 2/5th of the year). internaldebt and other liabilities continued to rise at a faster rate As per media reports, in February 2002, the government could (31.4 per cent and 30.2 per cent, respectively during 1996-97 not pay back the OD in time and hence RBI stopped payments to to 2000-01). Other liabilities recorded higher rate of growth the state on two days. Due to liquidity problem, the state continued during the 1990s, especially from 1994-95. Total liabilities as to impose controls on payments from the state treasuries. a percentage of SNDP at 37.7 per cent in 2000-01 have crossed the generally considered sustainable level of 30 percent (Table 23 Indicators of Financial Sustainability and Chart 8). The gravity of the situation is evident from the net retention from fresh borrowings. During 2000-01, only 9 per The financial performance of a state can be broadly assessed cent of the fresh borrowings were available to the state as in terms of indicators pointing to sustainability, flexibility and additional resource, after meeting annual repayment obligations. vulnerability of state finance. Sustainability is the degree to which It indicates that the state is approaching a debt trapas fewer funds a governmentcan maintainexisting programmesandmeet existing out of fresh borrowings are available for investments (Table 24). credit requirementswithout increasing the debt. Flexibility is the As a result of financial difficulties, the state has been curtailing degree to which a government can increase its financial resources capital expenditure. The rate of growth of capital expenditure to respond to rising commitments either by expanding its revduring 1996-2000 decelerated to just 3.6 per cent from 14.3 per enues or by increasing its debt burden. Lastly, vulnerability is cent during 1990-95. According to budget estimates, capital the degree to which a government becomes dependent on expenditure during 2002-03 is likely to be Rs 667.9 crore, which and, therefore, vulnerable to sources of funds outside its control is Rs 71 crore lower than the level of capital expenditure incurred or influence [GoK 2002]. five years back, in 1997-98. Another dimension on the declining In case of Kerala, indicators like higher negative balance from trend in capital outlay is provided by the ratio of capital outlay current revenues (BCR), rising primary deficit (GFD minus to capital receipts. In Kerala, this ratio has been less than one interest payments), significant rise in interest rate ratio, drastic indicating that a part of the capital was used for revenue decline in the ratio of capital outlay to capital receipts, worsening commitments. The ratio has declined sharply in recent times ratio of taxes to GSDP and low level of return on investment to 0.17 in 2000-01 from 0.64 in 1997-98, indicating tremen- suggests that the current financial position cannot be sustained dous pressure of revenue expenditure on capital receipts for non- in the future. Other indicators like higher debt/GSDP ratio and capital purposes [GoK 2002c]. One of the reasons for the decline high deficit indicators reveal that the state has lost flexibility in in capital expenditure in recent times has been attributed to fiscal management and it is getting more vulnerable to factors the transfer of around 30 per cent of the annual plan outlay outside its control. The ratio of assets to liabilities deteriorated to local self-governments (financial devolution under over the years and in 2000-01 it was 0.47. Ideally, the ratio has
Table 26: Major Financial Indicators of Kerala Indicators Financial of Health I Sustainability a) BCR(Rs crore)* ratio** b) Interest c) Capital outlay/capital receipts(ratio) d) Totaltax receipts/GSDP (ratio) e) Statetax receipts/GSDP (ratio) on ratio f) Return investment IIFlexibility borrow a) Capital repay/capital (ratio) b) Debt/GSDP (ratio) III Vulnerability deficit$/fiscal deficit(ratio) a) Primary b) Revenuedeficit/FD (ratio) c) Outguarantees/revenue receipts(ratio) IVAssets/liabilities 1995-96 128 0.15 0.50 0.11 0.08 0.005 0.15 0.28 0.29 0.31 0.38 0.71 1996-97 142 0.17 0.51 0.11 0.08 0.003 0.18 0.28 0.28 0.42 0.32 0.71 1997-98 248 0.17 0.64 0.10 0.08 0.004 0.20 0.29 0.47 0.47 0.46 0.67 1998-99 (-)437 0.19 0.24 0.09 0.07 0.004 0.20 0.31 0.52 0.67 0.71 0.61 1999-2000 (-1)2069 0.24 0.14 0.10 0.08 0.006 0.18 0.33 0.57 0.80 1.0 0.52 2000-01 (-)1704 0.26 0.17 0.10 0.08 0.006 0.21 0.34 0.42 0.81 1.09 0.47

