global financial crisis and kerala economy: … · global financial crisis and kerala economy:...
TRANSCRIPT
Report on the
GLOBAL FINANCIAL CRISIS AND KERALAECONOMY:
IMPACT AND MITIGATION MEASURES
Centre for Development StudiesPrasanth Nagar, Thiruvananthapuram 695011
December 2008
2
CONTENTS
Acknowledgements 3
List of Tables 4
List of Figures 5
Executive Summary 6
Chapter 1 Introduction 28
Chapter 2 Channels Of Transmission Of The Impact Of Global Crisis To
Kerala Economy
33
2.1 Remittances from Abroad 33
2.2 Credit Availability 38
2.3 Exports as a Channel of Transmission of the Crisis 44
2.4 Tourism 64
2.5 Intermediate Input Prices 66
Chapter 3 Impact On Sectors: Growth In Output, Employment And Revenue 68
Chapter 4 Mitigation Measures 76
4.1 Introduction 76
4.2 Mitigation Measures Specifically Addressing Channels Of Impact 77
4.3 Measures to Enhance the Crisis-Facing Capacity: The Society and
Economy 81
4.3.1 Strengthening Social Security 81
4.3.2 Measures to Stimulate Economy 82
4.3.3 Measures to Improve Governance 87
References 90
Appendix Methodology of Projecting Growth Rates of SDP and Revenue
Deficits 92
3
ACKNOWLEDGEMENTS
This report, prepared in response to the request from Gove-rnment of Kerala was
drafted by a team, led by the undersigned consisting of S.Irudaya Rajan, A.V.Jose,
K.J.Joseph, Sunil Mani, M.Parameswaran, P.Mohanan Pillai and V.Santhakumar
The initial work of the report was coordinated by Sunil Mani and the final draft was
put together by V.Santhakumar, Parameswaran and K.J.Joseph.
The study team wishes to acknowledge the inputs received from various institutions
and individuals. This include, all the commodity Boards, especially, the Spices
Board, Coir Board and Coffee Board, all the export promotion councils especially
Cashew Export Promotion Council and Marine Products Export Development
Authority. Industry Associations like Confederation of Indian Industries (Kerala
Chapter), Small and Medium Industry’s Association, Technopark group of
Companies. The study team also got benefited from the feed back and information
received from, Technopark, Trivandrum, state level banker’s Committees, and leaders
of Travel and Tourism industry.
We are also grateful to a number of Heads of Government Departments for providing
us with their valuable inputs.
Needless to say the views expressed are that of the study team and may not be treated
as having endorsement by the Centre or the individuals and institutions mentioned
above.
December 18, 2008 K.N.NairDirector
4
LIST OF TABLES
Table No Title Page No.
Table 1 Trends in NRI deposits in Kerala (Rs in Cores) 35
Table 2 Actual remittances to India and estimated remittances to Kerala,
1990-91-2008-09 36
Table 3 Asset-Liability Mismatch of Indian Banks as on 2008 41
Table 4 Growing NPAs in Indian Commercial Banking System at the end
of June and September 2008
42
Table 5 Growth in commercial bank advances in Kerala (Rs in Crores) 44
Table 6 Export of Coir and products during October 2008 and October
2007 47
Table 7 Export of Cashew to major markets during Oct 08 and April-Oct
2008 change over the corresponding period in 2007 50
Table 8 Recent trends in exports of marine products from Kerala 53
Table 9 Spices exports during April-Sept 2008 and Change over April-
Sept 2008 58
Table 10 Export of spices during September 2008 and change over
September 2007 59
Table 11 Foreign Tourists Arrival in Kerala and India 65
Table 12 Earnings from Tourism (Rs. in crores) 65
Table 13 Country-wise distribution of Foreign Tourists to Kerala in 2007 65
Table 14 Trends in the wholesale price index of Intermediate/Basic Inputs 66
Table 15 Projected Growth rate of SDP for 2008-09 (in Percent) 72
Table 16 Projected Growth rate of SDP for 2009-10 (in Percent) 72
Table17 Projected Revenue Receipts and Revenue Deficit (Rs in crore) 73
Table 18 Number of Persons whose livelihood may be affected by crisis 75
Table A3.1 Projected Growth rate of NSDP without financial crisis 93
5
Table A3.2 Projected Growth rate of GSDP without financial crisis (Current
Price and Growth rates in percent) 94
Table A3.3 Financial crisis and NSDP Growth rates: Three Scenarios
(Constant price and growth rates are in percent) 95
Table A3.4 Financial Crisis and NSDP Growth rates: Three Scenarios
(Current price and growth rates are in percent) 96
Table A3.5 Financial Crisis and GSDP Growth rates: Three Scenarios
(Current price and growth rates are in percent) 97
Table A3.6 Correlation of Sectoral Growth rates 98
LIST OF FIGURES
Figure 1 Ratio of NRI deposits to Domestic deposits 35
Figure 2 Channels of transmission of the financial crisis to Kerala’s
economy 67
6
EXECUTIVE SUMMARY
The Financial Crisis
1. The liquidity crisis and associated recession currently gripping the
global economy have far reaching consequences for the economies
of all developing countries, in particular those with a higher degree
of integration with the global economy. India is not an exception to
this general trend. Kerala, being historically more integrated with
the rest of the world, is more susceptible to any external shocks
compared to rest of the states in India. This preliminary report
has been prepared with a view to assist the state government in
understanding the implications of the crisis, so that appropriate
policies and programmes could be chalked to deal with any adverse
situations that may arise.
2. We have identified the following six possible ways through which
the crisis can affect to the Kerala economy. They are: (a)
remittance inflows; (b) availability of credit from the banking
system; (b) exports; (d) tourist arrivals; (e) prices of intermediate
inputs ; and (f) prices of imported goods, both raw materials and
finished.
Possible Impacts
3. The direction of change in remittances to Kerala depends on the
following set of factors: (a) the economic conditions in the host
countries such as those in the Middle East, the USA, and the UK;
(b) the exchange rate of the Indian Rupee vis-à-vis the US Dollar;
7
(c) Rate of interest on NRI deposits; (c) Perception on the relative
strength of Indian banks in the light of the global financial crisis
compared to the banks abroad.
4. Considering all these factors, we expect remittances to be positive
but with a reduced rate of growth during the short and medium
terms. However, we need to monitor the emerging economic
scenario in the Middle-East after the oil price crash and plausible
reduction in investment and the resultant employment
opportunities for the migrants from Kerala.
5. The credit crunch is likely to continue, at least for some more time
and can dampen the scale of all credit dependent activities such as
cashew export, sale of automobiles, construction, real estate and
the Micro, Small and Medium Enterprises (MSMEs). However, the
various policy initiatives already taken by RBI and Ministry of
Finance may ease the situation, to some extent.
6. On the basis of recent trends observed in exports and the
feedback from different stakeholders, we expect at least 20 per
cent decline in export of coir and coir products in the immediate
future. This may cause a loss of direct employment to about
32,000 persons. The actual reduction could be higher if we
consider the plausible decline in domestic demand and other
indirect effects.
7. Regarding cashew, reduction in export demand coupled with credit
squeeze is likely to cause at least 15 percent reduction in its
8
export. Import of raw cashew can become costlier due to rupee
depreciation and thereby adversely affect the employment
prospects of at least 18000 workers. The intensity of the problem
is likely to increase in the medium term unless appropriate
measures are initiated at the earliest to address the credit
squeeze and search for new markets.
8. The decline in marine exports is about 25-30 per cent across all
the major destinations except South East Asia. Against the above
trend we anticipate a decline in the export by about one-third in
the short run and this could in turn lead to an employment loss to
at least 20,000.
9. Some of the handloom units reported that sales have decreased by
20 per cent. A short term-reduction of export by 15-20 per cent is
expected in handlooms and that could go up if recession prolongs.
The industry is affected by rising input prices as well. The Rupee
depreciation is not helping the manufacturers since most of the
export contracts were settled prior to the onset of depreciation.
10. In the case of spices, the major impact is being felt in pepper as
the value and quantity of export more than halved between
September 2008 and same month last year. To the extent that
there was a marginal increase in price (12 per cent) the observed
decline in export and export earning could be attributed to decline
in demand. Such a drastic decline will have an adverse effect
especially in two districts of Idukki and Wayanad, which in the
recent past had undergone a major agrarian crisis on account of
9
the fall in price of commercial crops. One of them (Wayanad) also
witnessed large-scale farmers’ suicide. If the observed trend
persists, it could lead to distress and its consequences.
11. The situation is less clear in the case of Tea, though there are
certain disconcerting reports. First, the cancellation of Letter of
Credit by Pakistani banks owing to a severe dollar crunch in
Pakistan. Second, the volatility in the exchange rates slowing down
export orders. The exact impact of these factors would only be
evident in the coming months. On coffee, the financial crisis
coupled with fluctuating dollar has resulted in gaining no major
export orders. On the other hand, the price of Rubber has come
down by 40 percent in the recent past due to decrease in demand
from tyre industry - the major consumer of natural rubber.
12. With regard to software exports, the larger companies are yet to
feel any severe adverse effect of the financial crisis. To the
extent that the IT and ITES industries at the national level
expect almost 50 per cent reduction in growth rate, the firms in
Kerala will also get affected. The limited exposure to crisis thus
far could perhaps be seen in the context of relatively lower
engagement of Kerala based companies with financial services. We
understand that, there is a greater orientation of Kerala based
firms towards the Japanese market while at the national level
share of Japan is only about 3 per cent. However, many of the
smaller firms reported that there is definite decline in the orders,
postponement of projects and delay in realization of payment. It is
10
also felt that if the crisis is prolonged, it will definitely impact on a
wide cross section of firms.
13. Tourism industry is already adversely affected by the crisis.
Recent terror attacks still have aggravated the situation. Given
that there exist linkages between tourism and retail trade, any
decrease in the number of tourists is likely to have a negative
effect on retail trade. Given the weight of trade, hotels, transport
and storage in the service sector of Kerala, any adverse effect on
the tourism sector could have its impact on the overall growth of
the state’s domestic product.
14. The crisis and recession are likely to lead (if have not already led)
to a reduction in the price of a number of intermediate inputs like
oil, steel, cement, etc. This can reduce the cost of manufactured
items. As Kerala is a “consumer state”, rather than a producer, of a
number of intermediate inputs (except natural rubber) and
manufactured goods, the state would benefit from this decline in
prices. But, as already noted, in a context wherein the prices of
most of the products in traditional industries and plantation crops
are likely to face a downward pressure, the ultimate outcome may
be the worsening of the terms of trade for the state.
15. Though accurate prediction on the net effect of all these impacts
on the growth rate of State Domestic Product (SDP) is difficult to
make, our simulation exercise shows that given the considered
sectoral scenarios, there is a 95 per cent probability that NSDP
growth rate in current price will be between 5.15 and 7.58 per cent
11
during the next couple of years. Thus there can be a decrease in
the growth rate of Kerala economy by around 2 to 3 percentage
point, and there can also be a consequent increase in the revenue
deficit of the state government. Though we have identified the
employment intensity of the sub-sectors likely to be affected by
the crisis, we do not wish to provide an estimate of the people who
might become jobless.
Mitigation measures to address the immediate crisis
16. In summary, the major negative impacts are: (a) decline in credit
availability despite attempts made by the Government of India; (b)
a perceptible reduction in the exports of traditional industries and
commercial crops; and (c) reduction in the number of tourists and
tourism revenue. There may not be any immediate fall in
remittances, but pre-caution is needed with regard to any possible
reduction in future.
17. In the context of credit crisis, the Government of Kerala
has to monitor the credit availability through mechanisms such as
state level bankers committee. The state may also consider using
the co-operative banking network to extend credit to small and
medium enterprises and exporters especially those dealing with the
products of traditional industries. This depends on the viability of
co-operative banking system in Kerala, and its ability to meet
future challenges. A more pragmatic approach to the reforms
suggested by the Vaidyanathan Committee may be in order in this
regard.
12
18. Since the construction and real estate sectors - sectors having
high multiplier effects in terms of both employment and income –
are highly vulnerable to credit crisis more pro-active measures
need to be taken. Here the mitigation measures include
rationalization of stamp duty as promised by the government a
couple of years ago, and lessening the cascading effect of present
tax structure.
19. GOK may have to take steps to enhance the ability of commercial
crop growers to withstand the instability in export market. The
crisis may lead to panic reactions like suicides by the affected
people. However knee jerk responses like writing off loans are not
sustainable. Crop insurance and other mechanisms that limit the
cost/price fluctuations need to be re-evaluated, based on recent
assessment that such insurance is indeed viable for pepper.
20. Yet another strategy of minimizing the impact of price fluctuation
is crop diversification. Such diversification (cultivating other
crops, practicing different forms of animal husbandry, etc.) is
being practiced by many farmers as strategies to cop up with price
declines. However, there can be more effective and coordinated
intervention by the Government of Kerala to strengthen this
process of diversification. It should be noted the Government of
India has announced productivity enhancing schemes for plantation
and other crops in districts such as Idukki, Wayanad, and
Alappuzha (Kuttanad). The effective implementation of such
schemes is also important in this regard.
13
21. Some of those affected by the decline of the price of commercial
crops (which include farm/plantation workers) or by the low
demand for cashew, coir, and fish from Kerala, are likely to join the
team of unemployed temporarily. They need alternative
employment. Implementing NREGA more effectively covering all
areas of the state may provide an effective social protection not
only to those who are already unemployed, but also to those who
are likely to be unemployed due to the crisis. Urgent steps should
be taken to effectively implement NREGA in all districts, especially
where such traditional industries and fishing/fish processing units
are located.
22.Considering the negative impact in tourism sector, Government of
Kerala may correct those policies that work against the
competitive advantage of tourism operators and service providers
in Kerala. This requires rationalization of taxes charged on tourist
services like hotels and of license regulations on bars/beer parlors
aimed at foreign tourists, to make Kerala comparable with other
tourist destinations within and outside the country.
