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Disconnect between politics, economics

Disconnect between politics, economics
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First Published: Tue, Apr 12 2011. 09 42 PM IST
Updated: Tue, Apr 12 2011. 09 42 PM IST
The once famed Kerala model of development is gradually losing its sheen due to the looming second generation problems of this development strategy. Today the economy of Kerala is going through a phase where the state is unable to reap the gains from the visionary leadership of the past.
While focusing entirely on human development with heavy public investment in literacy, education, health and social security in 1960s and 1970s, the implicit assumption was that higher levels of human development would generate higher growth in the later stages. Yet, despite sustained high levels of human development, there was no sign of Kerala’s economic growth accelerating even when the rest of the country sped up in the mid-1980s.
Unemployment rates, especially among educated youth, started increasing during the 1980s. Faced with a stagnant economy, international migration, especially to West Asia, was a welcome respite for the people. Kerala got transformed from being an agrarian economy to a money-order economy, with very high levels of consumption and very poor goods production. Today Kerala has the highest rates of unemployment in the country and has touched nearly 29% in 2004-05 compared with the national average of around 8%.
Along with the rise in unemployment rates, Kerala has also witnessed the second highest crime rates in the country during 2001-08. Morbidity of the aged, especially in the wake of a weakening public health care system, has become critical. While life expectancy had increased and mortality rates declined to the lowest in the country, morbidity rates, especially of the aged, have peaked to an all-time high in Kerala. Other indicators that point towards Kerala’s impending social crisis are high rates of suicides and alcoholism.
Meanwhile, the public expenditure-based development strategy is unsustainable. While poor economic growth kept the tax base low, the development model—dependent on heavy public expenditure—led to widening fiscal deficit in the state. The state coffers are relatively empty to provide any major additional social securities or pensions to the vulnerable. Nor does the state have sufficient resources to revamp an ailing public health care system.
In the last two decades the economy has started growing at a robust rate of around 7-9%. However, the growth is almost entirely concentrated within the services sector. This implies that even if the economy is growing at high rates, the proportion of tax to state domestic product (SDP) may not increase, since the Indian constitutional provisions do not allow states to levy tax on services, except on a few marginal sources. Another way to sustain the public funded Kerala model through deficit financing is also limited owing to instruments such as the Fiscal Responsibilities and Budget Maintenance (FRBM) Act, which restricts states from spending beyond their means. As a result, the share of development expenditure in Kerala’s budget dropped from nearly 70% of the revenue expenditure in the sixties to nearly 50%.
The development path that Kerala followed is inflationary in nature as well. On the one hand, Kerala has virtually a stagnant manufacturing sector, which implies that most goods need to be imported from neighbouring states, including essentials such as rice and vegetables. On the other hand, remittances flowing into the economy, along with a service-oriented domestic growth, ensured that despite high unemployment rates, consumption demand remained high, thus creating conditions ripe for spiralling inflation in the state. Any hike in prices, often due to crop failures in neighbouring states, or a rise in oil prices transmitted from the international market, create inflationary pressures.
It is now time to revisit Kerala’s economic and social future and develop a new vision. Business as usual may only accentuate the already visible signals of a society under strain. An economically sustainable model of development needs to find place instead of an unbalanced model of development. A sustainable model of development essentially needs to start with economic growth. But concentrating this economic growth in one sector, especially services, is not sustainable.
There is need for structural change. Agriculture needs to be brought back into focus, for reasons of containing food inflation, unemployment and political exigency. Basic economics teaches us that sustained productivity increase is fundamental to the manufacturing sector, and it is this sector that ensures sustained growth.
The backward and forward linkages between manufacturing and agriculture needs to be strengthened, for which the services sector should play a crucial role. The economy of Kerala should be placed on the edifice of this network of industries. This, in return, would probably widen the tax base, increase the tax-SDP ratio, and the state of Kerala could probably reinvigorate its weakening welfare state roles.
Now, take a look at the two contending forces to take power in Kerala: the Communist Party of India-Marxist led LDF (Left Democratic Front) and the Congress led UDF (United Democratic Fund). The political formations seem to be largely convinced that the need of the hour is more of the old. Hence, both have staked claim to the ownership of the legacy of Kerala’s development strategies and press ahead with the same.
A prominent feature in the manifesto of both the parties is providing employment to a large number of unemployed youth. While it is a laudable goal, it is essential that the government has a clear strategy to achieve this goal. Moreover, the government needs to ensure the employment generated is sustainable. Both parties seem to compete to provide larger social security to the people. But how is the state going to sustain such efforts? It is an opportunity for the people of Kerala to build a vision that will make it possible to sustain a welfare state.
Vinoj Abraham is assistant professor at the Centre for Development Studies, Thiruvananthapuram. The views expressed here are personal.
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First Published: Tue, Apr 12 2011. 09 42 PM IST