Notes: *BCR: Balancefromcurrent revenues - BCRis definedas revenuereceiptsminusplanassistance, grantsand non-planrevenueexpenditure. positive A BCRshows surplusfromstate's revenues for meeting planexpenditure. *:Interestratio=(interest revenue receipts- interestreceipts). payment- interestreceipts)/(total GSDP: Gross State DomesticProduct.$: Primary Deficit=fiscal deficit- interestpayments. Source:Reportof the Comptroller Auditor and Generalof India,Civil,variousissues, Government Kerala. of

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to be more than one, which in turn would indicate that the state government is solvent (Table 26). During the second half of the 1990s, therewas deteriorationin certain other indicators like ratio of primary deficit to NSDP and ratio of interest payment to revenue receipts.33 The above analysis brings out that the state has been facing deep fiscal crisis which is affecting the health of the economy. In this context, the white paper on state finances [GoK 2001] rightly pointed out the extent of unsustainable level of gross fiscal deficit and public debt and immediate financial requirements of the state to clear the pending dues. It also indicated some of the unhealthy practices followed by the state to tide over its financial problems like (1) transferof funds to public account,34 (2) borrowings from cooperative banks at higher rateof interest,35 (3) not utilising the money mobilised for infrastructureinvestment, (4) pending bills of contractors, medical suppliers and (5) resorting to controls on payments from the treasury. Another practice followed in recent times to tide over the situation was not financing the full fiscal deficit for the currentyear and, hence showing the uncovered gap as carryover deficit in the next year. Following the publication of white paper,36the government has hiked the electricity tariff, bus fare, and imposed more taxes in the last two budgets. However, there was no attemptin the budgets to reduce the revenue expenditure, though the scope is very limited, which is really affecting the fiscal health of the state. As per the budget estimates, revenue expenditure will increase by 17.2 per cent during 2002-03 from the revised estimated for the previous year. Due to liquidity problems, the government continues to delay payments and postpone some of the revenue expenditures to the next year. On the positive side, the budget for 2002-03 has proposed introducing a Fiscal Accountability Bill and preparing a medium-term fiscal reforms programme (MTFRP). As per the MTFRP, drawn up subsequently, the ratio of fiscal deficit to state income will be brought down to 1.4 per cent during 2004-05 from 3.13 per cent in 2002-03. Further,the ratio of debt stock to state income will decline to 27.04 per cent from 31.03 per cent, duringthis period [GoK 2002a]. However, the government could not make a beginning in this direction in budget 2002-03 by reducing revenue and fiscal deficits. To find a lasting solution to the fiscal problem, the state needs to streamline the deployment of labourforce,37reorganise or wind up loss-making PSUs, target concessions and benefit of social welfare schemes to only people below the poverty line and enhance expenditure for the provision of infrastructure attractingemerging industries such as inforfor mation technology, bio-technology and tourism. Besides, efforts should be taken for strengthening the productive sectors of the economy, which in turncan improve the financial position through improvementin tax collection. Recently, the governmenthas taken some concretemeasuresfor fine-tuningthe fiscal situationand also for attracting privateinvestmentin the state. Itis expected thatthese measures will improve the image of Keralaas an investor-friendly state and thereby leading to higher growth and a better fiscal position.

