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In Kerala, a garment maker’s messy exit forces a reckoning

An umbrella manufacturing factory in Alappuzha, Kerala. The state has few major new industries, and although service sector jobs are now growing, it has failed to harness the IT boom of the last thirty years in a substantial way. (Photo: HT)Premium
An umbrella manufacturing factory in Alappuzha, Kerala. The state has few major new industries, and although service sector jobs are now growing, it has failed to harness the IT boom of the last thirty years in a substantial way. (Photo: HT)

  • A garment firm’s decision to pull the plug in the southern state has put the spotlight on Kerala’s quest for jobs.
  • There are many who believe that Kerala should focus on the high -tech industries of the future as its high prevailing wages makes it an unattractive destination for manufacturing businesses

It was a Sunday evening. A spirited debate is underway on the Clubhouse app with more than 1,200 eager Keralites glued to their cell phones. The discussion was on an issue that has in recent weeks animated the discourse in the southern state. Kitex Garments Ltd, a large employer and garment manufacturer, had announced it would not invest further in Kerala and would take a proposed investment worth 3,500 crore elsewhere. The immediate provocation, the company’s managing director Sabu Jacob said at the time, was a series of inspections—11 in less than a month—the company was subjected to, in what it claimed was an exercise in political intimidation.

Within days of him making the announcement, Telangana government sent a private jet to ferry Jacob and officials to the state. “The world has changed a lot, but Kerala refuses to change. We are 50 years behind other states," Jacob told reporters as he departed for Telangana.

Kerala chief minister Pinarayi Vijayan said Jacob’s moves were “motivated" and meant to sully the state’s investor-friendly image. The markets reacted a bit differently, however. Kitex’s stock rose 86% in one week—between 7 and 14 July—after its decision to move became public.

There is some political context to the dispute. In 2015, Jacob floated a voluntary organization called Twenty20—backed by Kitex’s corporate social responsibility (CSR) funds. The outfit undertook a range of charitable activities in the company’s home panchayat. As its popularity rose, it started fielding candidates in the local body elections and started winning a number of seats. It also fielded eight candidates in the assembly polls this year.

Economic pluse
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Economic pluse

So while the political tussle is localized, the episode has served to revive the debate around industry and jobs in the state. The highly literate state, which has social and development indicators comparable to European nations, also has an unemployment problem, which means a large number of Malayalis live and work elsewhere in the country or overseas. The unemployment rate among the youth was 36% in 2018-19, double the national average of 16%, according to the Economic Review tabled in the Kerala assembly in January 2021. Kerala has few major new industries, and although service sector jobs are now growing, the state has failed to harness the IT (information-technology) boom of the last thirty years in a substantial way. Engineers from the state work in large numbers in the IT industry clusters in cities such as Bangalore, Chennai and Hyderabad.

The Clubhouse discussion mirrored some of these issues. High wages in the state means industries will always find it cheaper to be located elsewhere, one person said. “Unfortunately, the wages are always linked to the profit and the owner’s willingness to share it. When the labourer demands higher wages, the industry captains smirk away," said one of the moderators of the room, organized by a Left-leaning study circle.

Return of the expats

The Kitex controversy has come at a time when the state is realizing it might soon have to reckon with its dependence on remittance monies. Kerala ranks among the top ten in Indian states by per capita income. But 17-18% of its workforce are emigrants and about 14% of its net state domestic product is contributed by remittance, according to a 2020 paper by K.P. Kannan of Centre for Development Studies in Thiruvananthapuram and K.S. Hari of Gokhale Institute of Economics and Politics in Pune. The latter figure used to be about 23% till 2015 and has since seen a relative decline.

Nearly 1.5 million non-resident Keralites (NRKs) have returned home since the onset of the pandemic, as per the data compiled by the Department of Non-Resident Keralites Affairs (NORKA). It is an opportunity and a challenge for the state government. “Many have approached us to scout for potential business opportunities in the state," says Vivek Govind, former president of Kerala Management Association (KMA) and partner of Varma & Varma, a chartered accountancy firm.

