|Economy|

Kerala Prescription for Economic Crisis

PN Venugopal

1/16/2009

A few months ago the world woke up with an uneasy sensation that there is an economic crisis engulfing it. And once it was confirmed that it was not just a nightmare, bailout packages started tumbling down the governmental aisles world over. Sensitive as it is almost always to the international seismograph, Kerala government asked the Centre for Development Studies (CDS) Thiruvananthapuram to study the implications of the global financial crisis for the Kerala economy and to suggest remedial measures.

“CDS is an autonomous research institute. Its main objective is to promote research, teaching and training in disciplines relevant to development. Established in 1971 by the noted economist Professor K.N.Raj, it is considered to be one of the foremost development economics research centers in the country.” This is how CDS describes itself in its website http://www.cds.edu/. “CDS draws financial support from the Government of Kerala and the Indian Council of Social Science Research (ICSSR). The Reserve Bank of India and the Indian planning commission have instituted endowment units for research in selected areas at CDS.” Thus the credentials of CDS have never been suspect and Kerala governments irrespective of the hue of the political conglomeration in power has looked up to CDS for clarity and solutions whenever intractable problems cropped up (of which there has been no shortage in the last 38 years).

The CDS submitted its report (prepared by a team led by its director K.N. Nair and seven other experts) in December 2008 and a few weeks ago the state cabinet formed a subcommittee with finance minister Thomas Isacc as the chairman for implementing the recommendations.

Observations of CDS

Kerala being historically more integrated with the rest of the world is more susceptible to any external shocks compared to the rest of India. Six possible ways through which the crisis can affect the Kerala economy have been identified as remittance inflows, availability of credit from the banking system, exports, tourist arrivals, prices of intermediate inputs and prices of imported goods.

Considering that the Gulf countries, where most Keralite migrants are, have not been seriously affected and also in view of the falling rupee-dollar exchange rate, inward remittances are not going to be seriously affected.

The credit crunch is likely to continue and will dampen the scale of all credit dependant activities such as cashew export, sale of automobiles, construction, real estate and the micro, small and medium enterprises.

CDS expects at least 20 percent decline in export of coir and coir products leading to loss of direct employment to about 32000 persons. Similarly a 15 percent reduction in cashew export and consequent loss of jobs to 18000 workers is anticipated. The decline in marine exports will be about one third and job loss to about 20,000 is on the cards. A 15-20 percent decline is possible in the handloom sector.

Exports of spices, tea will be affected. The price of rubber has already come down by 40 percent. Software export will also feel the pinch.

Even though price of intermediate inputs like oil, steel, cement etc will decline, the state will not benefit from this in the context of the general decline of traditional industries and the plantation sector.

Recommendations

The state government has to monitor the credit availability through mechanisms such as state level bankers committee. It may also consider using the co-operative banking network to extend credit to small and medium enterprises and exporters.

Pro-active measures like rationalization of stamp duty should be taken to keep the real estate, construction sectors going.

The state government can do precious little to induce demand in foreign markets for coir, cashew, fish or the cash crops. Ensuring crop insurance and changing over to other crops and practicing different forms of animal husbandry etc can be encouraged and adopted.

Since thousands from these sectors will lose their lively hoods, social security measures are to be enhanced. “Urgent steps should be taken to implement NREGA (National Rural Employment Guarantee Act) in all districts”.

n the tourism sector, government should correct those policies that work against the competitive advantage of tourism operators and service providers. Taxes charged on hotels and licence fee for bar/beer parlours aimed at foreign travellers should be rationalized.

The public distribution system should be revamped to make it more effective. Even though it is not possible to attain self-sufficiency in food, food production can be increased by utilising the land left fallow or under cultivated. The existing lease laws will have to be amended for this.

SEZ (Special Economic Zones) and Private Investments

Private investments should be encouraged and for this it is imperative that all administrative hurdles as well as the social mindset that works against private capital should be overcome. Private industrial estates with SEZ designation can be considered for attracting capital.

Inefficiently used forestland can be made available to private investors at competitive rates. Public Private Partnership (PPP) model can be considered for using the government land in urban areas and in the custody of loss making public sector undertakings for developing shopping malls, entertainment complexes, and parking lots and for housing. The PPP model can be emulated in infrastructure building also. Not only in infrastructure, private capital is required in distribution of water and electricity. All kinds of subsidies, not only in these sectors, but in all sectors have to be scrapped.