23.Though crisis may encourage deficit-financed public spending that
is desirable in general, the state needs to consider alternative
avenues of spending that maximizes the multiplier effect. For
example any cash transfer, or equivalent to that such as subsidy, to
the middle class need not either stimulate Kerala economy or work
as a necessary social security measure. This is mainly due to the
fact that the commodities bought with such money in Kerala, are
likely to be produced outside the state. On the other hand, sectors
14
which are affected by demand slump like exports or construction
sector are unlikely to be stimulated by a transfer of small amounts
of money (subsidy) per person, within the domestic economy.
24.One area where (deficit financed) public spending can be beneficial
during the crisis, either to provide fall back employment, or to
serve as a long term support to economic activities, is that of
infrastructure. Moreover, Kerala has crucial gaps in quality
infrastructure. The state may need more resources for such
infrastructure-oriented public spending. However, the greater
constraint in this regard seems to be the inability of the state in
project planning and implementation, and also the slow pace of
decision-making in general. This prevents the effective use of
external resources available (like those from multilateral agencies).
These issues need to be addressed.
25.The crisis provides an opportunity to make more investments in
infrastructure through the reduction of costs of intermediate
inputs. The prices of oil, steel, cement, and many others have come
down due to the tapering (or slackening) of demand all over the
world. Thus the real cost of construction of physical infrastructure
like roads, ports, bridges, railway lines, etc. is likely to come down.
Thus if public spending can be directed to infrastructure, the value
enhancement could be much higher during the crisis compared to
the earlier situation.
Mitigation measures to enhance the ability of society/economy to
address such crises in future
15
a. Strengthening Social Security
26.Some sections of society who are on the threshold of above
poverty line (APL) may fall into the category of poor or vulnerable
sections due to the impact of crisis in Kerala. These include those
who work in traditional industries like coir and cashew, fishing/fish
processing, unorganized labourers in trade and hotels, and also
marginal farmers and workers depending on cash crops like pepper.
We need social security measures for them. However it is difficult
to design social security for such crisis affected people
exclusively. Thus we need to enhance and strengthen general social
security measures, which can benefit poor and vulnerable sections
in general, including those who are likely to join these sections due
to the current crisis.
27.Strengthening basic public distribution system (ration shops but
not `maveli’ stores) can add to the livelihood support required
during the periods of crisis. Given that own food production is
insignificant for the majority of households in Kerala, availability
of basic food at affordable prices in ration shops can be an
important component of state support during the periods of crisis.
28.Though food self-sufficiency cannot be achieved, food production
can be increased by utilizing the land left fallow or under-
cultivated. Enhancing food security is important in the context of
the declining price of the commercial crops and adverse the terms
of trade of the state. The fact that Kudumbasree units could take
up paddy cultivation in significant areas points to this possibility.
This may require more explicit changes in legal restrictions that
16
discourage leasing of land. Moreover it should be seen whether
group or cooperative mechanisms can be utilized to reduce the
transaction costs in procurement of inputs and marketing of
outputs.
29.Expenditure on healthcare is a major drain on vulnerable families –
the ones affected by price decline of commercial crops. Currently
debated models on health insurance can be worked out to see
whether they meet the requirements of commercial crop
cultivators. Commercial farmers would be able to pay premiums at
the time of price hikes of their crops.
30.The expansion of the coverage of NREGA to the whole state, and
ensuring the availability of work for all those who demand can be
the other important form of social security. A clear understanding
of the problems faced in implementing NREGA in Kasargode and
Wayanad is required for the effective implementation of the
programme in other areas.
31. The quantum and coverage of the pension schemes aimed at aged
workers from agriculture and other sectors where either statutory
or provident fund pensions are not available, physically and mentally
disabled, and widows from poor households, need to be enhanced.
Their disbursement should be made timely.
b. Measures to stimulate economy
32.In the long run, there is a need to generate more employment and
income within the state to minimize the impact of potential crises
17
in future. Public investments are inadequate to give a momentum to
the economic development, and hence a strategy to attract private
investments on a sustainable basis is unavoidable. The state should
foster the development of industries by inviting more resources
for direct investment from potential investors, especially those
from the non-resident Indian communities.
33.Construction is an important economic activity that caters to
requirements of residence, commerce, entertainment etc., To some
extent, private industrial estates with possible recognition as SEZ
can also be considered under this category. Though there can be
objections to the concept of SEZ, there is little option in this
regard for Kerala other than allowing SEZ since the concessions
granted to SEZ may discourage industrial units from being set up in
non-SEZ parks. Moreover, the objection to land acquisition and the
changed policy of GOI of not allowing SEZ status to parks coming
on land newly `acquired’ by the governments, necessitate allowing
private industrial parks with SEZ status. Given the comparative
disadvantages that Kerala has in terms of manufacturing, parks
established in the state may have to use a greater part of their
space for residential, commercial, entertainment and other service
oriented activities. State government should consider these
factors, and take a facilitating role towards this investment.
34. There are institutional (and attitudinal) restraints that make the
buying of land `costly’ for construction and private SEZ industrial
parks. These have to be removed. Efforts should be made to see
whether the inefficiently used non-forest land owned by the
18
government can be made available to private investors at
competitive rates. The proposal to use the land held by KSRTC to
develop under PPP model is worth emulating. There may be
significant demand for multi-storied parking lots, entertainment
complexes (including multiplexes), and shopping malls in the major
and small cities and towns of Kerala. Some parts of the government
land can also be developed through PPP models for housing in urban
and municipal areas. This can be used for housing poorer families,
as part of the schemes to provide `houses to all’ in Kerala. There
are also small pieces of land (like where a single story government
office is located) under the government. There are sizable
properties lying unused by public sector units that are unviable and
loss making and these can also be used for such development.
These may not require any investments from the government, but
can become sustainable sources of income for the government.
35.Kerala requires massive investments for infrastructure. In this
case too, public investments alone are grossly inadequate. Public-
private partnership can make infrastructural investment more
effective, and efficient through better management and
technologies. The problems that discourage private investments
(for private good production) work against private investments for
public goods (or infrastructure) too. PPP in infrastructure can be
fruitful only if long standing cost and benefit sharing agreements
(or contracts) could be arrived at between the state and private
investors, and the state also should provide clear signals that such
contracts will not subjected to political tussle and administrative
corruption. At present, there are serious limitations in the
19
administrative and political space of Kerala that discourage the
shaping of mutually beneficial contracts and their enforcement
(though GOK in the past have worked out some models of PPP
successfully). These have to be addressed.
36.However a pro-industrialization policy should be cautious on some
dimensions, otherwise it will reduce social welfare rather than
enhancing it. Recent debates on land acquisition have brought out
the fact that there is no economic justification for government
acquiring land for industrial projects (producing private goods).
This has been recognized by the Government of India too, and
hence the new bill tabled in parliament has limited land acquisition
for companies to only those cases where they have already bought
three-fourths of the required land, and getting the remaining part
very important for the project but buying is difficult (or
transaction costs are very high). Thus the policy of the government
should be to ease restrictions on companies and investors from
buying adequate size of land on their own. Land acquisition should
be limited to public good (including infrastructure) projects carried
out by public or private agencies (or through PPP), where connected
stretch of land is necessary, and when the transaction costs of
negotiated purchase is very high.
37.Industrial policy needs to be careful with regard to the
concessions offered. It is better to offer across the board
concessions, and firm-specific design of concessions should be
avoided. Firm-specific design of concessions not only causes
20
opportunities for corruption and rent seeking, but also give wrong
signals to potential investors.
38.In the context wherein the industrial sector is not vibrant there is
the need for a Regional Commission on Industrial Development, in
line with the National Manufacturing Competitiveness Council to
inquire into all aspects relating to industrial growth in the state
and to recommend measures towards evolving a vibrant industrial
sector.
39.Given that a number of public sector industrial enterprises in the
state are currently operatiing on loss and their revival should be a
core concern of the state, we propose to explore the possibility of
linking suitable among them with the better performing Central
public enterprises preferably the Navaratnas.
40.Credit crunch along with slackening demand have adversely
affected the MSMEs. In this context the possibility for enhanced
Government purchases from MSME sector may be explored.
Though there is large outlay provided under the National
Horticultural Mission for subsidized supply of Agricultural inputs
to small and marginal farmers, going by the reports from SMEs
these funds are not effectively utilized. An effective utilization of
this fund is expected to be a boon for units engaged in the
manufacture of products like Bio Pesticides, Bio Fertilisers, Neem,
Copper Sulphate etc especially in a period of crisis. The GoK also
may explore the possibility of including all items of handicrafts in
21
Vishesh Krishi and Gram Udyog Yojana in consonance with a recent
central Governmnet statement.
41. Appropriate pricing of the infrastructure services is also
important. The case of electricity in Kerala is a typical care in
point. The state charges high on industry to meet the cost of
subsidy provided to middle class consumers. All industrial firms
(both small and big) in Kerala perceive lack of adequate power and
its high charge as major constraints. In fact it is the subsidy which
indirectly affects the availability of power too. The state
electricity company is unwilling to buy enough power, and
generation capacities remain unutilized because buying more power
would mean more losses for the company (since they cannot recover
costs through tariff from domestic consumers). This problem
affects the whole set of electricity consumers including industry
which are willing to pay a cost-based tariff. Industry should be
given electricity at cost-based tariffs and not at cost-plus tariffs.
42.The prevailing rules and practices seem to discourage industries
from generating or acquiring electricity on their own. The state
electricity company and the regulatory commission are yet to take
a favorable view on open access. The option of captive generation is
also made costlier. Industries in Kerala should be able to
procure/produce electricity through the cheapest means. This
would require changing the attitude to captive generation and open
access.
22
43.Government can facilitate skill enhancement of people. These can
include language training (Chinese, Japanese, etc.) and finishing
schools for potential employees in software industry which may be
forced to diversify to Asian markets due to the recession in their
conventional markets. Such skill enhancement facilities can also
benefit potential migrants (or return migrants who may come back
due to any slump in investment activity in the middle-east) to
position themselves at vantage points for re-entry into the global
value chains, as and when conditions improve in the labour markets
of their host countries.
44.The crisis is likely to increase the revenue deficit of the state.
The mitigation measures suggested demands more expenditures
leading to additional deficits. Thus the Government needs to be
prepared for a budget with higher deficit. But there is no
justification for increasing deficits to continue or increase the
subsidy that the middle class enjoy in Kerala, even during the crisis
situation. Rationalization of such subsidies can be one way of
reducing the financial pressure on the state government. It has
been noted by studies that non-poor sections enjoy a greater part
of the subsidy given to electricity, water supply, and so on. There is
a need to target these subsidies to the poor and vulnerable
sections.
45.The terms of reference of the 13th Financial Commission have been
decided prior to the financial crisis. In the context of crisis and
its unequal impact across states, it important that the Terms of
References of the Finance Commission is reexamined to
23
accommodate the new realities. We also call for better
coordination between the Centre and the state Governments in
implementing the mitigation measures.
46.Even if formal sector trade unionism might have declined in its
ability to affect industrial investments, anti-industrial attitude
still prevails in many forms. Though trade unions need to be vigilant
against labour hostile practices, they have to educate workers on
enhancing productivity, especially during the periods of crisis. On
the part of the employers, they should try to minimize the lay offs
due to crisis, because such lay offs can adversely affect the
overall economy, and work against the political support for a pro-
industrialization (fiscal) policy. The law and order machinery is not
adequately responding to the conflicts between industry and local
people, and also in minimizing the negative impact of forced close
downs like `hartals’. Though the labour legislations have lost much
of their tooth, occasional inspections (as in the case of the
software company which had to fire some employees recently) can
scare off investors, and they may reduce future investments, given
the ample opportunities for investments in nearby states with many
more concessions and fewer hassles. Government and society need
to be more careful in this regard.
47. In general, there are many cases of underutilization of resources-
land, other natural resources (like minerals, water, etc.) and human
capital. The possibilities in agricultural (including food production)
and industrial development remain under-explored and resources
are not optimally utilized in the service sector too. There are
24
institutional rigidities that prevent the optimal use of resources of
Kerala. Examples include the restriction on leasing land,
institutional problems that discourage the use of water and mineral
resources, unwanted restrictions on the use of land in plantations
for other commercial uses, inability to sort out the conflicts
between industry and local people, and so on. Urgent reforms are
required to effectively and efficiently utilize the resources of the
state. Though the crisis has created genuine doubts about the
appropriate pace of financial sector reforms, there is widespread
consensus among economists on the need for reforms in real
economy.
48.The global financial crisis should be seen as an opportunity to
pursue reforms in real economy with vigor. This is especially so due
to the likely decline of prices of many commodities and goods
during the recession. Carrying out reforms may be difficult when
prices are on the increase, since more people are likely to perceive
a higher short-term loss due to reform. (For example reducing 100
Rupees subsidy given to the middle class, when the prices of many
commodities go up can be costlier socially and politically, where as
it may be relatively less difficult during a period of price decline.
It is also due to the fact that a major part of the middle class –
barring commercial crop cultivators – is not likely to encounter a
significant reduction of their direct income during the crisis). This
window of opportunity provided by the financial crisis should be
effectively used to implement much needed reforms to stimulate
economy.
25
c. Measures to improve governance
49.The most important bottleneck in achieving faster and equitable
economic development seems to be the weak governance of the
state. Improper management and un-timely implementation of
projects work against the effective use of external sources.
Administrative reforms and capacity building aimed at enhancing
the quality of project planning and implementation are urgently
required. There should be more transparent, speedier and
effective mechanisms to hire qualified consultants to prepare
projects and monitor their implementation.
50.There seems to be laxity in quick decision-making and coordination
at the state-level. This is true with regard to the sanctioning of
private sector or PPP projects too. Without solving this issue,
efforts to get more resources for public spending for
infrastructure may not yield successful results. It is high time that
coordination mechanisms at the level of multiple ministries (like
industry, revenue, finance, water, local government, etc.) are
established, and made functional. Such mechanisms exist in
Government of India and in other states. These `empowered’ group
of ministers and top officials should meet once or twice a month to
take decisions and also to review (and to take corrective measures,
if required for) the project implementation. All investment
proposals for an amount more than Rupees 100 crores can be
considered by this empowered committee. Decision on such
proposals should be taken within a specific period, and once it is
decided lower level functionaries of other departments should not
be allowed to block the implementation.
