The economic implications of the Kerala floods
An analysis of the economic implications of the Kerala floods shows some short-term negatives. But all is not lost
Thiruvananthapuram: Over the past week, the entire state of Kerala is in the grip of a massive, unprecedented flood: the last time anything like this has happened was in 1924. The Kerala government has been trying to cope with the crisis. It has so far put up a very reasonable and credible relief effort. Help from the centre, although welcome, has been a meagre ₹600 crore. Now, the major question confronting the state and its hapless citizens is an assessment of the material damage to both public and private properties. There are at least seven implications of these catastrophic floods that have a strong and lingering bearing on Kerala’s economy.
The main source of income for the state exchequer is the goods and services tax (GST). Unofficial estimates show that in its first year of operation in 2017-18, the SGST (state GST) collected was only ₹7,000 crore, although an additional IGST (integrated GST) of equal amount will be forthcoming. Even including IGST, the total collection is still lower than what was being collected under the old VAT (value-added tax) regime. Kerala is essentially a consumption state, but consumption is now going to be adversely affected as many people have lost their livelihood.
With scaling down of consumption, GST collections may be adversely affected. However there can be an opposing force. Reconstruction and replacement by affected families, especially by those who can afford it, may actually precipitate a consumption boom, which may actually increase consumption, leading to a larger GST collection. So, it will depend on which of these two forces have an upper hand.
Roads and bridges
One of the worst affected is among the main arteries of the state, the Main Central, or simply the MC Road. Further, many village roads—especially in the hilly districts of Idukki and Wayanad—have been badly incarcerated. Landslips have completely cut off certain hill stations such as Nelliyampathy. This will further affect the living and working conditions of people living in these areas.
Even schools and other educational institutes have been affected, as many of them have been converted to relief camps. This has affected students, especially those who are in Class X and XII. This is an important challenge to a state where education is an important aspect.
Kochi international airport has been closed for over a week and the consequent rescheduling of flights have meant not only terrible inconvenience to travellers but also loss of revenue to the airlines and Cochin International Airport Ltd (CIAL). For CIAL, the non-aeronautical income, which is about 70% of its total income, will be adversely affected. Further repairing and reconstruction of structures and facilities will impose a heavy burden on this otherwise efficient and profitable firm.
In terms of gross cropped area, the three main crops in the state are coconut, rubber and paddy. Of these, the worst affected are paddy and rubber. One of the worst affected areas is Kuttanad—the rice bowl of the state. The area has been home to a number of poultry farmers, primarily duck hatcheries. This also has a significant negative implication for the livelihood of a number of small farmers. Also affected are plantation crops, primarily tea and spices.
Natural rubber growers have relatively been spared as the south-west monsoon (July through August) is a lean season. But Kottayam and Pathanamthitta districts—that have been badly affected— are also home to some of the major rubber plantations, and this is likely to dampen rubber production. The domestic price of rubber has risen by almost 92% during the week ended 18 August.
The two plantation crops that are badly affected are cardamom and black pepper. The production areas of Idukki and Wayanad have been very adversely affected, as these are also the areas where landslips have been rampant. Loss of hoofed animals, such as cows, goats, etc., are yet to be ascertained.
Services sector, tourism
The services sector accounts for about 63% of Kerala’s gross state value added and of which tourism alone accounts for about 10%. The other two services that are complementary to tourism are hotels, restaurants and retail trade, besides transportation (essentially air and rail). Some of the most important tourist spots are located in the districts of Idukki, Wayanad, Kottayam and Alappuzha. The recent floods have affected all the tourist spots, although efforts will be made to reopen them as quickly as possible.
The one saving grace is that Kerala is still open to business as Thiruvananthapuram and Kollam are not that much affected and tourists can still reach the state through the Thiruvananthapuram gateway. Also the tourism sector has shown great resilience and it is hoped to be back on its feet fairly soon. Even in the dark week of 13 August, there were no reports of tourists being holed up or trapped. If the roads can be repaired as quickly as possible, the sector can actually receive tourists from the forthcoming tourist season, which starts around October. The state will also have to deal with negative publicity that may be unleashed by other competing locales.
Kerala is considered a large market for both consumer durables and non-durables alike. According to the recently released National Family Health Survey 2015-16, 30% of the households in Kerala have at least six of the following assets— pucca house, electricity connection, mobile phone or a landline, air conditioner, refrigerator, TV, washing machine and motorized vehicle. People living in the worst affected areas may have lost or have to replace or repair some of these assets.
That is going to make Kerala a large market for these items. The probability of fridges and TVs being replaced is the highest. There will be a similar demand for small household appliances like electric irons, blenders, pressure cookers, and pots and pans. Given the liquidity crunch, the vendors of these items may have to come up with attractive packages. There will also be increased demand for water purifiers, pressure washers and other cleaning products to effectively clean up the mess, which the floods have left behind. So after an initial lull, there will be a huge spurt in the demand for these items.
One of the important lessons that Keralites will learn from this crisis is the need for having some sort of insurance protection for their homes or at least for their important assets. This is likely to increase the demand for home insurance rapidly, which at the moment is very minuscule. Many Keralites have learnt that having insurance for their cars has come in very handy, although many of them may have fallen to the sales tactics of insurance agents who promise significant reductions in yearly premiums by simply reducing the insurance declared values. In times of total loss of a vehicle, this can be foolhardy.
In short, the unprecedented floods of the week of 13 August have some short-term negative implications for the economy of the state. But given the way Kerala has managed the disaster, one is optimistic that it will make the state more strong to deal with future crises induced by capricious weather.
Sunil Mani is director and professor, Centre for Development Studies in Thiruvananthapuram, Kerala.
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