Arun K., a senior manager at Choppies in South Africa, is among them. He wants to come back and start a business venture in Kerala. Toby Jose, another Malayali businessman from Bahrain, wants to set up a small waste-management unit in the Kochi-Alappuzha belt. They know Kerala is not what it used to be two decades ago when they left—an investor-unfriendly state. And that there have been efforts to bring in investments and create job opportunities. Yet, they are guarded. What plays out in their mind is the 1989 movie Varavelpu, which memorably depicts a Gulf returnee who is forced to go back in tears after his venture goes bust in an extremely hostile milieu. Many believe it is the overhang of communism. The state faces an unusual dichotomy.

As India turns increasingly capitalist, Kerala strives to remain an island of socialist ideologies, unmindful of the growing gap between reality and aspirations. While wages for skilled and semi-skilled workers are the highest in the country, an array of professionals—engineers, doctors, nurses, researchers—turn eventually migrants and move out in search of better-paying jobs and opportunities. If the previous migration waves had been to plantations in Sri Lanka and Burma, the later lot went to West Asia at the onset of the oil boom. Now many are migrating to Europe, Australia, Canada and the US.

Hostile to investors?

Thomas Isaac, former finance minister of Kerala and an economist, says Kerala faces an image problem. “It is an ideological construct. The number of strikes, lockouts and industrial disputes in the state has dropped sharply and is now way below the national average. There are, of course, some bottlenecks, especially in the construction and transportation sectors. They need to be reformed," Isaac told Mint.

R. Ramakumar, a member of the Kerala State Planning Board, and professor of School of Development Studies, Tata Institute of Social Sciences (TISS), cites a few historical reasons. “Kerala as a state does not historically have an illustrious history of the culture of entrepreneurship and industrialization. The propensity to take risk while investing capital was poor." Of course, he says, there were labour movements and trade unions that demanded decent work conditions.

“These may also have contributed to the poor inflow of industrial capital, as these demands for decent work are easily perceived as hostility to the industrial capital," he says. Despite sustained efforts to change the state’s impression, Kerala could not easily wriggle out of its perception trap. A series of global investment meets may have put the spotlight on Kerala as an investment destination for IT and knowledge sectors, but these haven’t translated into an industrial revival. “From the 1970s, remittances began to flow in. It gave rise to a sharp rise in consumption expenditure. Yet, Kerala could not use this advantage to hasten industrial production in the state, as other cheap labour options existed outside the state. Thus, potential employment opportunities and its multiplier effects in the form of increases in income levels and demand were leaked out of the state," says Ramakumar.

Kerala is also an ecologically-fragile state, with 44 rivers, numerous backwaters, streams and ponds; a large green cover; and a huge hilly region in the Western Ghats. Kerala can ill-afford the kind of large industries seen in Tamil Nadu or Gujarat. Land is also scarce.

It is clear that there is a vast difference between the issues faced by large industries and small-scale industries. Govind of KMA believes that large manufacturing units face several legacy issues related to the labour unrest and union problems. “Also, there are so many redundant laws related to pollution, affluents, environment, construction and so on," he says.

Small investors, too, find it difficult to set up a unit, though the challenges may be different. Joson Therattil, a young Keralite entrepreneur who runs a small balloon-printing unit for clients like McDonald’s, says there are several roadblocks to getting a project off the ground. He shares his travails of setting up a tiny unit in the state. “I did apply for space in an industrial estate five years ago, but have not heard from them yet. Many influential people take up the space and lease it out to others for a cut." He bought a piece of land in Thrissur and wanted to develop a unit there.

“We faced a tough time getting the building plan approved. The officials routinely returned the file citing deficiencies and non-compliance, but without explaining what they wanted us to do, in one go. The approval came after six months. Then you face issues related to pollution, water, electricity, labour, etc. Most of the laws are antiquated and redundant, and worse, officials interpret them their own way. Investors will run from pillar to post, get drained, and finally abandon the project," he says, adding that his project—a backward integration to manufacture quality balloons—is still on the drawing board.