during the 1990s. The Kerala economy has become a serviceoriented economy with significant share of tertiary sector in the composition of state income and its faster growth during the 1980s and 1990s. While manufacturing has lower share in state income and has been growing at a lower rate during the 1990s, construction activity has a relatively higher share and it has been growing at a faster rate. It appears that Kerala economy, driven by the service sector, which in itself depends upon expatriate remittance, is likely to lose its growth momentum sooner rather than later. In the agricultural sector, the changes in cropping pattern in favour of commercial crops continued during the 1980s and 1990s and in case of rubber the area almost doubled. There was a persistent decline in the production of foodgrain, especially rice production, which now constitutes only one-fourth of the requirement of the state. Though production performance of commercial crops was satisfactory till the late 1990s, there was deceleration in the rate of growth from 1997-98 onwards, mainly due to decline in prices, following large imports. Production of both coconut and rubber was severely affected. Kerala's share in the export of spices, cashew kernels, marine products and coir and coir products has declined over time. With the removal of quantitative restrictions on imports, productivity improvement assumes critical importancefor facing the competition and growth of the sector. The state continues to be industrially backward, with few medium and large industries, weak traditional industries and unhealthy SSIs. Though there was consistent rise in the total number of SSIs in the state, due to an apparent preference for tiny units, output and employment generation per unit was limited. Over the years, the share of Kerala in capital invested and value added in the factory sector in India has declined considerably. The factory sector in Kerala appears to be more labourintensive and it is lopsided with the dominance of agriculture/ forestry and chemical industries and lack of capital goods industries. During the 1990s, there was deceleration in the rate of growth of value added in the factory sector. Kerala has the largest number of SLPSUs in India (111 out of 1071) and their accumulated losses is Rs 1,590 crore. One of the major weaknesses of the industrial sector in Kerala is the lack of investment. The state's share in total investment proposals and projects implemented in Indiawasjust 1.1 per cent and 0.6 per cent, respectively, during the 1990s. Further, its share in FDI was very low at 0.6 per cent. Kerala's negative image on the labour front is more perceived than real as there has been considerable reduction in the number of industrial disputes pending and mandays lost in recent years. The revival of the industrial sector hinges on labour reforms, adequate power supply, good infrastructure facilities and private investment. Commercial banks in Kerala seemed to give more thrust to mobilisation of deposit than credit expansion. Since 1991, there has been a drastic decline in credit-deposit ratio in the state. Credit + investment - deposit ratio was also lower in Kerala and it was even lower than CDR at the national level. Among the southern states, Kerala has the lowest CDR. Higher proportion VII of non-resident deposits in total deposits of banks may not be a significant factor responsible for the lower CDR in the state. and Summary ConcludingRemarks Reasons for low CDR can be on account of lack of credit At the macro level, there was a revival in the growth of state absorptioncapacity in the weak productive sectors and banks not income during the 1990s from a phase of low growth during the evolving suitable policies to expand credit to the rising services 1980s. There were three phases in the growth of state income sector and wean away borrowers who are depending on private

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financiers. Kerala's share in total disbursement of credit by AIFIs was abysmally low at 1.5 per cent and their per capita credit was less thanhalf of all-Indialevels. Thereis scope for disbursement expansion of credit by banks and AIFIs in the state throughSHGs. With regard to public finance, during 1996-97 to 1999-00, revenue deficit increased by 73.4 per cent and fiscal deficit by 37.6 per cent. Fiscal deficit as a per cent of state income stood at 5.7 per cent in 2000-01 against 3.7 per cent in 1995-96. Total liabilities of the government more than doubled during the five years from 1996-97 to 2000-01 and as a per cent of NSDP stood at 37.7 percent in 20G0-01. There was hardlyany growth in capital expenditurein real terms. To manage liquidity, the state has been making ad hoc resource mobilisation from cooperative banks, state-owned corporations, availing WMA and OD from RBI, delaying payments and imposing controls on the treasury.Various fiscal ratios revealed that the current fiscal position cannot be sustained in the future and the state has lost flexibility in fiscal management and is increasingly vulnerable to factors outside its control. A lasting solution to the fiscal problem lies in the growth of the economy, rationalisationandredeployment of the workforce in the public sector, reorganisation or winding up of loss-making SLPSUs, and targeting concessions and benefit of social welfare schemes to only people below the poverty line. To conclude, the analysis attempted in the paper brought out the fact that with low growth of productive sectors, very low level of investment, worsening fiscal situation, rising imports, and poor performance of SLPSUs, the economy of the state is in a perilous condition. It is, therefore, imperative for the state to evolve concrete strategies for the growth of the economy by focusing attention on productivity improvement in agriculture and larger private investment in the industrial sector. The state needs to identify the areas in which it has a comparative advantage over other states and regions in the country. The obvious choices for the state are the development of information technology, tourism, advanced health care services and scientific research and traininginstitutions. These areas can capitalise on the already built-up social assets like high level of education and standard of living and also the natural beauty of the state. So far, the state has not been encouraging sufficient amount of private investment in the economy. Given the fact that there is very little resource available with the government, the state has to take measures for attracting larger private investment, including FDI, in selected areas. [3 Addressfor correspondence: jeromipd@hotmail.com