26
51. The use of ICT is yet to make significant impact in the process of
governance in Kerala. Most attempts made to have changes in the
administrative procedures to enable speedy decision-making, have
been stalled on the way. With regard to the responsiveness of
administrative machinery, and quickness of decision-making, Kerala
is behind some other Indian states which have lower levels of social
development. Ability to face any crisis depends on the
administrative/institutional ability of the state. Revamping the
administration of the state and widespread and deeper use of e-
governance should be another important strategy. This can also be
a strategy to revitalize the software industry (especially the small
players) which is likely to be hit by the demand slump due to
recession in the developed world.
52.After the decentralization, the responsibility of the local
governments has gone up but they do not have adequate staff. On
the other hand, state level offices and government secretariate
are burdened with excess staff and multiple layers of decision-
making. Though many plans for redeployment of adequate staff to
local governments and administrative reforms of state level offices
are on paper, their implementation is tardy. This crisis can be an
opportunity to reinitiate administrative reforms to enhance the
crisis-facing preparedness of the economy and society.
53.It may be noted that what is written above on the nature of and
factors that determine, (weak or slow) governance in Kerala, is
based on our impressions, informal consultations and anecdotal
27
evidences. However detailed explorations are required in this
regard. It is better if Government of Kerala institute a mechanism
to monitor the impact of the global financial crisis and recession of
the developed world regularly, and to coordinate the mitigation
measures of different department.
28
GLOBAL FINANCIAL CRISIS AND KERALA ECONOMY:IMPACT AND MITIGATION MEASURES
Chapter 1
INTRODUCTION
The liquidity crisis and associated recession originated in the US and then spread to
Europe has by now engulfed most of the economies in both developed and developing
world. While some of the developing countries whose financial system is not
sufficiently opened up and/or not exposed to toxic securities are likely to escape from
the direct impact, there is hardly any escape route for them from the adverse impact of
the recession in the real economy. It has been predicted that the export earning of
these countries, from both merchandise and invisibles, will be hit causing
unemployment and output contraction on the one hand and foreign exchange crisis,
exchange rate depreciation and accentuated inflation on the other (Patnaik 2008). To
the extent that the present crisis echoes the great depression of 1930s the global
community has woken up to address the challenge. Institutional responses and
strategic initiatives have been under way at the global, multilateral, national and sub-
national levels to address the crisis. Nobel laureate Joseph Stiglitz (2008) considered
the crisis as 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.
The impact of global financial crisis in India is already felt, inter alia in terms of
reduced export earning1, drastic decline in industrial growth2 and employment3,
depreciation of Rupee, reduction in foreign exchange reserves4, downturn in stock
market 5and many other indicators. The central Government and Reserve Bank of
1 Going by the latest estimates, export declined by about 12 per cent during the month of October 2008as compared to corresponding month in 20072 The index of industrial production for the month of November 2008 recorded a negative growth forthe first time during the last 15 years.3 It has been reported that about four lakhs workers have been laid off from textile industry itself.4 The stock of foreign exchange declined from $ 330 billion some six months before to 245 billion bythe first week of December 2008.5 The BSE index declined from over 20000 during the early months of 2008 to 9000 during the lastweek of November 2008
29
India have already initiated a series of steps6 to ease the crisis. But in a country like
India, which is regionally more diverse than most continents, measures at the state
level to address the impacts that are specific to the regional economy cannot be
overemphasized. Such initiatives are especially called for in the context of Kerala
which is more vulnerable to any external shock as it is more integrated with rest of the
world. It is against this background that the Government Kerala requested Centre for
Development Studies to undertake a study on the likely impact of financial crisis on
Kerala and suggest mitigation measures.
While the extent of integration with the rest of the world is an indicator of potential
vulnerability, the actual impact would also depend on the preparedness of the regional
economy to face any shock as evident from the present state of institutional dynamism
and economic vibrancy. To the extent that the financial crisis has been generated
exogenously, any attempt at diagnosing its impact should perhaps begin with
identifying the channels through which global recession get transmitted to the
regional economy. The channels of transition in turn are shaped by the structural
characteristics of economy. Hence in the discussion that follows we shall undertake a
very preliminary exposition of the state of Kerala economy at the eve of financial
crisis and its major structural characteristics. The underlying objective is to reflect
on the preparedness of the regional economy to face the external shock and also to
locate the broad channels of transmission of global recession to the regional economy.
Recent Growth Trends
It is generally held that since 1987-88 there has been a turn around in Kerala’s
economic growth (Ahluwalia 2000, Harilal and Joseph 2003) with recorded growth
rate in NSDP during the last 19 years being 6.2 per cent as compared to 1.8 per cent
during 11 preceding years (Government of India 2008). However, a close
examination of the annual growth rates of different sectors reveal that the last 19 years
was marked by at least three phases where in only tertiary sector maintained the
growth momentum. The first phase (1987-96) was characterized by high growth in
primary (5.0%) and secondary (8.3%) and tertiary (7.1%) sectors. This was followed
by the second phase (1997-02) of low growth in primary (0.6%) sector mainly on
6 This included reduction in repo rate by 100 basis points to 8 per cent and CRR to 8.5 per cent byOctober 20, 2008 to make available more liquidity at lower cost followed by a series of fiscal measuresto rejuvenate the economy.
30
account of decline in commodity prices. The secondary sector (5.0%) also slowed
down, especially manufacturing sector (1.7%). The third phase (2003-06) was
characterized by a revival in the primary sector (6.8%) thanks to an upturn in the price
of commercial crops. The secondary sector (7.8%) also witnessed a turn around
mainly on account of the construction sector. To be more precise the recorded growth
rate of secondary sector less construction was only 2.3 per cent during the last three
years. Thus viewed, the present financial crisis coincides with a state of revival in the
agricultural sector preceded by a prolonged crisis and the large scale farmers’ suicide
on its aftermath. Given that the earlier crisis and recent signs of revival are almost
entirely driven by the exogenous factors the ongoing recession in the global economy
is bound to make the commercial cultivation more vulnerable.
In case of the manufacturing sector there is hardly any sign of dynamism in the
organized manufacturing. Nonetheless, there are evidences to suggest that large
number of industrial investment proposals remain inacted up on. What is more, while
FDI inflows into the country has increased manifold to reach nearly 3 per cent of
GDCF, the share of Kerala has been only about 0.34 per cent – only one tenth of its
population share. Recently, there are some signs of vibrancy in the unorganized
segment of the manufacturing sector. But they are likely to be adversely affected by
the credit availability and associated problems induced by crisis. In the context of
lower growth of manufacturing sector at the national level, the Central government
appointed the National Manufacturing Competitiveness Council (NMCC), to suggest
various ways and means for enhancing the competitiveness of manufacturing sector.
In this context it is advisable to appoint a Regional Commission on Industrial
Development to inquire into all the aspects relating to industrial growth in the state
and recommend measures towards evolving a vibrant industrial sector. Also to the
extent that a number of state industrial enterprises are unviable it is worthwhile to
explore the possibility of their networking with the profitable central public
enterprises.
Though the recorded growth of the service sector is found higher than the other
sectors, it compares only poorly with that of neighbouring states and national average.
What is more, the relatively more vibrant segment of service sector like tourism are
likely to be adversely affected by the crisis.
31
The Emerging Structure
Kerala, being historically more integrated with the rest of the world, is generally
construed as more susceptible to any external shocks as compared to other states in
India. The adverse impact of the current recession is likely to be more intense given
its adverse effect on the process of structural adaptation that has been taking place in
the context of heightened international competition. The recessionary trends through
its adverse impact on different sectors could have its bearing on the growth prospects
of the regional economy.
With the structural changes in the recent past, Kerala has emerged as one of the states
with largest share of output originating in the services sector (61 percent). Within
services, fortunes of the emerging sectors like tourism and software are exogenously
determined. In the agricultural sector two discernable trends could be seen; there has
been a move away from labour intensive rice cultivation that has made the state to
depend heavily on food imports. Simultaneously there has been an increase in the area
under less labour intensive and high value commercial crops that made the
agricultural sector vulnerable to external shocks more than ever before. The
commercial crop cultivation is a major source of livelihood for people in some of the
backward regions of the state and a source of employment, especially for women and
the backward classes. Though the industrial sector is yet to emerge as a significant
contributor to NSDP of the state, a large segment of the labour force, especially
women, is engaged in the traditional and export oriented industries like coir, cashew,
handloom and others.
About 10 percent of the state’s labour force belongs to the category of migrants
working in other states or countries. It has been noted through several studies of the
CDS that Kerala accounts for the largest share of remittances received among
different states of India. Such remittances, annually estimated to be in the range of
Rupees 20000 crores, are mainly responsible for the high levels of per-capita
consumption expenditure in Kerala observed through various rounds of the National
Sample Survey.
Quite naturally therefore, when a liquidity crisis grips the global economy and it is
poised to turn into a worldwide recession of unprecedented magnitudes, one has
reason to feel perturbed about its possible implications for the economy and people of
32
Kerala. At this stage, it is worthwhile exploring the extent to which the current crisis
can spill over, so that the policy community of the state can prepare some contingency
plans that can minimize the adverse impact of such a crisis. This report has been
prepared with a view to assisting the state government in analyzing the implications
of the crisis, so that the state could be better equipped with appropriate policies and
programmes to deal with any adverse situations as and when they arise.
Readers’ Guide
This report is structured in four chapters including this introduction and the
concluding chapter where the mitigation measures are presented. The chapter two will
identify the channels through which this financial crisis can transmit itself to the real
economy of Kerala. Chapter 3, drawing from the feedback obtained from different
stakeholders, presents an informed speculation on the impact of the crisis on various
sectors of the state’s economy. It includes a preliminary estimation on the impact of
the crisis on output growth and employment at the aggregate and sub-sectoral level
along with its likely impact on the revenue receipts. The last chapter discusses some
of the measures that the State Government may employ to mitigate the negative
effects of this crisis.
33
Chapter 2
CHANNELS OF TRANSMISSION
OF THE IMPACT OF GLOBAL CRISIS TO KERALA ECONOMY
Given the specificities of Kerala’s economy, namely that it is remittance driven and
highly integrated with rest of India and the world, we have identified the following six
channels through which the crisis can diffuse to the rest of the economy. These six
channels are: (a) remittance inflows; (b) availability of credit from the banking
system; (b) exports of certain specific items from the state such as Cashew, coir,
spices, marine products, handicrafts and IT and ITES; (d) tourist arrivals; (e) prices of
intermediate inputs ; and (f) prices of imported good, both raw materials and finished
goods. Theoretically there can be a channel of foreign direct investment (or how can
the crisis impact FDI), but this is neglected here since FDI hasn’t yet become a major
source of investment in Kerala. Given the perceived significance and given the
availability of data, present note focuses much more on some of the channels
mentioned above.
2. 1 Remittances from abroad: There is now enough consensus that although the
per capita domestic product in Kerala is low compared with most other states in
India, the per capita consumption expenditure in Kerala is second only to Punjab,
mainly because the shortfall in GDP is offset by the inflow of large scale remittances
from abroad especially from countries in the Middle East and also from other parts of
India. Increasingly a number of economic activities within the state notably,
commerce, real estate and construction are financed to a certain extent with
remittances from abroad. Three rounds of Kerala Migration Surveys (1998, 2003,
2007) conducted by the Centre for Development Studies (CDS), reinforces the fact
that migration has emerged as the single most dynamic factor in the otherwise dismal
scenario of Kerala in the last quarter of the twentieth century. In Kerala, probably,
emigration might have contributed more to poverty alleviation than any other factor
including agrarian reforms, trade union activism and social welfare legislation.
In 2004, India passed a milestone in the matter of workers’ remittances pushing back
other major labor sending countries such as Mexico and Philippines. Data on
remittances to India as a whole only are available as these are derived out of the
34
current account of India’s Balance of Payments. In 2008, remittances accounts for
about 3 per cent of net national disposable income. Unfortunately no official
estimates of remittances to Kerala or any other states in India are available. There is,
of course, a plethora of estimates very often done under simplifying assumptions. We
also conduct our own estimates of remittances for Kerala and these estimates are
based on three rounds of field survey covering 10,000 households dispersed through
200 localities in Kerala. The Kerala Migration Survey 2007 conducted by the CDS,
(with financial support from Department of Non-Resident Keralite Affairs,
Government of Kerala) gives the following estimates: (i) the number of international
migrants (emigrants) from Kerala stood at 1.85 million representing 24.5 emigrants
per 100 households; (ii) the proportion of Kerala emigrants who went to the Gulf
region accounts for 89 percent; and (iii) the largest number of Gulf emigrants (45.7
percent) had only primary education but without a secondary school certificate. It is
widely held that 25 percent of all remittances to India consist of remittances to Kerala.
However, our estimate of remittances to Kerala comes to Rs 24525 crores in 2007
which represented just 19.4 percent of the total remittances to India. We strongly
believe that due to changes in age structure of Kerala’s population, the number of
emigrants from Kerala may stabilize 1.9 to 2.0 million.
The recent Annual Report published by Ministry of Overseas Indian Affairs,
Government of India, indicates that the number of workers granted emigration
clearance to work abroad has come down in Kerala during the last two years and the
proportion of such workers to total workers in India has come from 19.7 percent in
2003 to 18.6 percent in 2007. Though the remittances to India increased from 28.95
Billion US dollars in 2007 to 42.59 Billion US dollars in 2008, we believe that the
share of Kerala has come down while remittances to other states in India are growing.
Also note that deposits into Non-resident accounts in Kerala (See Table 1) have come
down from Rs. 33,303 crores in March 2007 to Rs. 29,889 crores in March 2008 – a
decline of 3414 crores in just one year. However, during March to June 2008, there
had been an increase of Rs 1976 crores thus taking the total deposits to Rs. 31865
crores in June 2008.
35
Table 1: Trends in NRI deposits in Kerala (Rs in Cores)
Year NRI Deposits Increment in NRI Deposits2001-02 245342002-03 28696 41622003-04 30100 14042004-05 29120 -9802005-06 30671 15512006-07 33303 26322007-08 29889 -3414April-June 2007 31995 -April-June 2008 31865 -130
Source: State Level Banker’s Committee (2008)
It is also seen that the ratio of NRI deposits to domestic deposits have more than
halved itself during the period March 2002 through June 2008 implying the declining
importance of remittances to Kerala as a whole (Figure 1). However to make this
statement more strongly we do require all components of remittances to Kerala as
according to RBI only local withdrawals from NRI deposits are treated as part of
remittances, the major component of remittances being remittances for family
maintenance which does not always go through banking channels.