Dependability of the Report

The picture projected by the experts is quite alarming. Thousands join the army of the unemployed, the traditional sectors on the verge of annihilation and the establishment can do nothing to avert all this…But a close reading throws up many doubts about the fundamentals on which the economists have formatted the future scenario. Economists generally analyse and make projections on the basis of numbers and statistics. They do not make on-the-spot studies going to the wave-drenched huts of fisher folks, or to the tin sheds of the plantation labourers nor to the tiny ‘factories’ of the coir workers. They go by data and so data is the whole and soul of all their predictions. Its credibility is totally dependent on the authenticity and the immediacy of the data used. CDS report says that 32,000 workers will become jobless. So we would expect them to tell us how many are currently working in this sector, at least approximately. But what they know is the figures of 1997 only. As per a survey done in 19997, there were 3,50,000 workers in the coir sector. They are ignorant of what happened in the last 12 years. It is to be noted that this was the period when the Kerala society underwent drastic changes. How many workers were rendered redundant due to the mechanization of coir sector that was rampant during that period? (One mechanized ratt needs only five workers and substitutes 25 manual workers). Did the younger generation step into the shoes of those who died during this period? (That the youth hardly care to work in coir is common knowledge.)

The report claims that there were 4,00,000 cashew workers on the basis of a study by Dr Mridul Eapen. However, the ‘References’ at the end has all the other documents that were referred to in this report except this one.

When it comes to the fisheries sector, the report flatly claims that 1,20,000 people are engaged in this activity. Those who are willing to take this at face value, do it, others just buzz off seems to be the refrain. Does it sound to be just nitpicking? Then have a look at this: “Historically, productive sectors of Kerala economy is known to be more outward oriented than that of most other states. The available estimates (Isaac and Reddy 1992), though out-dated, tend to suggest that exports accounted for 14.8 percent of the state’s Domestic Product.” Oh, what a piece of information to build on, after all it’s only 17 years old, one might think. But if you have some more patience and ferret out the paper by Isaac and Reddy, you are confronted by the startling fact that Isaac & Reddy had undertaken this study specifically regarding the exports of the financial year 1980-81! So the report is on the basis of a figure that is 28 years stale. Let’s also not attach any significance to the fact that the Isaac is none other than the present Finance Minister of Kerala, TM Thomas Isaac, who was then with the CDS. After all, it has been the practice of CDS to quote from a past paper by a CDS associate to substantiate a new study.

Kerala has the reputation of being a ‘remittance economy’ meaning that the backbone of Kerala’s economy is remittance from abroad. However CDS does not know the quantum of actual remittance being made to Kerala annually. “Unfortunately no official estimates of remittance to Kerala or any other states in India are available,” laments the report. So what does CDS do? They conduct field surveys covering 10,000 households and make estimates on that. It is stupefying that all the debates that have raged in Kerala over the decades about the remittance economy, its gains and pitfalls were all based on mere estimates. Every financial institution in the state handling foreign inward remittance including banks and exchange companies submit remittance figures every fortnight to the Reserve Bank of India. Is it too difficult a task for the CDS to get a consolidation of this from the RBI especially when the central bank is one of their patrons? That no such arrangements are on stream for gathering information so crucial to the state’s economy is pathetic, especially in this age of ‘information explosion’.

The methodology adopted for analysing the banking sector is not quite convincing. Much is made of the fact that two of the eight banks with asset-liability mismatch, Federal Bank and South Indian Bank are Kerala based. At the same time State Bank Of Travancore and Canara Bank which are the leading banks in respect of credit disbursal in the state are not brought under the scanner. An attempt has been made to conclude that the credit disbursal has come down by quoting the figures for April-June quarter of 2008 and by comparing them with the previous quarter that ended in March. Traditionally, the first quarter figures have always been much lower than that of the last quarter of the previous financial year. If a comparison is to be made, it is to be done with the April-June 2007 figures, which unfortunately have not been furnished in the report.

It’s nobody’s case that there is no crisis. But when remedies are being prescribed, the diagnosis and the investigation leading to that have to be beyond disputes.

NREGA

The recommendation regarding implementation of NREGA is a classic example of theoreticians losing all touch with the ground realities. Thousands will lose jobs in the traditional sectors and to mitigate their hardships NREGA should be implemented in the whole state exhorts the report But what are facts? NREGA was first implemented three years ago in Palakkad and Wayanad districts. In the second phase the scheme was implemented in Kasargode and Idukki districts and the remaining 10 districts were covered in 2008-09. Employment has been provided to 5.22 lakhs families, 99.9 lakhs person days, 36687 works undertaken….All this information was just a click away for the experts as they are available in the website of NREGA. Instead they recommend that the problems that cropped up while implementing the scheme in Kasargode and Wayanad should be studied and solutions found while spreading it across the state. There have been no reports of any special issues that cropped up in these two districts. If at all there were problems it was in Palakkad and Wayanad as the scheme was first implemented there.