Notes
[This paper expresses the personal views of the author and not of the institutionto which he belongs. The authoris highly indebtedto K A Menon him forencouraging to writethepaperandvaluablecommentsandsuggestions offered on in its earlier version. Assistance received from AbrahamDavid and K Premavatiis thankfully acknowledged.] 1 Sub-title adopted from Franke and Chasin (1999). 2 The major factors enabling high standardof living in the state include the following: (1) welfare-orientedpolicies followed in the state, even before the formationof the state, (2) higher government spending for educationand healthcare and (3) large amountsof remittancesreceived from Keralites working in other parts of India and abroad, especially in Arabian countries. 3 At the end of December 2000, the number of job-seekers in the live registersof employmentexchanges in Keralastood at 41.86 lakh, which formsaround13.1 per cent of total populationof Kerala.One significant featureof job seekers in Keralawas the high proportionof people with

educationalqualificationsabove pass in secondaryschool (SSLC). Their share in total work seekers rose from 51.5 per cent in 1980 to 77.4 per cent in 2000. In case of unemployment,there is a paradoxicalsituation in the state. While the state is facing shortage of agriculturallabourers and constructionworkers,the numberof job-seekers in the live registers of employmentexchangeshas been on the rise, mainlydue to a preference for white-collarjobs. Here it is also worthwhileto note thatemployment in the organised sector recordedonly a marginalgrowth of 1 per cent per annumduring 1980 to 1999. Duringthe 1990s therewas deceleration in the rate of growth of employment to 0.4 per cent per annum from 1.5 per cent duringthe 1990s. Public sector accounts for more than half of the employment in the organised sector, the share of which stood at 52.6 per cent in 1999. 4 Migration and foreign remittances play a crucial role in shaping the economy. The number of emigrants from Kerala employed abroad in 1998 at 12.2 lakh (out of total emigrantat 13.6 lakh) was equal to the total workforce in the organised sector in Kerala. However, since then there seems to be a noticeable reduction in total numberof emigrants from Kerala- from 13.6 lakh in 1998 to 11.4 lakh in 2000 or 16.2 per cent [Kannanand Hari2002]. While the overall impactof the migrationremittanceswas favourableto the economy, it had a dampeningeffect on the goods producingsectors due to resourcemovementand spending effect associated with remittance boom, similar to 'Dutch disease' [Harilal and Joseph 2000]. 5 One significant featureof the Keralaeconomy is the wider presence of public sector in most of the economic activities in the stateand existence of a less vibrantprivate sector. Irrespectiveof the governmentsruling the state, there was an overwhelmingpreferencefor economic activities undertakenby public sector, and private initiative was not encouraged to the desired extent. The result was the existence of a large number of loss making public sector enterpriseswith poor quality of products and services. Thereare very few privatefirms in Keralawhich can make a difference to the state economy. 6 A significant decision on decentralisationof planning in the state was taken in July 1996, when the state governmentdecided to earmark3540 per cent of the Plan outlay for projects and programmesdrawn up by the local bodies. Further,the governmentalso resolved to launch a 'People's Campaignfor the Ninth Plan' in orderto ensure that the local bodies preparetheir local plans in a scientific, participatory and timebondmanner. Introduction grassrootslevel decentralisation planning of of since 1996 was indeed a majordeparture from the developmentstrategy followed till then. 7 The major measures taken by the government included the following: (i) announcementof new industrial,IT and labour policies, (ii) higher plan outlay targetedfor the Tenth Five-Year Plan, (iii) rationalisingthe strengthof governmentemployees (identifying the surplusposts which are not filled up and reducing the sanctioned strength),(iv) withdrawn some of the facilities availableto the governmentemployees, (v) contract a loan from Asian Development Bank for fiscal, power sector and PSU reforms, (vi) initiate action for restructuringPSUs according to the recommendations made by the Enterprise Reforms Commission, (vii) proposalto hold a global investorsmeet in Novemberand(viii) hiked user charges for some of the government services. 8 The stateincome,estimatedby theDirectorate EconomicsandStatistics, of Government of Kerala (GoK) does not fully reflect the remittances received from the Keralites working abroad, which is regardedas the backbone of the state economy. Due to lack of appropriate accounting of foreignremittances, stateincome figuresmay not adequately the reflect the actualeconomic situationin the state.Ideally,the stateincome figures need to be blown up by a factor representingthe remittancesreceived in the statefromabroad.However,thereis no reliabledataon totalamount of remittancesfrom abroad.The only available data are the outstanding non-residentdeposits with the commercial banks in the state. Deposits form only a portion of total remittancesand, hence, it can at best be taken as a crude indicatorof remittances.The outstandingnon-resident deposit with commercial banks in the state, at the end March 2001 at Rs 21,430 crore,formedaround31 per cent of net statedomestic product (NSDP) at currentprices in 2000-01. If only net additionto the deposits during 2000-01 was taken, which is more appropriatein the context, then the proportion is around 4 per cent. Kannan and Hari (2002) estimatedthe annualremittancesin 1999-2000 at Rs 14,158 crore,which will constitute around 22.6 per cent of state income. 9 To derive annualaveragegrowthratefrom 1980-81 to 1992-93, we have used old series datawith base year 1980-81 and for the subsequentyears new series data with base year 1993-94 have been used. 10 During the 1980s, annual average rates of growth of NSDP of Tamil