Figure 1: Ratio of NRI deposits to Domestic deposits
Source: State Level Banker’s Committee (2008)
36
Our estimates of remittances for Kerala are based on two assumptions: One, we have
kept the proportion of remittances to Kerala as constant 19.4 percent as the highest
level of estimates; second, we have assumed one percentage reduction of remittances
to Kerala; 19.4 percent to 18.4 percent in 2008 and 17.4 in 2009.
Table 2 Actual remittances to India and estimated remittances to Kerala,1990-91-2008-09
Year Remittancesto India (inMillion of US$)
Remittances toIndia (in RsCrores)
EstimatedRemittance toKerala (Rs inCrores)
1990-91 2068 37121991-92 3783 9382 30251992-93 3852 11226 38821993-94 5265 16514 60841994-95 8093 25417 70691995-96 8507 28660 95211996-97 12367 43969 107611997-98 11830 43765 108171998-99 10280 43242 136521999-00 12256 53132 144382000-01 12854 58811 157322001-02 15398 73363 173622002-03 16387 79229 184652003-04 21608 99165 197972004-05 20525 91971 212512005-06 24493 108565 228282006-07 27941 126088 245262007-08 40778 163709 301222008-09 46088 221222.4 38492**2008-09 42917***
Source: Remittances to India: Reserve Bank of India, Handbook of Statistics of Indian Economy 2008;Remittances to Kerala: Estimated. Please see text for the methodology*Estimated by blowing up the data on remittances during first quarter of 2008-09 to the entire year (ie.,net private transfers during Q1 of 2008-09*4); ** Low estimate; *** High estimate ; NA-Not available
What will be the direction of movement of remittances to India and Kerala although
we are not in a position to predict its level for both (India and Kerala) in any robust
fashion? The answer to this question will crucially depend on the following set of
factors: (a) the economic conditions in the host countries such as the Middle East, the
USA, and the UK where most Keralites have migrated to, and where over 90 per cent
of the remittances to the state originate from. Among these three regions, Middle East
is the most important from where 56 per cent of the total remittances to Kerala have
37
originated from; (b) the exchange rate of the Indian Rupee vis-à-vis the US Dollar; (c)
Rate of interest on NRI deposits; (d) Perceptions about the relative strength of Indian
banks in the light of the global financial crisis etc compared to the banks abroad. We
elaborate on each of these factors.
(a) Economic conditions of the host countries: Most of the NRKs are located in
one of the seven Gulf countries. Of these seven, maximum numbers are in Saudi
Arabia and in the UAE. The economies of all these countries, according to IMF
assessment, are in good shape although there are liquidity concerns in the banking
sectors of Saudi Arabia, UAE and Qatar. But the governments of these three countries
have taken a number of steps to improve the liquidity position of their respective
banking systems. So there appears to be no immediate cause for concern in the health
of the commercial banking systems of these countries. International Energy Agency
(IEA) found that even after recent investment, production from the oil fields (world’s
largest 800 oil fields) was declining at an annual 6.7 per cent and that this rate was
accelerating. Many of the fields experiencing the sharpest decline in production lie in
developed countries, including in areas such as the North Sea and Alaska. This meant
that the west would become less and less of an influence in terms of production, while
the Persian Gulf countries would become more important. According to IEA, most of
the projected increase would come from members of OPEC, whose world share
would jump from 44 per cent to 51 per cent by 2030. This means the Gulf countries
will continue to grow with a steady source of income from oil exports.
In the short and medium terms, given the large Current Account surpluses that these
countries enjoy, we do not expect any adverse impact on their growth performance
and therefore we assume that there are no immediate deleterious effects on the
employment position of Keralites located in these countries. It must be mentioned,
that house rents in the UAE has been rising at a rate of 20 per cent. This has forced
many Keralites to send their families back to Kerala to whom they regularly remit
cash for family maintenance. However, if the reduction in oil price and its sustained
low level reduces investments in gulf countries, then it can have negative impact on
job opportunities and the income of migrants from Kerala. We have not seen so far
any indications of such a reduction in investment there, though such an eventuality
cannot be ruled out. We, therefore, expect the remittances from the Gulf region to be
38
positive but with reduced rate of growth over the next few years or so. In the case of
the other two regions, namely the USA and in the UK, the economies are already in
recession and there are a number of job losses. (However most of the Keralites
working in these two regions is in the public health system of these countries and they
are therefore unlikely to lose jobs.)
(b) Nominal exchange rate of Indian Rupee vis-à-vis the US Dollar: The
exchange rate of the Rupee has depreciated by almost 18 per cent since January 2008.
This factor can encourage more repatriation of funds from abroad. Since we do not
have the composition of NRI deposits (into dollar denominated FCNR and otherwise)
we are not in a position to unequivocally say that remittances will increase as a result
of depreciation per se. But given the usual inverse relationship between the exchange
rate and remittances, the Rupee depreciation is likely to yield positive net remittances
as has been noticed over the first quarter of the current fiscal year 2008-09.
(c) Rate of interest on NRI deposits: This has been revised upwards by 50 base
points since September 2008. Consequently with the depreciating Rupee, one would
expect to have positive impact on remittances;
(d) Perception about the relative strength of the banking system: Although the
NRI deposit component of remittances is only about 50 per cent or so, there is a
general feeling that India’s commercial banks have very little or no exposure to the
toxic assets and is therefore perceived to be safe.
We, therefore expect, remittances to be positive but with a reduced rate of growth
during the short and medium terms. However, we need to be careful to monitor the
changes in level of investments in the Gulf countries, possibly due to the reduction in
oil prices.
2.2 Credit Availability: There is little doubt that credit is an important route through
which the financial crisis can impact upon the quantity and indeed even quality of real
economic activity in the state. Global financial crisis is a banking crisis and given the
integrated nature of India’s economy with rest of the world, it has in no time
39
transmitted itself to the real economy of India and indeed even to that of Kerala7,
though the crisis had originated abroad. Its manifestation has been a severe liquidity
crisis in the banking sector, with sharp increases in the Prime Lending Rate, which
has precipitated the invocation of a number of monetary policy instruments by the
Reserve Bank of India over the period since the 16th of September 2008. The severity
of the crisis could be judged by the fact that both the RBI and the Ministry of Finance
has been working together, monitoring the situation virtually on a daily basis and then
taking corrective steps within a very short span of time. As can be seen below, the
RBI has even revised of the rates, for instance the repo rate, two times within a span
of a fortnight.
All these measures have supposed to have resulted in an infusion of approximately
Rupees three lakh crores of liquidity into the banking system. Further after meeting
with finance minister P. Chidambaram on 4 November, India’s state-owned banks
decided to slash their PLR by up to 75 basis points between 13.25 per cent and 13.5
per cent8.
All these recent initiatives by both the RBI and the Ministry of Finance show that the
government is very much concerned with quickly fixing up an imminent liquidity
crisis in the Indian banking sector.
Liquidity crisis in the Indian banking sector: Banks in India may see a significant
drop in the rate of growth of the loans they extend to companies and individuals
because they don’t have sufficient liquidity to do so despite the central bank’s efforts
to infuse liquidity into the system, say some economists and equity analysts. They
also warn of defaults by some companies, especially the so-called small and medium
enterprises (SMEs) that borrowed in better times. According to Reserve Bank of India
(2007), credit to industry (non priority small, medium and large) and personal loans
make up nearly two thirds of the total outstanding gross bank credit. According to the
7 The fact that both the IMF and Government of India has both scaled down the growth rate estimatesof the overall economy for the current fiscal year is a clear reflection that the financial crisis is going toaffect or have already started affecting the real economy of the country.
8 On November 6 2008, the country’s biggest bank, State Bank of India, announced a 0.75 percentagepoint reduction in its prime lending rate, which now stands at 13 per cent.
40
latest data from the RBI, gross bank credit works out to Rs 26, 15, 041 cores as on
October 24, 2008 implying a year-on-year growth rate of 29 per cent or so. However a
closer look at the data shows that gross bank credit has grown at a rate of only 10.7
per cent during the period April 1 through 28 October 2008. Over the fortnight ending
28 October 2008 it has grown only at 0.3 per cent compared to the similar fortnight in
2007. If this is to continue loans may become very difficult for industry and personal
purposes and this can have a deleterious consequence for the real economy both in
terms of production, consumption and trade. Data on exports growth, just released by
the Director General of Foreign Trade, shows that India’s exports declined in October
2008, for the first time in any month in five years, and the country will miss the $200
billion target for 2008-09 Higher borrowing costs and prices have also discouraged
spending by consumers who rely on loans to buy cars and two-wheelers. Vehicles
sales, also including trucks, two-wheeled scooters and motorcycles, tumbled 14 per
cent, the biggest drop in almost eight years, (Society of Indian Automobile
Manufacturers press release on November 10 2008). India’s industrial production
growth grew at - 0.4 per cent in recently 2008, the slowest pace on record.
Possible hypotheses for the emergence of the liquidity crisis: The business press in
the country is rife with a number of hypotheses. One of these is expressed by the
respectable economist and erstwhile central banker, Dr C Rangarajan. According to
this view the liquidity crisis is caused almost entirely by net divestment by foreign
institutional investors. This is entirely possible as during the first quarter of the
current fiscal year of 2008-09, net divestment by FII’s work out to US $ -5.18
billions compared to a positive net inflow of US $ 7.09 billions during the
corresponding period last year (Reserve Bank of India Bulletin, October, 2008, Table
9, p. 1685). With the global financial crisis getting more entrenched this may have
precipitated a larger divestment by FII’s leading a liquidity crisis within the banking
sector. In order to prevent sharp Rupee depreciation in the wake of the exit by FIIs,
the RBI has been selling dollars, thereby reducing rupee resources with banks. While
this is quite plausible, a recent study of India’s banking system by the UK-based
equity research house Noble Group refers to a more fundamental problem with the
asset-liability mismatch in Indian banks’ balance sheets. The likely outcome (of this
mismatch) is a pronounced slowdown in lending. According to this study, “this
lending slowdown is almost certainly likely to coincide with rising non-performing
41
assets (or bad loans)”9.This mismatch has been driven by two key factors—growing
dependence on short-term liabilities and credit growth running ahead of deposit
growth. Over the past three years, according to the Noble group study, Indian banks
had funded long-term credit using short-term liabilities, with the phenomenon
becoming more pronounced in 2007-08, as bankers, expecting interest rates to
moderate, took on increasingly shorter duration liabilities. These banks are now left
holding a large volume of liabilities that are maturing faster than assets. Given the
liquidity squeeze, replacing these maturing liabilities will be an uphill task. This
underlying weakness (as if it were) of the Indian commercial banking system appears
to have been compounded by the recent divestment of FII’s from the market. Further
Indian companies now find it extremely difficult to raise external commercial
borrowings10 and they have in turn directed themselves to the domestic commercial
banking sector thus exacerbating the liquidity crisis leading to firming up of the PLR.
Table 3: Asset-Liability Mismatch of Indian Banks as on 2008
Name of bank Asset-Liabilitymismatch
quantified in Rsbillions
Extent ofmismatch (a a
per cent ofmarket
capitalization)Karnataka Bank -53 540Federal Bank -89 410ING Vysya -58 391Yes Bank -56 283South Indian Bank -13 168ICICI Bank -616 143Punjab National Bank -131 100State Bank of India -577 81Axis Bank -151 77Bank of Baroda -27 30HDFC Bank -24 5
Source: Noble Group (2008)
Current status with respect to credit availability: The Reserve Bank of India’s
(RBI) latest weekly statistical supplement shows a sharp drop in credit growth during
the fortnight ended 24 October to Rs 7,637 crore, compared with a huge Rs 64,937
9 Although at present , the net non performing assets in the Indian commercial banking sector are onlyabout 1 per cent of net advances. See Reserve Bank of India (2008), Appendix Table III.18.
10 ECBs during the first quarter of 2008-09 is only US $ 2.8 billion compared to US $ 8.3 billion duringthe corresponding first quarter of 2007-08. See Reserve Bank of India (2008), Table 8 on p. 1685.
42
crore growth during the previous fortnight. At the same time, investments in
government securities increased drastically by Rs 71,317 crore during the fortnight to
24 October, compared with negative growth of Rs 6,324 crore in the previous
fortnight. As a matter of fact, the increase in scheduled banks’ holdings of the
statutory liquid ratio (SLR) securities this fiscal year has gone up by Rs 80,519 crore
till 24 October, of which Rs71,317 crore was invested in the fortnight to 24 October.
As a result, the investment-deposit ratio for all scheduled commercial banks, which
was 28.27 on 10 October, went up to 30.45 on 7 November. Although these are
paradoxical developments, the clue to this apparent anomaly lies in the banks’
balances with RBI which came down drastically by Rs 1,08,399 crore during the
fortnight to 24 October due to cuts in cash reserve ratio. Most of this was invested in
government securities. This means that banks now (October 24 2008) have enough
liquidity with them, but they seem to be reluctant to lending for fear of defaults,
perhaps. And very recent data on the growth of non-performing assets (NPA)11 in the
Indian banking sector shows that this has been on the increase.
India’s banks are accumulating bad and doubtful loans at a faster pace as the economy
slows, and the trend may accelerate next year as small and medium enterprises
(SMEs) and households struggle to pay debts
Table 4: Growing NPAs in Indian Commercial Banking System at the end ofJune and September 2008Indicators Gross NPAs (in Crore) Gross NPAs/
Advances (in%)
Bank Name June Sep % ChangeICICI Bank 8511.36 9501.48 11.63 3.72 4.18HDFC Bank 1502.74 1675.94 11.53 1.4 1.6AXIS Bank 638.33 710.2 11.26 0.92 0.91State Bank of India 11408.12 12552.32 10.03 2.54 2.51Canara Bank 1447.28 1573.93 8.75 1.31 1.31Union Bank of India 1575.45 1674.72 6.3 2.08 1.93Kotak Mahindra Bank 526.59 544.95 3.49 3.17 3.16Bank of India 2017.3 1978.12 -1.94 1.64 1.53Punjab National Bank 3264.74 3124.57 -4.29 2.82 2.37Bank of Baroda 2091.06 1954.39 -6.54 1.86 1.62
Source: Jain (2008).
