Doing Business in Kerala: The Gap between Perception and Reality
The common view is that Kerala missed the development bus as a result of its mistaken focus on social welfare aspects like education and health coupled with militant trade unionism. This led to the demise of businesses, or the migration of existing businesses to other states. This deterred new investors from coming in, and also forced Keralites to seek jobs outside Kerala. Today, Kerala depends on inward remittances and is a "money order economy.’’ There is little business activity worth the name here, and new jobs are not being created. The Kerala Model is in trouble, and is not sustainable. This is the dominant narrative about business and industry in Kerala.
The counter narrative states that in the early 1950s, Kerala was among the lowest performing states in India on the economic front. Kerala then proceeded to allocate more of its budget to public health and public education, introduced comprehensive land reforms, and brought in social welfare measures aimed at the poorest sections. This resulted in producing a stream of young people who completed school and undergraduate education, and who were seeking employment. Since supply of such jobs was far short of demand, they went to other cities in India which were beginning to grow and found good employment, as they were preferred over the other uneducated young people from other parts. When the Gulf boom started in the late 1970s, the young people of Kerala were best situated to take advantage with their education and skills, and dominated the cohorts that went over to the Middle East. Their remittances became a major source of income for families and the economy, and today constitute more than 25 per cent of the state GDP! The State, which was among the poorer ones in the country, today has the highest per capita GDP in the country, with the highest per capita consumption expenditure. Life expectancy is the highest in India for both males and females. Literacy is the highest by far for both genders. The people of the State enjoy the highest quality of life among all Indian States. It is difficult to understand how there can be a perception that the Kerala Model has failed!
The flip side of this otherwise positive picture is that jobs are not being created in the State at the same rate as some other parts of the country. (Even this is debatable, as some data shows that the Kerala economy has grown faster than most of the country in the post-1991 period, i.e., after the so-called liberalisation of the economy under the Narasimha Rao Government.) However, it is a fact that the hard working Kerala worker who has gone far from his home to earn good incomes and do good work building the economies of other regions, including the Middle East, has not been as productive in Kerala. Why is that so? It is my view that this is due to the inability of business and entrepreneurs in Kerala to modernise and adopt technology. Labour productivity depends mostly on technology, and traditional businesses should have modernised, which would have enabled them to take advantage of the trained and educated workforce available in the State. Major segments of business like construction, plantation crops, primary food processing etc. continued to use antiquated methods and technology which required unskilled labour, and which had low productivity. This made them uncompetitive, and they depended on keeping the wages low to remain in business. This was obviously not sustainable, and it saw the migration of major employers like cashew, sea food and coir to neighbouring states, where wages continued to be low and availability of unskilled labour was plentiful.
While traditional industry declined or migrated out of the State, throwing large numbers of people out of work, new startups were appearing on the scene, in different sectors and in interior towns, that employed modern technology and gradually built impressive businesses that were nationally and globally competitive. These new companies were first generation businesses which grew organically, using local resources, and were often based on locally available raw materials. Companies such as Synthite, Plant Lipids, Kerala Solvent Extractions, Premier Cotton Mills, Premier Breweries, Premier Tyres, Apollo Tyres, MRF etc. all came up during this period. Several engineering companies sprang up at the same time, including Bhageeratha Engineering, Asian-Tech and others which employed the best engineering and technology to carve out a niche for themselves in the field of turn-key project in engineering and construction, executing major and difficult projects all over the country. During this time, a number of public sector enterprises too were set up in the State, mostly by the Central Government. These included VSSC, Hindustan Latex Ltd., Hindustan Organic Chemicals Ltd., Cochin Shipyard Ltd., Instrumentation Ltd., Indian Telephone Industries Ltd., HMT Ltd., KAMCO and Hindustan Newsprint Ltd. All these companies have worked efficiently, and have been the most profitable entities of the enterprises of which they were a part. The companies in the private sector also included new ones which came up in non-traditional areas like steel forging and casting, medical devices, dental prostheses, diagnostic test kits, electronic hardware etc. Their names include P K Steels, DENTCARE, AGAPPE Diagnostics, SFO, Terumo Penpol Ltd. and many others. Many of these companies today employ large numbers of people, who are well paid, and these organisations are able to compete nationally and globally.
During the first two decades after 1947, and especially under governments led by the Communist Party of India, important reforms like the Land Reform Act were enacted, making Kerala the only state in the country to introduce such legislation. This had a significant impact on rural poverty, and was a major cause of the emancipation of poorer sections of society who were mostly indentured labour on large land holdings. This, coupled with the focus on public primary education and public health, created the platform for the high HDI in Kerala. The second phase of reforms came under the Achutha Menon Government in the 1970s, when the second phase of land reforms was put into effect, and several research institutions including SCTIMST, CDS, CESS, CWRDM, FRI, TBGRI and KELTRON were created through public investment. These had the effect of not only spurring research in subjects relevant to the State, but also helped in creating employment opportunities for those graduating from institutions of higher education within the State who would otherwise have had to seek jobs elsewhere. The setting up of the VSSC, Cochin Shipyard, HOC, ITI, Instrumentation Ltd., HLL and HPC helped provide jobs for educated and skilled people from within the State. Most of these enterprises worked well and stood out in comparison with their peers in other states. Why didn't trade unionism and hartals prevent these PSUs from working well? The answer: professional management and good leadership coupled with the unique assets of Kerala are what made these PSUs thrive.
The strongest proof that Kerala had created the right conditions and ecosystem for sustained development of hi-tech industries can be seen from the fact that so many companies in these fields have developed and prospered in the past three decades. I have looked at 50 manufacturing companies that exemplify the kinds of businesses that can thrive in such an environment as is available only in Kerala. I foresee another 100 such companies coming up in the next few years generating thousands of new jobs, and creating a virtuous cycle that will generate impulses for many more smaller businesses to develop providing key services and components required by these companies. The rapid urbanisation of the State and the well-distributed urban centres is another factor that will enable more such MSMEs so come up in the State. This availability of quality living space endowed with all that is needed for the good life like schools and colleges, leisure activities, housing, shopping etc. are available in seven cities of more than 1.5 million population, and many more municipalities that are affluent. That is what will propel Kerala to the forefront of industrially developed states in India. Other states will need to invest considerably more resources in education, health and related subjects if they are to compete with Kerala.
The corollary of this argument is: it is not trade unions, hartals and attimari that have scared away businesses and industry from Kerala. Kerala has had a shortage of genuine entrepreneurs willing to take risks especially in the traditional sectors that were once dominant. Outsiders were scared off because it was the Kerala businessman especially the trading community and the construction sector which spread the story about the difficult conditions here. What was the motive? Possibly to keep the competition out and prevent other larger organised companies from coming in. If that was the case, the strategy worked. It is the local business community that is the biggest ambassador of any region or state or country. If they don't promote their own region, and bet on its future by investing in new ventures, why should others? No amount of government publicity campaigns and
marketing efforts can compensate for the negativism of the local business community.