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and Andhra Pradesh were 5.7 per cent, 5.1 per cent Nadu, Karnataka and 6.6 per cent, respectively. 11 During the first phase, national income recorded lower growth of 6.2 per cent. In the second phase, national income grew at a higher rate of 6.6 per cent. In the last phase, the growth of nationalincome was lower at 6.2 per cent. shift undergonein Kerala was not in line with Kuznet's 12 The structural of framework economic growthand structure[Kuznets 1974]. In Kerala, even before the primaryand secondary sectors developed, the tertiary sectorhas grown fasterand became the dominantsector of the economy. 13 Productivityof major crops of the state was lower than productivity achieved in other majorproducingstates. For example, productivityof rice in Keralaat 2,162 kg per hectare in 2000-01 was lower than 3,506 kg in Punjab,3,415 kg in Tamil Nadu, and 2,842 kg in AndharaPradesh. 14 Consistentdataon Kerala'ssharein exportof the above items from India are available only in case of marine products and cashew kernels. 15 Consisting of (i) own account enterprises operating with the help of householdlabour,(ii) establishmentsengaging at least one hired worker on a fairly regularbasis. 16 There is no official data available on total numberof software and IT relatedfirms in the state.Most of these firms in the stateareconcentrated and in Thiruvananthapuram Kochi. The Technoparkat Thiruvananthapuramhas around60 firms employing around 5,000 people. Software exports from Keralaare estimated at aroundRs 140 crore in 2001-02, at which compares very poorly with exports from Karnataka Rs 9,903 core and in Andhra Pradesh at Rs 2,800 crore. 17 The SSI sector in Kerala is described as a dark 'island' as authentic data on the sector are not available. The data reported in Economic Review of the State Planning Board are based on voluntaryreporting. Hence, they are not very reliable [ISED 2001]. 18 RegisteredUnderFactoriesAct, 1948 - (i) Units with 10 or moreworkers with power and (ii) units with 20 or more workers without power. 19 However, according to reportof the Comptrollerand Auditor General of India (CAG), as on March 31, 2001, there were 104 government companies and five statutorycorporationsin the state, taking the total numberof SLPSUs to 109. Further,according to the Economic Review 2001, published by the state planning board, the number of SLPSUs at corporation. reported 112,consistingof 103companiesandninestatutory 20 Total investmentin 13 non-workingcompanies was estimatedat Rs 40.2 crore. Most of the non-workingcompanies belonged to agricultureand industrysectors. Accumulated loss of these companies was estimated at Rs 66.8 crore. Of the 13 non-working companies, 2 became nonworking even before they startedcommercial production.All the nonworkingcompaniesareunderclosure (7) or liquidation(6) underSection 560 of the CompaniesAct, 1956 for the past several years - 18 years in respect of some companies [GoK 2002c]. 21 Head-loadworkers, doing loading and unloading, are well known for tactics.Whetherloadingor unloading, theirexploitativeandintimidatory they charge for two stages in handling things ('atti and mari') at two different rates. They will not allow others to load and unload even householdgoods. Sometimes they even charge for loading or unloading done by others(it happenswhen head-loadworkersare eithernot readily available or they are not trusted for the safety of things loaded or unloaded), which is termed in Kerala as 'nokkukooli', meaning that money is chargedforjust looking at loading or unloadingdone by others. To control unlawful practices, the government is proposing to enact a new labourbill titledas "TheKeralaLoadingandUnloading(Prohibition of Extortionary,Intimidatoryor other Unlawful Practices) Bill, 2002, whichsupplements some of the clauses of the KeralaHeadloard Workers' Act, 1978, which had encouraged much of the unhealthy practices in the loading and unloading sector. The proposed bill aims at containing the intimidatorypractices and it will provide full freedom to ordinary individualsto loadandunloadgoods for theirdomestic use andin notified areas. The Bill also offers severe punishmentfor intimidatorytactics. 22 The numberof disputespending during 2000-01 declined to 2,241 from 3,303 during 1995-96. Similarly, the numberof mandays lost declined from 23.7 lakh in 1995-96 to 1.38 lakh in 2000-01. 23 In Kerala,populationdensity was 819 per sq. km. in 2001 as against 324 at the all-India level. Kerala is the third most densely populated state in India after West Bengal and Bihar. 24 CDRis a simpleanda usefulconceptto measurethe extendof deployment of credit relative to the deposits raised by the banks from a particular region.However,CDR may not adequatelycapturethe intensityof credit dispensationas the ratio is influenced by either the level of credit or the level of deposits.For example, high level of deposits underestimates CDR, even if there is no decrease in credit deployment. On the other hand,low deposit level overestimatesthe ratio even with the same level of credit.In the context of Kerala,huge inflow of non-residentdeposits