Exit of Kitex

Kitex Garments, the second largest producer of children’s apparel in the world, is not the only big business group that shunted Kerala for neighbouring states. Many others, including V-Guard Industries Ltd and MRF, have done it in the past. Kitex’s Jacob told Mint that his decision to not invest anymore in Kerala is “final". He, however, cites the increasing cost of labour and land as two important factors.

“In fact, my decision is based on several factors. Apart from labour and land, water and electricity are important too. Though there is a lot of water in Kerala, we find it difficult to source water for industrial use. We invested 10 crore to upgrade government substations and lay the transmission lines to our substation. If you manage to address all these issues, you face a string of others— political issues, bureaucratic hurdles and a general attitudinal issue from the public," he says.

His clients such as Walmart Inc. do not look at the cost factor. “If you pay higher wages, your client is happy. But he will not pay a single penny more for the product. It’s an extremely competitive world. Salaries in Bangladesh are half of that available in Bhubaneswar, where the daily wage is around 200 per day, which, in turn, is much lower than Kerala wages. Our average cost-to-company (CTC) of an employee is around 25,000 per month. We have survived here only because of our efficiencies and better technologies," says Jacob.

The company that went public in 1995 has completed 26 years of its existence in Kerala. “Had I invested in some other state, I would have grown 10-fold," he rues.

Ramakumar avers that Kitex moved out to benefit from low wages in Telangana. “Kitex is a company that employs non-Keralites as more than 70% of its workforce. Their wages are lower than the reservation wage of an average Malayali worker, but the average wage rate in Telangana will be even lower than the average wage of a non-Malayali worker in Kitex. The demand for decent work will also be muted in a state like Telangana. So, Kitex would anyway have moved out given this advantage, if at all the news of the move is correct," he says.

Jacob clarifies that 51% of the labour force in his garment company are Keralites. In the group, which has over 15,000 employees, 68% are from the state, he says.

Knowledge economy

There are many who believe that Kerala should focus on the high technology industries of the future as its high prevailing wages makes it an unattractive destination for manufacturing businesses.

“Kerala’s advantage is not in sweatshops, but in new-age knowledge-based industries, precision engineering and so on, where it is rapidly attracting major investments," says Ramakumar.

There are several segments of the industry where Kerala wants to specialize in. Tourism, health, IT, biotechnology, nanotechnology, food processing, the list is pretty long.

Govind calls Kerala’s forays into the development of info-parks and knowledge industries productive. “The state has continued to attract investments by IT biggies such as TCS, Wipro and Cognizant. TCS is setting up two new campuses in Thiruvananthapuram and Kalamassery, near Kochi. It has taken 100 acres of land in Technocity while it has taken space in Kochi just outside the existing IT park, for one-third rent it pays outside. In the IT and services sector, there are no union-related issues. The units in info-parks work normally even during hartals (strikes)," he says.

Kerala’s quest for a transformative knowledge-based economy has taken wings. After the two oldest IT parks—Technopark in Thiruvananthapuram, which is one of world’s greenest tech campuses, and InfoPark in Kochi—have become nearly fully occupied, similar parks are mushrooming elsewhere in the state.

Isaac says the world is moving towards a work-from-home (WFH) and gig economy. “Kerala is poised to benefit from it," he adds. Several Malayali IT workers from across the globe have come back home under WFH policies, to enjoy the rains and serenity, and of course, the quality medical facilities in the state.

In March, Cognizant picked Kochi, Kerala’s commercial capital, as the only Indian city to be part of its coveted 21 Places of the Future list, considering a number of factors, including physical infrastructure, environment, lifestyle, culture and entertainment, talent pools, and affordability, among others. As most major tech hubs in India are reaching their saturation point, Kerala’s efforts to transform itself into a high-tech knowledge hub have drawn attention.

But that means young people from families that could afford them a good education will find employment, and those among the lower social economic strata, who typically raise themselves up through at least one generation of employment in manufacturing, may get left behind. Rising automation in tech also means IT firms might need fewer programmers in the future, although newer and more specialized jobs might get created.

The state has to find an answer for its employment problem at the confluence of these factors.

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