11 Loans on which no principal or interest has been paid for at least 90 days are classified as non-performing under Indian banking rules. Gross NPAs include loans against which banks have set asidemoney to cover the risk of default.
43
So our considered opinion is that the credit crunch is to continue, at least for some
more time.
Possible implications for credit availability in Kerala: In the light of the
international and national scenario, it is quite likely that credit availability for a
variety of economic activities such as small and medium enterprises, retail trade, real
estate and housing and indeed for personal loans of all kinds will indeed become a
difficulty (or has already become) in the months to come. Although our discussions
with the State Level Banker’s Committee, the regional director of the Reserve Bank
of India, and indeed one each of the leading public sector and private banks in the
state revealed that although at the moment (November 2008), credit availability is not
a problem for the non-priority sector (consisting of personal loans, home loans above
Rs 20 lakhs, loans for medium enterprises, and those for real estates and construction
companies) it can indeed become tight in view of the liquidity crisis outlined above.
In fact this likely scenario of shape of things to come is indicated by Table 5, which
shows that outstanding advances grew only by 1.2 per cent on June 2008 compared to
what was available on March 2008. Although advances outstanding do not correspond
to the flow of credit during a certain specific period, it can be taken as a good proxy12.
The same declining trend is available in priority sector advances and the annual credit
plan for priority sector lending in all the three sectors, primary, tertiary and services
(State Level Banker’s Committee, 2008). The tight credit situation is indicated by the
fact that if in 2007, 60 applications out of a possible 100 loan applications were
sanctioned credit; this has since drastically come down to just 20 or so. Given the fact
that the net NPAs of the banks are negligible, it may be the asset-liability mismatch
that may be causing the liquidity problem leading to tighter credit availability. It is
worth noting that, according to Table 3, two of the banks having an asset-liability
mismatch are from the state and these two are the leading private sector banks in
terms of credit flows.
12 This is because the term bank advances has two components: the flow of credit and loan recoveries.So the relative composition of these two components will determine the precise size of the advances,both the stock and flow of it.
44
Table 5: Growth in commercial bank advances in Kerala (Rs in Crores)
Fiscal Yearending March 31
TotalAdvances
Increment Rte of Growth(in Per cent)
2002 220622003 27007 4945 22.42004 31867 4860 18.02005 40948 9081 28.52006 51919 10971 26.82007 64273 12354 23.82008 75305 11032 17.2April-June 2008 76230 925 1.2
Source: State Level Banker’s Committee, Kerala (2008), p. 77
This has the potential of dampening the scale of activities of all those credit dependent
ones such as cashew trade, new car sales, construction and real estate, and so on.
There is also indication that lack of availability of credit has already affected the sales
of two wheelers as most if not all banks have stopped disbursing two wheeler loans
for quite some time. But then before we draw pessimistic conclusions in this respect
one must also consider the likely effect on liquidity within the banking sector
consequent to the various policy initiatives already taken by the RBI and the Ministry
of Finance. So our conclusion is that although there is a potential for a crisis, the
state government may monitor the situation with the help of the State Level Banker’s
Committee and the regional office of the Reserve Bank of India so that the availability
of credit may not become a constraint. The state may also consider using the co-
operative banking network to extend credit to small and medium enterprises and
exporters such as cashew exporters.
2.3 Exports as a channel of transmission of the crisis
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% of the
state’s SDP which was almost three times the national level. The study also noted a
declining trend in export orientation since independence which appears to have
continued since 1980s. The observed increase in the domestic market orientation in
many of the commodities notwithstanding, the export market continues to be crucial
for Kerala. The market dependence in general for the agricultural sector is said to
have intensified with the shift in cropping pattern marked by a drastic decline in area
45
under food crops like rice and increase in that of commercial crops(Nair and Menon,
2004).
In case of secondary sector, Isaac and Reddy (1992) found the export intensity as high
as 65 per cent in mid 1990s. While the non-tradable construction activities acted as an
engine of growth for the secondary sector since 1980s (Harilal and Joseph 2003) most
of the traditional industries in the unorganized sector (like coir, cashew, marine
products), known for their high labour intensity, employing mostly the women from
the lower strata of the society depends heavily on the export market. The service
sector of the state, which has emerged as the leading sector of the economy is
increasingly being fueled by export oriented with the emergence of software and
tourism.
Since most of these products are highly price/income/cross elastic and exported to the
traditional western markets of USA, Western Europe and Japan- all of which are
faced with recessionary conditions - exports of these products are likely to be
adversely affected. Further with difficulties on the credit front, despite a depreciating
Rupee, the cost of exports and indeed the competitiveness of Kerala’s exports can be
adversely affected although it must be stressed that we do not expect this to be the
case across the board. To the extent that the exports are affected, there is likely to be
an adverse impact on the fortunes of those engaged in these sectors and more
specifically on the labour force mostly women.
Given that the markets are integrated, domestic market oriented products are also
likely to have an adverse effect through international transmission of prices in a
globally integrated markets. Moreover, if the export prices are downwardly more
flexible and import prices are more flexible upwards, there will be an adverse effect
on the terms of trade of the regional economy.
In what follows we undertake an exploration of the likely adverse effect on the export
oriented sectors with focus on traditional industries, commercial crops and emerging
sectors like software and tourism. The limits set by data availability, was offset to
some extent by the feedback received from different stakeholders.
46
(a) Coir and Coir Products
Coir industry of the state, that account for about 93 per cent of the export from the
country, produces coir fibre, coir yarn and other coir products. Thanks to growing
environmental consciousness, there has been an increased world demand for coir
products and the coir exports increased from Rs 352 crores in 2002-03 to Rs 592
crores in 2007-08. The export growth has also been induced by the emergence of new
markets, new products and new uses for coir and coir products such as rubberised
coir, needle felts, geo-textiles and coir pith. Increase in internal market over the years
notwithstanding, exports accounted for 42.61 percent of the domestic production.
When it comes to direction of trade we observe high regional concentration. In 2006-
07, USA accounted for almost 37 per cent of the total export earning followed by UK
(9%) Germany (7.6%), and Netherlands (6.9%). Thus, top four importers accounted
for almost 60% of the exports. Such high regional concentration is not at all desirable
at all times and it becomes disastrous in periods of crisis.
Coir industry is a major source of employment for the rural poor, especially women,
in the coastal areas who are drawn from among the most disempowered social groups.
The total number of workers according to Survey of Coir Industry (1997) was 3,
62,440, including secondary and ancillary workers of which 82 per cent are women
and most of them (85%) work in household units. Occupations in the industry are
segregated by sex; women workers in the coir industry are mostly engaged in the
spinning of yarn while men are engaged in the weaving of mats and matting.
Exports of coir products - Recent trends:
If the available evidence, from month-wise export data as well as the feedback from
exporters, is any indication, the coir industry in the state has already felt the adverse
impact of the financial crisis. As per the export data for the month of October 2008,
there is definite downward trend in exports. The decline has been observed in the
entire coir product except rubberised coir and coir rope with significant variation
across products. With the export earning during October 2008 is about 15 percent
lower than that of the corresponding period in 2007 amounting to a loss of Rs 8
crores. More precisely, while there has been 9% decline in the quantity exported,
notwithstanding the devaluation of rupee, the decline in export earning was of the
47
order of 15 per cent (see table 6). Thus in case of coir and coir products the positive
devaluation effect appears to have been more than offset by the adverse demand effect
on account of the crisis.
Table 6: Export of Coir and products during October 2008 and October 2007
Oct 2008 Oct 2007 Growth (%)
Major Export Items MT Value Qty Value Qty Value
Coir mats 5989 3593.3 7052 4049.39 -15 -11
Coir pith 5895 412.63 5452 474.21 8 -13
Coir yarn 313 81.48 711 232.78 -56 -65
Coir mattings 189 122.99 348 226.78 -46 -46
Coir geotextiles 316 132.51 356 163.54 -11 -19
Coir rugs and carpets 6 4.09 8 8.44 -25 -52
Rubberized coir 131 98.14 91 68.11 44 44
Coir fibre 391 39.13 662 68.56 -41 -43
Coir rope 54 16.27 12 4.99 350 225
Curled coir 0 0 18 2.54 -100 -100
Coir other sorts 0 0 5 4.26 -100 -100
Total 13284 4500.54 14715 5303.6 -9.72 -15.14Source: Coir Board, based on DGCIS, Monthly statistics of Foreign Trade.Note: Quantity in Metric Tonnes and Value in rupees Lakhs
As expected, the feedback from stakeholders tend to suggest that, the US market
appears to have recorded a drastic decline as the US shipments from Cochin have
come down by about 50 per cent, according to shipping companies. The immediate
effect of the sub prime market collapse has been the closing down of two of the
biggest door mat buyers –LNT-Linens (371 out of 589 stores in 47 states and 7
Canadian province were closed) and popular retail store Mervyns LLC (both had a
vendor base of about 1000 suppliers). Retailers like Stein Mart, Nordstorm, JC Penny,
Kohl, Dillard etc. have cancelled many of the orders.
One of the biggest importers of printed Coir doormats from Kerala who imports
around 400 TEUs has stopped all their shipments. While there has been no
cancellation of orders, there has been increasing incidence of “keeping orders on
hold” leading to uncertainty. Going by available evidence, exports to the extent of
Rs.150 Crores already contracted have been put on hold by buyers citing global
meltdown reasons. The result has been that manufactured items, which are in ready to
48
dispatch mode, have been idling in the warehouses because of ‘put on hold’
instructions from buyers.
Apart from decline in exports, there has been an increasing incidence of delayed
payments. Most of the retailers are asking for longer credit periods, stretching to even
250 days. There are unpaid shipping bills to the tune of US $40 million while the
banks have down graded the credit ratings of coir exporters.
Drawing from the observed recent trend in exports and the feedback from different
stakeholders, we expect at least 20 per cent decline in exports in the short run. The
extent of decline in the medium and long term depends on how prolonged and intense
the crisis going to be. Our estimate tends to suggest that as a result of a 20 per cent
decline in exports, the loss of direct employment in the short run could be of the order
of 32,00013. The actual reduction could be higher if we were to consider the plausible
decline in domestic demand and other indirect effects.
(b) Cashew Industry:
This is a highly import dependent and export oriented industry with high employment
(mostly women) intensity. With the entry of other states, especially Tamil Nadu and
Maharashtra, prominence of Kerala declined. Yet with an export earning of Rs 1505
Crores in 2006-07, Kerala accounted for over 60 per cent of the exports from the
country.
Historically, the industry has been highly export oriented and in 2006-07 the export
intensity (export as a proportion of production) for Kerala is estimated at about 50 per
cent. In terms of employment, it is estimated that the industry generates employment
of 2.5 lakhs workers of a work force of four lakh workers (Eapen 2007) of which
about 95 per cent is women. Studies have also shown for the women workers who
process the cashew nuts it is essential for survival, but does not provide enough
income to raise households out of poverty. The increasing informalisation of
13 In this chapter the loss of direct employment is estimated based on the current employment, exportintensity and loss of export due to crisis. He we assume that employment intensity for both exportmarket and domestic market is the same – an assumption that could be justified.
49
employment in the sector creates insecure and hazardous working conditions (Harilal
et al 2006).
When it comes to direction of trade, EU and the US are important markets accounting
for nearly 50% of the total exports. While there is growing markets from emerging
economies like China Russia and others, concerted attempts are yet to be made
towards tapping them. Also studies have pointed towards the weak position of
countries like India in the Cashew value chain. Moreover, the power imbalance
between intensely competing producers and relatively few buyers in the global market
place gives large retailers, the supermarkets, the upper hand over their supply chains.
(Eapen et al 2003, Harilal et al 2006). This is manifested inter alia in the declining
trend in the unit value of exports. There is much to be gained by moving up the value
chain.
Yet another characteristic is its heavy import dependence. Increase in domestic
production notwithstanding, 40-45 per cent of the raw nut requirement is met through
imports at the national level and in Kerala the import dependence is much higher –
about 70%. Hence, unlike other traditional industries, the devaluation of rupee could
have an additional adverse impact by making its raw material dearer. Similar to most
other commodities, the demand for the product is price/income/cross elastic and that
there could be an adverse effect on the demand and price. Finally, export activities
could be adversely affected by credit availability at different levels. All these could
have its implications on the number of days of work available for the poor female
workers engaged in this sector.
Recent Trend in Exports:
From table 7 it is evident that, downward trend in export to major markets like the US
and European countries was evident during April-October 2008 itself. Total export
and export earning, however, recorded a growth rate of 21% and 41% respectively
inter alia on account of the market diversification into countries like Turkey, Syria
and others. However, if the data for the month of October 2008 is any indication, the
downward trend has become almost wide spread and intensified in case of the leading
markets like US, Netherlands and others. As a result, the quantum of exports recorded
a negative growth rate of over 20 per cent. The export earning however, recorded a
50
decent growth rate of over 23 per cent that could be attributed to devaluation coupled
with the product composition.