(NRD), without any correspondingeconomic activity undertakenin the CDR. Hence, therehave been suggestionsto exclude state,underestimates NRD deposits from total deposits to arriveat the CDR morerealistically. as However, the exclusion of NRD deposits may not be appropriate it defeats the very purpose of assessment of credit deployment out of deposits available in a geographicalarea. Further,if NRD deposits are to be excluded, then the credit availed by non-residentsfrom the banks need to be excluded to get a realistic picture. 25 CDR may not provide a complete picture of the extent of resources deployed by the banks in a particulargeographical area as it captures only the traditionaladvances extended and it does not take into account investmentsmade by the banks in governmentsecurities, bonds floated by state level corporations,equities of corporates,etc. To capturethis, ratio (CIDR) is estimatedtakinginto account credit+investment-deposit advances and also banks investments. This ratio internalises the SLR of requirements banks.Apartfrom advancesand investmentin approved securities, banks also deploy resources in marketableinstrumentslike debt securities, bonds issued by local bodies and corporation,equities, etc., not all are officially approvedfor SLR requirements.Hence, to get a complete picture, investment made in marketableinstrumentsalso needsto be considered.However,due to lackof reliabledataandproblems associatedwith its calculation,these investmentsare not capturedeither in the CDR or in the CIDR. 26 The chairmanof the task force was D D Avari. Its reporttitled 'Report of the Committee on Credit-Deposit Ratio in Kerala', was submitted in 1994. 27 Major recommendationsof the TF included the following: (i) treating small agricultural advances given against small size of operational landholdingsas business propositionsby banks, (ii) better cooperation between various governmentdepartmentand banks, (iii) formulatinga composite loan policy for financinghomesteadfarming,(iv) government may create a conducive industrialclimate for rapid industrialgrowth, (v) banks may provide largeradvances for agriculturalmarketing,food processing, tourism, housing, education and infrastructurefacilities, (vi) governmentmay evolve schemes for tying up NRDs with productive ventures, etc. 28 There is no precise estimate on the numberof private financiersin the state. Experts suggest that their number would be around 12,000 and their outstandingcredit is estimated at around Rs 6,000 crore, which will form 18.5 per cent of total credit of all financial institutions(banks, cooperatives, NBFCs and private financiers) in the state. 29 Comprisingof six all-India development banks, namely, IDBI, ICICI, IFCI, IIBI, IDFC and SIDBI, and two specialised financial institutions, namely, Nabard and Exim Bank. 30 As per the awardof the Eleventh Finance Commission, Kerala's share in centraltaxes will be reducedfrom an average of 3.85 per cent during 1995-2000 to 3.06 per cent during 2000-05. Further,Kerala's share in discretionarygrantswill be reducedfrom 2.49 per cent to 1.39 per cent, respectively. This will result in net loss of Rs.3,664 crore to the state during 2000-05 [GoK 2001]. 31 Deposits into the public accountsmaintainedin state treasuriesare made by individuals and institutions. 32 The Reserve Bank providesWMA to the state governmentsto help them tideover temporary mismatchesin thecash flow of receiptsandpayments. There are two types of WMA - normal and special. The normalWMA are clean or unsecuredadvances, while special WMA is given against the pledge of cenrtralgovernment securities and treasurybills held by state governments.For the year 2002-03, the normal WMA limits are worked out taking into account the three years' average of revenue receipts and capital expenditurefor fiscal years 1998-99, 1999-00 and 2000-01 and applying to this base a ratio of 2.4 per cent for non-special category states like Kerala.At present,the normalWMA for the Kerala state is aroundRs 225 crore and special WMA at aroundRs 11 crore. Besides, the state is allowed to run an overdraft for 12 consecutive working days beyond which RBI will stop payments to the state. The overdraftshall not exceed 100 per cent of normal WMA limits. If the overdraftexceeds 100 per cent of WMA, in more than one occasion, the state will be given five days to bring it down, otherwise payment to the state will be stopped. 33 The ratioof primarydeficit to NSDP increasedfrom 1.8 per cent during the first half of the 1990s to 2.4 per cent duringthe second half of 1990s. Similarly, interestpaymentsas a per cent of revenue receipts increased from 16.5 per cent to 19.5 per cent, respectively,duringthe above period [RBI 2002]. 34 Transferto the public account takes place when funds from the state's budgetare withdrawnfrom the treasuryand re-depositedinto the public account of the state maintainedin the treasuries.This process does not involve any outflow of cash from the treasury.It is a notional method