On the other hand there are larger issues confronting Kerala in the implementation of NREGA, like most of the unemployed in Kerala being educated and their general apathy towards physical labour, the wages guaranteed under the scheme being much less than the prevailing rates etc. Had the experts been more diligent and genuinely concerned about the fate of those who are going to be affected by the economic crisis, they could have gone deeper into these issues and could have come up with a Kerala model for the scheme. It is astonishing that such glitches appear in a report prepared for the cabinet to act upon when the NREGA Mission Directorate is almost next door to the CDS in Thiruvananthapuram.

Mitigation measures?

The report does not have any creative suggestion for the traditional sector. The Kerala government can do nothing to create international demand for the products traditionally exported from the state, says the report. But how about creating and increasing the domestic demand in the vast market that India is? Take for example coir products. Why not make a concerted effort to boost its domestic demand? But then certain basic maladies will have to be confronted. The ordinary person cannot afford the price of coir products and that is the reason why the domestic market stagnates. And the primary reason for the high price is the high cost being paid for the basic raw material, coir fiber. Ironically enough, coir fiber is no more available in abundance in Kerala, the land of coconut. Environmental hazards and the change of life style have practically brought an end to husk retting and the subsequent thrashing of it into yarn. But at the same time the state did not also go for de-fiberring machines that churn out yarn from coconut husks without the husk being retted in water. So Kerala now imports coir fiber from Tamil Nadu and even Sri Lanka at a high cost. Those in the know of things opine that setting up of such machines (which are costly) at various points and constituting a mechanism for collection of husks (millions of husk are now being wasted, either burnt or allowed to rot) will result in drastic reduction of cost of the coir products and thereby reduce the dependency on foreign markets.

The only recommendation regarding tourism is the reduction of bar/beer parlour licence fee. One has never heard of any group of tourists skipping Kerala because alcohol is costly.

The core recommendations which could lead to policy changes is that of conferring SEZ status to private industrial parks and the prompting to overhaul the existing norms for private capital. So far SEZ was mooted for augmenting the foreign exchange corpus of the country. But now the privileges enjoyed by the SEZs are sought to be extended for bringing in capital too! The debate in Kerala regarding SEZs was centred around the proportion of land in an SEZ to be used for production and for other purposes. And now the CDS recommends that since manufacturing is not a strong point of the state, let the new SEZs use any percentage of the total available land for residential/commercial/entertainment purposes. But give them all the tax concessions and incentives!

The one burning issue in Kerala during the last one decade has been the ownership of land, land reforms and the fate of the landless. The Muthanga agitation, the Chengara issue, the eviction of illegal constructions in Munnar, the renewal of lease/eviction of large plantations are all continuing to plague the government and the polity, defying solutions. Despite all this comes the recommendation of the CDS to handover all possible public owned land whether in the forests or in urban centers to private capital.

While strongly arguing for abolition of subsidies to the common people, the report does not have any qualms in recommending huge concessions for bringing in private capital conveniently camouflaging the fact that a financial concession is a subsidy in reverse.

The CDS has a word about trade unions too. “Though the labour legislations have lost much of their tooth, occasional inspections can scare off investors, and they may reduce future investments….”So even inspections by the labour department must be stopped!

The most pathetic aspect of the report is that it devotes just three sentences in its 98 pages for food production. If anything is lacking in Kerala it is food. Rice, milk, vegetables, sugar, cereals….all of these have to come from neighbouring states. At the same time, the cultivation of paddy has been reduced to 2.29 lakh hectares where as the land under rubber cultivation has gone upto 5.12 lakh hectares (Pre budget survey 2009). CDS has lost a great opportunity to make a comparative study of the ‘real cost-benefit’ aspects of a cash crop being double that of a food crop, to the society at large.

The CDS report has the following in its introduction: “Nobel laureate Joseph Stiglitz considered the crisis an opportunity to reassess global economic arrangements and prevalent economic doctrines. Perhaps such a reassessment and revisit are imperative at the national and sub national levels.” Unfortunately that is exactly what the CDS has not done, despite having a clear picture of the collapse of the private capital oriented economies of the western world.

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The core recommendations which could lead to policy changes is that of conferring SEZ status to private industrial parks and the prompting to overhaul the existing norms for private capital. So far SEZ was mooted for augmenting the foreign exchange corpus of the country. But now the privileges enjoyed by the SEZs are sought to be extended for bringing in capital too!


While strongly arguing for abolition of subsidies to the common people, the report does not have any qualms in recommending huge concessions for bringing in private capital conveniently camouflaging the fact that a financial concession is a subsidy in reverse.


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