Table 7: Export of Cashew to major markets during Oct 08 and April-Oct 2008change over the corresponding period in 2007
Oct-08Change over
Oct- 07 April-Oct 2008Change overApril-Oct-08
QTY Value Qty Value QTY Value QTY Value
Countries
(MT) Rs 000 (%) (%) (MT) Rs 000 (%) (%)
Netherlands 747 214640 -29.06 14.62 6432 226903 -27.23 -85.85Norway 32 9106 -74.80 -61.55 519 16275 -16.16 -86.12Saudi Arabia 87 25027 -72.38 -59.76 1846 51002 -8.79 -86.64Spain 175 52324 -26.78 10.51 1368 397260 -21.02 15.65Syria 135 38648 50.00 90.16 956 274215 1.38 44.37Thailand 64 16581 222 61123
Turkey 159 46532 101.27 193.21 805 240840 104.83 213.39UAE 1695 486011 37.92 97.52 7273 2074646 29.05 83.38UK 220 60151 -31.25 -5.47 2060 561388 -13.08 18.57USA 2120 609357 -35.13 -0.58 23689 6266678 -7.53 26.85Others 2461 753199 -1.01 1.60 41404 8007790 -12.33 -102.07
Total 7895 2311576 -20.15 23.41 86574 18178120 29.13 41.53
Source: Cashew Export Promotion Council, based on DGCIS, Monthly Statistics of ForeignTrade
Feedback from Stakeholders:
Exporters felt that the importers are reportedly hesitant to accept the consignment on
quality terms. Other set of issues related to the credit market. It was reported that the
banks are sending the documents for collection to buyers' bank, instead of discounting
the Letters of Credit apparently because the Banks feel that if the buyer's bank goes
bankrupt and the documents are not retired or returned, the Indian bank's position
would be that of an unsecured creditor of the foreign bank.
Now, the procedure followed by the banks is that if an export payment is not received
within a due date, the exporter's account is debited the USD amount. Thus,
effectively, the risk of bank-default is being passed on to the exporter. Banks have
been delaying the payment, and this leads to instances where the exporter's accounts
are being debited and their credit-limits reduced to that extent, causing a credit crunch
in the cashew industry. These Debits at the current exchange rates where the Dollar is
much higher than the levels at which the documents were originally discounted,
causing additional distress to exporters. This comes at a time when buyers are
51
postponing taking delivery of their shipments, and the whole cashew export industry
is affected.
Banks as well as private finance organizations want to ascertain that the orders are
proper and from the right direction. After this, they want to ensure the capacity of the
buyer as well as his country’s reputation. When orders are received from developing
countries as well as from under developed countries including some from SAARC,
exporters are unable to get advances, bills discounting, etc. from the bank. Even the
at-site L/C from Bangladesh is not being treated as valued documents for purchase, by
the banks unless extra securities are offered. The banks will not put in writing that due
to cash crunch they are unable to finance. Many reasons will be spelt out verbally and
never in writing, but sanctioning of the funds would be delayed.
On the whole, the financial crisis is having adverse effect on the industry. Reduction
in export demand coupled with credit squeeze is likely to have at least 15% reduction
in the export in the short run. This could adversely affect the employment prospects
of at least and 18000 workers. The intensity is likely to increase in the medium term
unless appropriate measures are initiated at the earliest to address the credit squeeze
and search for new markets. In this context, it is important to explore more intensively
the domestic market where the price realization could be higher than what is being
obtained in the export market. Secondly, it will be rewarding to explore the new and
emerging market of China, South East Asian countries, South Africa and the Middle
East.
(c) Marine Products:
Total marine production of Kerala is about 6.4 lakhs tonnes of which about 17% is
exported. The total export earning from Marine product is estimated at Rs 1448 crores
in 2006-07. The population of fisher folk of Kerala is about 12 Lakhs, which include
8.46 Lakhs in the marine sector and 3.2 Lakhs in the inland sector. Estimates indicate
that about 8.46 lakhs depends on the marine sector for their livelihood. The number of
active fishermen is 1.91 Lakhs, but almost an equal number of people are presently
engaged in fishery related activities such as vending, processing and marketing. Thus
it may be inferred that the export sector provides employment for about 65,000
people.
52
In terms of the direction of trade, European Union is the major export destination of
Kerala’s marine exports. EU holds around 50 percent of Kerala’s export followed by
Japan and US with around 16 per cent. The major change over this period, however,
has been the emergence of China as a significant market, most notably for frozen fish.
By 2000-01, China accounted for 12 percent of exports by value but it had come down
to around 7% or the past 4 years. In terms of product composition prawns accounted
for over 60 per cent of the total exports.
Recent Trends:
From our discussion with the leading exporters it was discerned that of late there has
been a decline in exports to the order of 25-30 per cent. Data of export in the recent
months tends to confirm this view. Table 8 presents data on exports of marine
products to the major exporting countries during the month of September 2008 and
2007. It also reports data on exports during the April-September 2008 and 2007. Both
of these indicators point towards a decline in exports and that is accelerating with the
passage of time. To be more specific, the decline in the volume of exports was only
13% during April-September 2008 as compared the corresponding period in 2007. But
the observed decline in the month of September 2008 was of the order of 30% in
quantity and 33% in value as compared to September 2007. The table further
indicates that the decline was almost across all the major destinations and the only
exception being South East Asia, his point towards the scope for exploring this
market given the new India ASEAN Free trade agreement.
53
Table 8 : Recent trends in exports of marine products from Kerala
Source: MPEDA.Note: Quantity in Metric Tonnes and Value in rupees Lakhs
Against the above trend we anticipate a decline in the export by about 33 per cent in
the short run and this could in turn lead to an employment loss of the order at least
20,000.
(d) Textiles and Handloom:
Handloom industry, one of the important traditional industries in Kerala, mostly
concentrated in Thiruvananthapuram and Kannur districts give employment
opportunities to around 1.75 lakh people. This industry stands second to the coir
industry in providing employment among the traditional industries of the state. The
RegionSeptember2007
September2008
%Change
Apr-Sept07
Apr-Sept 08
%Change
Q: 442 165 -62.67 4574 1436.17 -68.6
V: 1052.88 262.27 -75.09 8911 3786.74 -57.5
Japan $: 2.59 0.61 -76.45 22 9.1 -58.4
Q: 921 700 -24.00 3726 4254.93 14.2
V: 1559.73 1144 -26.65 6604 6978.21 5.7
USA $: 3.84 2.65 -30.99 16 16.7 3.2
Q: 7235 4430 -38.77 26578 22490.5 -15.4
V: 11686.2 7178.37 -38.57 41432 38447.4 -7.2
EU $: 28.78 16.64 -42.18 101 91.95 -9.1
Q: 335 365 8.96 2277 1077.4 -52.7
V: 410.24 346.57 -15.52 3137 1881.16 -40
China $: 1.01 0.8 -20.79 8 4.5 -41.2
Q: 1850 1234 -33.30 3585 5411.28 51
V: 1099.74 958.24 -12.87 2387 4339.12 81.8SouthEastAsia $: 2.71 2.22 -18.08 6 10.37 77.2
Q: 253 676 167.19 2171 2044.63 -5.8
V: 428.62 688.08 60.53 3252 2775.13 -14.7MiddleEast $: 1.06 1.59 50.00 8 6.67 -15.6
Q: 943 759 -19.51 4988 4987.4 0
V: 903.96 829.21 -8.27 5119 5313.64 3.8
Others $: 2.23 1.92 -13.90 12 12.86 3.4
Q: 11980 8328 -30.48 47899 41702.3 -12.9
V: 17141.4 11406.7 -33.45 70841 63521.4 -10.3
Total $: 42.22 26.44 -37.38 173 152.16 -12.1
54
industry is dominated by the co-operative sector with 94 per cent of looms. The
remaining six percent of handloom units are owned by industrial entrepreneurs. The
co-operative sector consists of factory type and cottage type societies. The total
production cloth in Kerala is estimated at 62.8 million meters in 2006-07.
Feedback from Exporters
From our interaction with different producers and exporters we had a mixed picture.
While a few of the exporters expect an adverse impact of crisis, few were of the view
that the low priced Indian products might act as a substitute for the high priced.
A Kannur based exporter having an annual export earning of 20 crore rupees for the
current year reported to have already reached an export level of Rs 9 Crores by
September itself The exported items mostly comprises of home textiles, ready made
garments and furnishings. 40% of export is to Europe, another 40% to Japan and the
rest to Australia. It was told that the X’ Mas sales in the retail shops of these countries
would start in November and would last till January. The impact of the crisis would
be known only after that. The materials for X’Mas sales were already shipped and so
the impact has not been felt on the manufacturers. Further, as most of the products are
of moderately priced as per the European standards, even if there is an expenditure cut
it may not affect their textile business. There is also the chance that high income
groups leave costly branded items and go in for moderately priced Indian items. And
so he does not envisage a bad situation.
There is no credit crunch and soft loans are available. But the companies are not for a
big expansion of the existing facilities by utilizing credits since they think it is better
not to grow big as it may attract trade union related conflicts. The company employs
300 workers directly and has 200 more in the sub units. Rather than the financial
crisis it is the energy crisis that is affecting the unit.
A Weavers Co-operative Society from Kannur that exports bath mat and furnishing
items to Japan and Honkong had an export earning of Rs. 46 lakhs in 2006-07. In
2008 for the first six months income from exports is Rs.26.58 lakh. It is expected that
55
by the end of the financial year the earnings would be around 60 lakhs. The secretary
of the society is confident in achieving this.
Another company head quartered in Chennai, employs 400 people engaged export of
home furnishing and decorative items mostly (ninety percent) to US and Europe also
had similar view. In 2007-08 the export was for 18 crore rupees. The target for the
current year is 20 crores. By September, they have earned 9 crores. Till now the
impact of global recession has not affected the export potential.
However, it was told that very often the exporters do not benefit from depreciation as
evident from discussion with the companies. When the value of Dollar started falling
many exporters went for a year long agreement with buyers thinking that the value of
Dollar may still come down. Now that there is depreciation of rupee against Dollar it
is not helping the exporters. The exporters have to fulfill earlier commitment and
supply items as per the agreement. It was told that since the agreement is a long term
one with the global giants, the depreciation of rupee has not helped the local exporter.
More over the buyer is conscious of devaluation of rupee and takes it into account
during negotiations.
In times of recession the buyers tend to be excessively quality conscious. As one
exporter reported, “now the buyers are verifying the old stocks with them and finding
some excuses for price reduction”. The buyers say the materials are faulty and so they
have to sell them on reduced price and this price reduction is transferred to the
exporter. In September a Debit Note for Rs.30 lakh has come from US and Europe
complaining poor quality of materials. This probably is due to reduction in demand
for textile items in these countries. There is pressure for price reduction.
Another handloom unit with an export turnover of Rs 10 crores employing 100
weavers reported that sales have been dropped by 20 per cent. Few others in the
handloom sector also shred the same view. A leading manufacturer of yarn in Kerala
has already felt a major down turn in demand and expect the situation to worsen in the
immediate future.
56
The industry is also said to be adversely affected by rising input prices. The cotton
prices have gone up recently. As petrol prices have gone up in India, the price of Dyes
also has increased. There is 20% cost escalation. Hence the Rupee value depreciation
is not helping the manufacturers. The total textile export from Kerala has been of the
order of in 2007 and a short term reduction of export by 15-20% is expected that
could go up if recession is prolonged.
(e) Plantation Sector
The structural adaptation of the agricultural sector of the regional economy has been
characterized by a shift towards commercial crops from labour intensive food crops
like rice. As a result, the share of commercial crops in the net sown area in the state
increased from about 57 per cent in 1970-71 to about 84 per cent in the early years of
this millennium. While the observed shift away from food crops has had its adverse
effect on the food security of the region – an issue of crucial concern at all times and
more so in crisis - it also has made the regional economy a leading player in the
commercial cultivation in the country as a whole. Kerala has near monopoly in the
cultivation of rubber, pepper and cardamom accounting for 92%, 82% and 72% of the
national production respectively. Its share in coconut (46%) and coffee (23%) is also
considerable. According to an estimate by the United Planters Association of South
India (UPASI), in 2002 the total value of output of the plantation crops like coffee,
rubber, pepper, tea, cardamom etc in South India amounted to Rs 5800 crores. Out of
this Kerala accounted for Rs 3125 (54 %) as compared to Rs 1750 (30%) for
Karnataka and Rs 925 (16%) for Tamil Nadu (UPASI 2002).
Plantation agriculture in Kerala has emerged as the crucial sector of Kerala economy
especially in terms of providing employment and livelihood. The sector is especially
important in the backward districts of Wayanad and Idukki and in others like
Kottayam, Pattanamthitta, Kasargod and Kannur. Given the heavy dependence of
plantation sector, which is dominated by small holders, on the export market the
global financial crisis is unlikely to leave this labour intensive sector unaffected. We
must also hasten to add that the effect is bound to be different from one crop to
another depending on the product characteristics. In what follows we shall explore the
available empirical evidence to gauge the magnitude of impact and its variation across
products with a view to come up certain mitigation measures.
57
Spices
Going by the available data the financial crisis is yet to make any significant impact
on the export of spices from the country in value terms. It is also to be noted that
Kerala is no more having any monopoly position in the export of spices from the
country as the export basket of spices got diversified over the years. Today black
pepper, traditionally known as the king of spices, accounts for only less than 10 per
cent of the total export earning from spices. The share of cardamom in the export
earning from spices is negligible. In contrast to the early 1970s wherein almost 90
percent of cardamom out put was exported, today most of the output is sold in the
domestic market. However, given the higher level of intergration with the world
market, changes in the world market prices almost instantaneously transmitted to the
domestic market. Data on export of different spices during the first half of the current
financial year and for the month of September 2008 and the corresponding period in
the previous year are reported in tables 9 and 10.
The cumulative spices export during the 1st half of the financial 2008-09 is estimated
as 253,550 tonnes valued Rs.2660.75 crores (624.15 million US $) as against 233,825
tonnes valued Rs.2329.51 crores (570.52 million US $) in the corresponding period of
the last financial year. Compared to last year, the export has shown an increase of 8%
in terms of quantity and an increase of 14% in rupee value (In dollar terms, the
increase is 9%). As per the estimates by the Spices Board, against the export target
of 425,000 tonnes valued Rs.4,350 crores (US$ 1025) for the year, the achievement of
253,550 tonnes valued Rs.2,660 crores (US$ 624 million) up to September 2008 is
60% in quantity and 61% in value terms.