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of accountingplanexpenditurewithoutactuallyeffecting the expenditure [GoK 2001]. 35 During 1999 to 2001, the governmenthas borrowedaroundRs 505 crore from 10 district cooperative banks, in violation of existing provision of RBI/Nabard.Though RBI and Nabarddirectedthe state government to pay back the money, the state could not comply with the direction. Following this, Nabard has suspended refinance to state government. 36 The WPSFhas pointedout the symptomsof financialcrisis andsuggested immediate measures requiredfor solving the crisis (liquidity ) within a yearor two. However,it has neithergone into the basic reasonsleading to the crisis nor does it prescribeany long-term solutions. Basically, it is a reportfor the crisis management.Hence, even if the proposals are implemented,the same problems will remerge after some time, unless the state follows sound economic policies to improve productivityand thereby bringing the economy on a higher growth curve. 37 Thereis no preciseestimateon thenumberof stategovernment employees, which is made available to the public. Their number is reportedto be around lakh[Joseph2002]. Currently, governmentis in the process five the of identifying surplus posts, which is expected to be around 60,000. Recently. the governmenthas identified 16,329 posts as surplus in 25 which constitutes 12 per cent of staff in these departments. departments,

Economy: An Open Economy Perspective,' Working Paper, No 305, Centre for Development Studies, Thiruvananthapuram. ISED, (2001): 'An ApproachPaper on Development of Small Enterprises in Kerala',Institutefor Small Enterprises Development,ISED Small and EnterpriseObservatory,Cochin. John, M S and Jos Chathukulam(2002): 'Building Social Capital through StateInitiative- Participatory Planningin Kerala',EconomicandPolitical Weekly. May 18. Joseph, K P (2002): 'Strike by GovernmentEmployees: Much Ado about Nothing?, Economic and Political Weekly, February23. Kannan, K P and K Pushpangadan(1988): 'AgriculturalStagnation and Economic Growthin Kerala:An Exploratory Analysis', WorkingPaper, No 227. Centre for Development Studies, Thiruvananthapuram. - (2000): 'Food Security in a Regional Perspective - A View from Food Deficit Kerala',WorkingPaper,No 304, CentreforDevelopmentStudies, Thiruvananthapuram. KannanK P and K S Hari (2002): 'Kerala's Gulf Connection:Remittances and their MacroeconomicImpact' in K C Zachariah,K P Kannanand S IrudayaRajan (eds) (2002): Kerala's Gulf Connection:CDS Studies for Development Studies, Thiruvananthapuram. Kuznets,Simon (1974): Economic Grovthland Structure.Oxford and IBH, New Delhi. DevelopmentReport2001, PlanningCommission (2002): National HuIman Governmentof India. Prakash,B A (1999): 'Economic Reforms and the Performanceof Kerala's Economy' in B A Prakash(ed), Kerala's EconomicDevelopment.Issues and Problems, Sage Publications. New Delhi. RBI (2001): Basic Statistical Returns of Scheduled CommercialBanks in India, Reserve Bank of India, Volume 30, March 2001. - (2002): State Finances: A Study of Budgets of 2001-02, Mumbai. Subrahmanian,K K and P Mohanan Pillai (1986): 'Kerala's Industrial Backwardness:Explorationof AlternativeHypotheses', Economic and political Weekly, Vol XXI, No 14, April 15. Subrahmanian K and E Abdul Azeez (2000): 'Industrial K Growthin Kerala: TrendsandExplanations', No WorkingPaper, 310, CentreforDevelopment Studies, Thiruvananthapuram. and Thampi,M M(1999): 'EconomicLiberalisation Industrial Development in Kerala:Challengesto New Investments'in B A Prakash (ed), Kerala's Economic Development:Issues and Problems, Sage Publications,New Delhi. Thomas, P M (1999): 'AgriculturalPerformancein Kerala' in B A Prakash (ed), Kerala's Economic Development: Issues and Problems, Sage Publications, New Delhi.
on International Labour Migration from Kerala State in India, Centre

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Kerala, United Nations, New York.

to 1997-98, Mumbai, 2002. Franke,Richard W and Chasin H Barbara(1999): 'Is the Kerala Model Sustainable? Lessons from the Past: Prospects to the Future' in M A Oomlnen(ed), Kerala'sDevelopmentExperience, VolumeI,Concept Publishing Company, New Delhi. George, K K (1999): Limits of Kerala Model of Development, Centre for Development Studies, Thiruvananthapuram. GoK (2001): White Paper on State Finances, Finance Department, Government of Kerala. Thiruvananthapuram, - (2002a): 'ModernisingGovernmentProgramme(MGP)', website: http:/ - (2002b): 'ApproachPaper for State Level Public EnterprisesReforms in Kerala', Industries Department,Thiruvananthapuram. - (2002c): Report of the Comptrollerand Auditor General of India, for the year ended March 31, 2001(Commercial), CAG of India. Harilal, K N and K J Joseph (2000): 'Stagnation and Revival of Kerala
/w'w. ke ralagov. coni.

EPW Research Foundation (2002): Annual Survey of Industries 1973-74

REVIEW OF WOMEN STUDIES

April 27, 2002
The New Segregation: Reflections on Gender and Equity in Primary Education Literacy, Power and Feminism Gender and Curriculum Pre-adolescent Girls in Municipal Schools in Mumbai in Mid-19th Century Bombay Presidency - Vimala Ramachandran, Aarti Saihjee - Malini Ghose

Enrolment,Dropout and Grade Completion of Girl Children in West Bengal

- Piyali Sengupta, Jaba Guzha

- Dipta Bhog - Vacha Kishori Project Team - Veronique Benei

Missing Indigenous Bodies: Educational Enterpriseand Victorian Morality

October 26, 2002

Perception and Prejudice: Uncertainty and Investment in Gender

Labour,Market Linkages and Gender: Case Study of a Village in Tamil Nadu

Work, Caste and Competing Masculinities: Notes from a Tamil Village Women's Participation in Forestry: Some Theoretical Issues

- K Balasubramanian,P Tamizoli,
S Murugakani - S Anandhi, J Jeyaranjan, Rajan Krishnan - Debnarayan Sarkar, Nimai Das

- Paul H L Nillesen, Axel Gelfert

Women, Water, Irrigation:Respecting Women's Priorities Globalisation, InformationTechnology and Asian Indian Women in US For copies write to Circulation Manager Economic and Political Weekly Hitkari House, 284, Shahid Bhagatsingh Road, Mumbai 400 001 email: circulation@epw.org.in

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