While, the export of spices in general is yet to show the signs of any adverse effect,
the major product of concern for Kerala – black pepper – has shown some signs of
adverse effect. During April-September 2008, the average export price of black
pepper, a product of concern for Kerala, has gone up from Rs.145.66 per kg in 2007
to Rs.169.18 per kg in 2008. But, this period also witnessed a drastic decline in both
58
Table 9: Spices exports during April-Sept 2008 and Change over April-Sept 2008
April- September 2008 (*)% Change over April - Sept
2007
Qty Value Rate Qty Value Rate
Item (Tonnes) (Rs.Lakhs) (Rs/kg) (Tonnes) (Rs.lakhs) (Rs/Kg)
Pepper 12,750 21,570.00 169.18 -33.47 -22.73 16.15
Cardamom(S) 215 1,358.50 631.86 10.26 73.52 57.13
Cardamom(L) 790 946.25 119.78 22.48 32.93 8.52
Chilli 109,000 58,117.50 53.32 0.22 -1.56 -1.77
Ginger 2,400 1,710.00 71.25 -51.81 13.71 136.01
Turmeric 29,000 13,096.50 45.16 10.31 65.35 49.88
Coriander 15,500 10,525.00 67.9 17.07 106.42 76.32
Cumin 23,500 24,173.13 102.86 97.15 92.87 -2.17
Celery 1,650 1,034.50 62.7 10.74 91.08 72.58
Fennel 3,500 1,883.25 53.81 10.24 9.25 -0.88
Fenugreek 9,500 3,301.50 34.75 36.69 74.01 27.29
Other Seeds 10,850 4,066.25 37.48 285.44 335.16 12.89
Garlic 485 177.5 36.6 61.67 -3.86 -40.59
Nutmeg & Mace 595 1,826.00 306.89 -16.78 19.60 43.67
Vanilla 190 1,760.50 926.58 100.00 114.73 7.90
Other Spices 12,750 5,998.50 47.05 0.20 25.69 25.43
Curry Powders/Paste 7,250 8,189.50 112.96 31.10 53.71 17.24
Mint Products 9,550 65,993.83 691.03 -17.67 -8.96 10.58
Spice Oils &Oleoresins 4,075 40,347.25 990.12 25.97 48.17 17.63
Total 253,550 266075.5 8.44 14.22
Value in Million US $ 624.15 9.40Source: Spices Board
the export earning and quantity of export. The decline was over 33% in quantity and
nearly 23% in terms of value notwithstanding an increase of over 16 per cent in price
(see table 9).
However, data for the month of September leaves some room for concern (see table
10) for the spices as a whole. During September 2008, a total quantity of 29,600
tonnes of spices valued Rs.392 crores ($86 million) was exported from India as
against 34,828 tonnes valued Rs.379 crores (94.07 million US $) in September 2007.
This indicates a decline of about 15% in terms of quantity and an increase in revenue
by 3.4% attributable to devaluation of rupee along with the composition effect of
exports.
59
In case of black pepper the adverse effect became more evident in the month of
September 2008. The quantity exported more than halved during September 2008
from 3543 MT in Sept 2007 to 1500 MT Sept 2008 (-58%). In terms of value, the
decline was more or less of the same order from Rs 5270 Lakhs to Rs 2505 Lakhs (-
52%). To the extent that there was a marginal increase in price (12%) the observed
decline in export and export earning could be attributed to decline in demand. Such a
drastic decline could definitely have an adverse effect especially in two districts of
Idukki and Wayanad. Both of these districts in the recent past had undergone a major
agrarian crisis on account of the fall in the price of commercial crops. One of these
districts (Wayanad), consequent on agrarian crisis, also witnessed large scale farmers’
suicide(Nair and Menon, 2007; Nair et al 2007(a), 2007(b)). It the observed trend
persists it could lead to distress and other associated problems.
Table 10: Export of spices during September 2008 and change over September2007
Source: Spices Board
September 2008 % Change Over Sept 2007
QTY Value Value Rate Qty Value Value RateItem
(Tonnes) (Rs.Lakhs)(Us $Mil.) (Rs/Kg) (Tonnes) (Rs.Lakhs)
(Us $Mil.) (Rs/Kg)
Pepper 1,500 2505 5.5 167 -57.66 -52.47 -57.92 12.26
Cardamom(S) 40 260 0.57 650 37.93 73.47 54.05 27.16
Cardamom(L) 100 125 0.27 125 -35.06 -22.17 -32.50 19.74
Chilli 12,000 7200 15.8 60 -19.54 -6.33 -17.06 16.41
Ginger 350 350 0.77 100 77.66 186.81 156.67 61.32
Turmeric 4,500 2250 4.94 50 32.39 127.12 100.81 71.59
Coriander 1,250 1000 2.19 80 -48.26 -4.14 -15.44 85.31
Cumin 2,250 2700 5.93 120 -38.51 -32.52 -40.22 9.73
Celery 375 251.25 0.55 67 68.16 202.13 161.90 79.29
Fennel 400 220 0.48 55 15.94 24.64 9.09 7.42
Fenugreek 1,000 400 0.88 40 62.07 99.32 76.00 23.00
Other Seeds 750 315 0.69 42 36.36 78.44 56.82 30.84
Garlic 10 7.5 0.02 75 -23.08 -22.20 0.00 -2.39
Nutmeg & Mace 185 545.75 1.2 295 77.88 203.23 166.67 70.84
Vanilla 15 95.25 0.21 635 -21.05 -21.09 -30.00 -1.30
Other Spices 1,300 871 1.91 67 -3.70 22.46 8.52 27.21
Curry Powders/Paste 1,250 1500 3.29 120 29.80 47.22 30.04 13.48
Mint Products 1,750 12950 28.42 740 -5.61 11.64 -1.15 18.28
Spice Oils &Oleoresins 575 5750 12.62 1000 20.29 35.62 20.08 12.71
Total 29,600 39295.75 86.24 -15.01 3.57 -8.32
Value in Million US $ 86.24 94.07
60
Tea
India is the largest producer and third largest exporter of tea in the world. The Indian
tea sector, until now, was relatively less affected by financial crisis compared to the
other competing tea producing countries like Sri Lanka and Kenya. This could be on
account of the lower export orientation of India vis-à-vis Sri Lanka and Kenya.
Another plausible reason could be the higher demand in the domestic market.
In the case of Sri Lanka, the largest tea exporter in the world, financial crisis has
severely hampered the exports and thereby the prices. As per the reports, the Sri
Lankan tea exports – the orthodox variety – was severely hindered as result of lower
exports to Russia and Middle East. This had bearing on the auction prices, which was
reported to be lower by 30-40 Sri Lankan Rupees. In line with this trend, Indian
orthodox tea prices have also declined by around Rs15-25 per Kg. There was some
decline in CTC prices also, but the magnitude of decline was much lower.
Coming to Indian tea exports, the latest figures available for January-September 2008
suggest that there has been a significant improvement in the exports to an extent 15
Million Kgs compared to the corresponding period previous year. However, as
regards to September 2008 it may be noted that there was a fall in exports to the tune
of 1.9 M.Kgs. However, the latter could not fully be attributed to the financial crisis;
rather it is a result of higher prices prevailing at the auctions as a result of higher
domestic demand. Having said that, there are also certain disconcerting reports
emerging of late that could have some impact on the Indian tea exports. First, is
cancellation of Letter of Credit by Pakistan banks owing to a severe dollar crunch in
Pakistan. Second, the volatility in the exchange rates has also slowed down export
orders. The exact impact of these factors would only be evident in the following
months.
Coffee
Indian coffee accounts for about 4.3% of the global coffee production and around
4.5% of global exports. Given the small share of India in the global production and
exports, any changes in the domestic production and exports is unlikely to have much
impact on international prices. On the contrary, international developments in coffee
sector are likely to have implications for the domestic coffee sector.
61
India exports nearly 75% of its total coffee production, which makes it more
vulnerable to international developments. However, Indian exports during January-
November 2008 were estimated at 1.99 lakh tones compared to 1.93 lakh tones
reported during the corresponding period last year. Here it may be noted that the
exports that were made correspond to the coffee crop year 2007-08 that start from
October. The current crop 2008-09 had only partially begun and by now the
producers would have started receiving export orders. But the financial crisis coupled
with fluctuating dollars has affected in no major exports orders. Given the fact that
market fundamentals are strong with the onset of winter, the demand for coffee is
bound to increase.
Natural Rubber
By now natural rubber cultivation, consisting of both estates and small holders
accounts for over 20% of the net sown area in the state. From the estate sector, it was
reported that nearly 60 percent of the input cost is in wages. After protracted efforts
wage negotiations have been just settled, by the time the global crisis have hit the
industry. The wages in the rubber plantations industry have gone up by 40%. There is
going to be a crucial problem of arrear payment in the next three months. Meanwhile,
the prices for Rubber have come down by 40% in the recent past from about Rs 140
per Kg resulting from reduction in the demand from tyre industry, the major consumer
of natural rubber.
(g) IT Software and Services:
Software services have been one of the areas where the regional economy has been
focusing in its restructuring process in a context of loosing competitiveness in a
number of tradable commodities In this process the state has undertaken a series of
initiatives that inter alia include a highly industry-friendly IT policy that focus not
only promoting software exports by establishing a regional diffused IT software as a
means of employment generation and balanced regional development but also to
accelerate the diffusion of IT into different sectors of the economy and segments of
the society. In addition the government while promoting public-private participation,
has also been making direct investment towards creating IT infrastructure as
manifested in the setting up of technopark in Trivandrum (the first of its kind in the
62
country) and the Infopark in Cochin. Simultaneously, concerted efforts have also been
made towards harnessing ICT for developing that included, but not limited to akhshya
– state wide e-literacy program, FRIENDS - an e payment system and different e-
governance initiatives.
As a result of the various initiatives even the National Association of Software &
Service Companies (NASSCOM) has rated Trivandrum and Cochin as leading tier-2
cities with IT focus. Cities in Kerala especially Trivandrum and Kochi have been
rated as the next booming metros and challenging IT locations in India. It is also
predicted by that the tier two cities such as Trivandrum, Kochi, offering quality life
with good infrastructure and educational institutions will attract more IT/ITES
businesses than existing leading locations like Bangalore, Hyderabad and Chennai14
However, it is to be noted that software exports from Kerala during 2007-08 has been
only of the order of Rs. 1,200 crores as compared to Rs 108,612 crores from India,
Rs. 54,000 crores from Karanataka Rs. 28,490 crores Tamil Nadu and Rs. 26,122
crores from Andhra Pradesh. Similarly, total employment in the software sector of
Kerala is only of the order of 20,000 when the leading firms like Infosys and TCS
employed more than one lakh people. Nonetheless, given the fact that there are a
number of initiatives are underway, as discussed below, to accelerate the development
of this industry in the state, the impact of crisis has to be viewed in terms its bearing
on the expansionary moves being undertaken at present
On the likely impact: The impact of financial crisis on the software sector depends
on factors like product/service composition, market orientation and above all the
direction of trade. Thus viewed, firms involved the financial sector services are likely
to be more affected as compared to those dealing with other services/products.
Similarly, companies that are more export oriented and catering mainly the US and
European market are likely to feel the adverse impact more as compared to those
14No wonder, Kerala has been ranked top in “Entrepreneurial Confidence” by IT/ITES companies in a
study conducted by KPMG/TiE in 2008. Kerala has also been ranked number 2 among states in Indiaby India Today September 2007. Trivandrum has been ranked as No. 1 in upcoming IT Cities inIndia by Knight Frank, UK in January 2008. Trivandrum and Ernakulam are among the top 10 in“Most livable cities” and “Affluent districts” – ET 2007.
63
involved in the domestic market and oriented to towards emerging economies and
Eastern market. Further, to the extent that there are obvious limits in not honouring
the contracts already made, the adverse impact on the current revenue may be mainly
on account of banking related restrictions. But, to the extent that most companies in
the western world appears to have put on hold the new expansionary activities and
limits have been set on the discretionary spending of management along with greater
focus on cost reduction, it likely that there will be a reduction in future revenue
flows. At the same time, the cost reduction measures along with $700 billion bail out
program announced by the US government and others in the offing might generate
new opportunities for outsourcing and new business opportunities for India’s software
firms. Thus viewed the net effect depends on the relative influence of these opposing
forces. Finally according to the industry association at the national level, NASSCOM,
a real picture of the impact of the financial crisis will only be known by December
2008.
On discussion with firms from Kerala, it was discerned that almost all the larger
companies are yet to feel any adverse effect of the financial crisis. To the extent that
the IT and ITES industries at the national level expect an almost 50% reduction in
growth rate, the firms in Kerala are also bound to get affected. The limited exposure
to crisis thus far could perhaps be seen in the context of relatively lower engagement
of Kerala based companies with financial services (The export finance related
software from India is only about 15%). Further, it was discerned that, there is a
greater orientation towards the Japanese market while at the national level share of
Japan is only about three per cent.
However, many of the smaller firms reported that there is definite decline in the
orders, postponement of projects and delay is realization of payment. It was also felt
that if the crisis prolonged, it will definitely impact up on the wide cross section of
firms.
It appears that the strategy should be to further strengthen the presence in Japanese
and South East Asian market and explore the new emerging markets like the Middle
East, China and others. Any institutional intervention from the state in this regard,
64
like the arrangement for providing training foreign languages like Japanese and
Chinese would be highly useful
In case the recession continues, retrenchment could be avoided if the state joins hand
with the private sector for creating new avenues for training and skill upgradation. At
the same time, given the uncertainty coupled with credit squeeze, the private sector
firms are unlikely to commit investment at present. Hence, it is important to create
investor confidence on the one hand and create institutional arrangements for
promoting public private partnership for new investment.
2.4 Tourism
Tourism has generated nearly 10000 crores of Rupees of annual revenue (direct and
indirect) to the state economy at its maximum. Forty five percent of the foreign
tourists come from US. UK, etc, which experience recession currently. In addition, a
substantial section of domestic tourists come from occupations affected by global
slow down. Hence tourist arrivals in the state from both domestic and foreign sources
are likely to come down by over 20 to 30 per cent in the short term and double this
rate if the crisis continues well through 2009. So the larger tourist industry consisting
of hotels, transport, tour operators, travel agencies etc are being adversely affected.
Two things are happening in the industry:
(i) Because of the relative rise in the price of domestic air tickets and the
cancellation of virtually all the low cost routes, there is already a big fall in
the number of tourist arrivals from other parts of the country. According to
the discussions that we have had with a leading tour operator there has
already been a slump in the arrival of domestic tourists to Kerala; and
(ii) Our discussions with the industry representatives revealed that although
there are no cancellations (prior to the Mumbai attacks), the number of pre
booked or tourists arriving by chartered flights is less than the number
such tourist arrivals in 2008.
So it is almost clear that the tourism industry is one such industry that is already
affected in an adverse manner by the global financial crisis. Given that there exists
linkages between retail trade and tourism, any reduction in the number of tourists is
65
likely to have an adverse effect on retail trade as well and given the role that trade,
hotels, transport and storage plays in contributing to the overall growth rate of the
service sector of Kerala, any adverse effect on the tourism sector may have multiplier
effects on the overall growth performance of the state’s domestic product.
Table 11. Foreign Tourists Arrival in Kerala and India
Year India(Nos.)
Kerala(Nos.)
Share ofKerala inIndia
2002 2384364 232564 9.752003 2726214 294621 10.812004 3457477 345546 9.992005 3915324 346499 8.852006 4429915 428534 9.67
Source: Economic Review 2007 (Department of Tourism)
Table 12. Earnings from Tourism (Rs. in crores)
Year ForeignExchangeEarnings
Earningfrom
DomesticTourists
Total RevenueGenerated fromTourism (Direct
& Indirect)2002 705.67 3011.31 4931.002003 983.37 3492.68 5938.002004 1266.77 3881.92 6829.002005 1552.31 4281.42 7738.002006 1988.40 4891.94 9126.00
Source: Economic Review 2007 (Department of Tourism)
Table 13. Country-wise distribution of Foreign Tourists to Kerala in 2007
S.No Country Share in %1 U.K 23.362 France 9.333 USA 7.724 Germany 6.955 Maldives 4.396 Italy 3.507 Australia 3.128 Netherlands 2.839 Canada 2.0310 Sweden 1.9711 Japan 1.50
Source: Department of Tourism.
66
Table 13 shows that four countries, which are affected by the financial crisis, account
for around 45 per cent of foreign tourists in 2007.
2.5 Intermediate Input Prices
The industrial recession, as a consequence of recession in the developed world and
tapering of demand in countries like China, has resulted in a slackening of demand for
many intermediate inputs like steel, basic chemicals, raw rubber in recent times,
causing either a decline or stagnation in their prices. The table 14 presents the trends
in the prices indices of a number of intermediate/basic inputs. The table shows that
price indices of majority of the commodities have gone down during this time period,
and anecdotal evidence indicates that this declining trend continues even now.
Table 14: Trends in the wholesale price index of Intermediate/Basic Inputs
DateIron and
SteelBasic Pig
Iron Cement Zinc
Basic HeavyOrganic
Chemicals NaphthaRaw
RubberRaw
cottonAluminu
m
05/07/08 362.6 485.9 221.9 171.4 219.9 1133.4 457.3 234.8 250.812/07/08 362.6 485.9 221.9 171.4 219.9 1133.4 449.9 237.6 250.8
19/07/08 362.6 486.2 222.0 164.3 219.9 1145.0 455.1 238.1 250.826/07/08 362.6 486.2 222.1 164.3 219.9 1145.0 455.1 242.1 250.802/08/08 362.4 484.7 222.1 160.7 215.3 1113.6 478.5 242.1 250.8
09/08/08 362.4 484.7 223.2 160.7 215.3 1113.6 468.0 240.0 250.816/08/08 363.1 490.2 223.0 160.7 215.5 1014.2 475.7 239.8 250.8
23/08/08 363.1 490.2 224.2 158.3 215.5 1014.2 472.0 245.9 250.830/08/08 363.1 490.2 224.2 158.3 215.5 1014.2 479.3 247.7 250.806/09/08 360.3 466.6 224.2 158.3 208.1 1004.1 480.0 247.7 250.8
13/09/08 360.3 466.6 225.3 160.7 208.1 1004.1 484.1 248.3 250.820/09/08 361.7 478.0 225.3 160.7 208.1 1004.1 471.3 248.3 250.8
27/09/08 361.7 478.0 225.2 160.7 208.1 1004.1 471.3 242.2 250.804/10/08 358.4 450.0 225.2 158.0 208.1 896.1 387.0 242.2 250.811/10/08 358.4 450.0 225.2 158.0 208.1 896.1 312.5 231.9 250.8
18/10/08 356.8 437.0 225.2 141.3 202.9 896.1 287.4 218.4 250.825/10/08 356.8 437.0 225.1 137.7 202.9 896.1 308.0 224.8 250.8
Source: Economic Advisor, Ministry of Commerce
As Kerala is a “consumer state”, rather than a producer of a number of intermediate
inputs (except natural rubber), the state would benefit from this price decline. But, as
already noted, in a context wherein price of most of the products in traditional
industries along with that of most of the plantation crops are likely to face a
67
downward pressure, the ultimate outcome may be in the worsening of the terms of
trade for the state. Given the possibility of such an adverse terms of trade, the state
should make concerted effort towards improving the social security of the affected
people.
Thus the impact of the financial crisis on Kerala through different channels is
summarized in the following Figure.
Figure 2: Channels of transmission of the financial crisis to Kerala’s economy
68
Chapter 3
IMPACT ON SECTORS:
GROWTH IN OUTPUT, EMPLOYMENT AND REVENUE
This chapter analyses briefly the impact of global financial crisis and consequent
recession on different sub-sectors of Kerala economy, and how the net effect of all
such impacts affect the growth rate of State Domestic Product. The possible impact on
the revenue deficit of the state, and employment are also analyzed. First, we take up
sectors and sub-sectors of the state economy.
Agriculture and Allied Activities:
For convenience, we divide this sector into two sub-sectors, (a) food crops and (b)
cash crops. The cash crops include among others, cashew, rubber, tea, coffee, coconut
and spices. As the export dependence of cashew and spices are relatively higher, the
slackening of demand in the USA and Europe might reduce the prices of these
commodities. In the short run exchange rate depreciation might partially offset the
revenue loss from the lower export price. However, in the medium term these crops
may suffer a net loss because exchange rate depreciation may not persist beyond the
short period to offset the revenue loss resulting from lower export price. This effect
will also be strengthened given the inelastic supply of these products resulting from
the perennial nature of these crops. Another problem that can emerge is from the
possible liquidity crisis, since the export of many of these items heavily depends on
the availability of credit. Rubber price can also go down if there is a general industrial
recession, particularly in the automobile sector to which rubber is an important
intermediate input. (As the impact is mainly on price given the inelastic supply, we
can expect that the decline in the nominal SDP of this sector would be more
pronounced.)
Forestry and Logging:
No direct effect is expected, but it can have indirect effect.
69
Fishing:
This sector may be affected negatively because of the lower export demand in USA
and Europe15. As in the case of cash crops, in the short run the revenue loss may be
partially offset by the depreciating rupee, hence the net effect may not be large. One
possible positive effect is expected from the reduction in the domestic oil prices,
lowering the price of diesel which is an important input into this sector. If the
recession in USA and Europe continues for the next one year, this sector may suffer a
net loss in income in the medium term. The extent of loss also depends on the sector’s
ability to adjust itself to the changed demand conditions.
Mining and Quarrying:
This sector can have an indirect negative effect due to the possible slowdown in
construction activity and general economic environment.
Manufacturing:
Manufacturing sector may be affected through (1) credit channel, (2) increase in the
cost of import, (3) lower price for intermediate goods, (4) sluggish domestic demand,
and (4) export. If there is a credit crisis, manufacturing sector may be adversely
affected. As the modern manufacturing industries in Kerala are serving mainly
domestic market (within India), there may not be much impact through export side.
But industries such as automobiles will be affected adversely on account of the
reduction in domestic demand. However, these industries may gain through reduction
in the prices of oil (if passed on to them), steel and other intermediate inputs.
Traditional industries, such as coir, cashew, textiles and fish processing, which are
export oriented, may loose in the short run due to lower demand in the US and
Europe. The short run loss might be partially offset by the depreciating rupee. In the
medium term these industries may adjust themselves to the changed demand
conditions.
15Here we assume that the marine products are luxury items in destination countries so that
their income elasticity is high
70
Electricity, Gas and Water Supply:
No major effect is expected, except the cost of electricity generating in naphtha/oil
based thermal stations. It may come down due to the reduction in the price of
petroleum products.
Construction:
This sector will be affected through (1) credit, (2) remittances, and (3) reduction in
intermediate input price. If there is a credit crisis, construction may face decline in
that part of demand financed through credit. It is a shared knowledge that, major
source of demand for building projects in Kerala is Non-Resident Keralites (NRKs).
Demand may come down if there is actual reduction in the income of NRKs or if their
future job/income is uncertain. Under certain conditions, NRKs may either reduce
their demand or postpone decisions. One can also expect an increase in the housing
demand from NRKs as EMI in foreign currency terms is lower currently due to
exchange rate depreciation. Positive effects on this sector include reduction in the
prices of inputs such as steel and cement. In the medium term the negative effect on
this sector may be moderated through lower input prices and enhanced investment by
the NRKs induced by the exchange rate. Further, the sector also adjusts itself to the
changed demand conditions. Any dampening in construction has serious
consequences for industrial activity, as more than 250 ancillary industries depend on
the construction sector. Another important problem is the decline in employment.
Construction being a labour intensive sector, that too with low skill levels, its slow
down is going to aggravate unemployment in the state.
Transport, Storage and Communication:
In the short run, transport sector may face lower demand if there is a decline in the
tourists’ arrival to Kerala. This sector will gain, if the domestic oil price is reduced in
response to the declining international price. The reduction in the oil price can reduce
the cost of transportation, which can have significant impact on the prices of
commodities transported to Kerala from outside.
71
Trade, Hotel and Restaurants:
In the short run, trade, hotel and restaurants may face a lower demand due to the
possible decline in tourists’ arrival. In the medium term, the decline in the tourists’
arrival may be moderated by the lower travel cost resulting from the reduction in oil
price and increased purchasing power of dollar due to exchange rate depreciation.
Banking and Insurance:
The short run effect on banks can be positive as funds may be diverted from stock
market and mutual funds to fixed deposits. Further, exchange rate depreciation may
also bring more NRI deposits. In the medium term the positive effect may be
moderated, as depreciation in exchange rate may stop and stock market might revive.
Real estate ownership and business services:
This sector will have negative effects through reduction in remittances, which
reduces the demand for real estate. Liquidity crisis may adversely affect that part of
the real estate business which is financed through bank credit. Further, recession in
the IT/ITES may also reduce the demand for real estate as employees in this sector
form a major source of demand for housing and other real estate assets.
Public Administration:
No major impact is expected.
Other Services:
No major impact is expected.
Overall impact on NSDP growth rates and state revenue receipts
We made an attempt to assess the impact of the crisis on the growth rate of state
domestic product (SDP) and revenue deficit of Kerala. For this we adopt a
methodology based on our detailed understanding of the sectoral impacts discussed in
previous sections16. The methodology incorporates all possibilities, from highest to
16 As we lack detailed and reliable quantitative data on external link of various sectors ofKerala economy through export, remittances and import as well as of inter-sectoral linkagesin the form of Input-Output Table we are unable to construct a formal econometric model ofthe economy to assess the impact.
72
modest impact of the crisis as judged on the basis detailed understanding of sectors
and projects. Most probable scenarios for aggregate SDP growth rate for years 2008-
09 and 2009-10 are attempted. The methodology of projection is discussed in
Appendix 3. The results of the projection are given in Tables 15 and 16.
The Table 15 shows that the mean growth rate of 50000 different scenarios is 5.47 for
NSDP (at constant prices). The third column gives 95 percent interval for growth
rates. The 95 percent interval tells us that, given the three scenarios of sectoral growth
rates (as presented in appendix 3), there is 95 percent probability that the realised
growth rates will be between these two numbers. For instance in 2008-09, there is 95
per cent probability that NSDP growth rate in current price is between 5.15 and 7.58
per cent.
Table 15: Projected Growth rate of SDP for 2008-09 (in Percent)
Income Measure Expected MeanGrowth Rate
95 PercentInterval
NSDP Current Price 6.39 [5.15 – 7.58]NSDP Constant Price 5.47 [4.89 – 6.03]GSDP Current Price 5.96 [4.83 – 7.06]
Table 16: Projected Growth rate of SDP for 2009-10 (in Percent)
Income Measure Expected Mean GrowthRate
95 PercentInterval
NSDP Current Price 6.59 [5.42-7.78]NSDP ConstantPrice
6.04 [5.59-6.48]
GSDP Current Price 6.62 [5.53-7.75]
Impact on Revenue receipts and Revenue deficit
To project the impact of growth slowdown on state government’s revenue receipts
and revenue deficit for the years 2008-09 and 2009-10, we use the expected mean
growth rates of nominal GSDP reported in Table 15 and16. In order to forecast the
revenue deficit of next two years, we use revenue expenditure figures projected in the
document Medium Term Fiscal Policy and Strategy Statement with Medium Term
Fiscal Plan for Kerala, prepared by the government of Kerala. It is quite possible
that revenue expenditure and central transfers may also be affected by the financial
crisis. However, right now it is difficult to project the direction of change in these
73
variables as they depend on the policies of the government. Now one could also
expect central government following expansionary fiscal policy in order to fight
recession. This policy might also increase central transfers. We use average elasticity
of revenue receipts with respect to GSDP growth rate over 2005-06 to 2007-08 to
project the revenue receipt at expected growth rates. The average elasticity used is
1.41863. Table 17 presents the projected figures.
Table17: Projected Revenue Receipts and Revenue Deficit (Rs in crore)
Year Revenue Receipts Revenue Expenditure Revenue Deficit
2004-05 13501 17169 -3668
2005-06 15295 18424 -3129
2006-07 18187 20825 -2638
2007-08 21497 26141 -4644
Projected Figures
2008-09 23315 28263 -4948
2009-10 25504 31008 -5504
An earnest implementation of the mitigation measures suggested in this report calls
for additional investment by the state and therefore the actual revenue deficit will be
of much higher order. Given the imperative of state intervention and fiscal measures
to address the crisis the Government needs to be prepared for a budget with higher
deficit until the economy is fully recovered from the crisis.
The terms of referenced of the 13th Financial Commission has been decided prior to
the financial crisis. In the context of crisis and its unequal impact across states, it
important that the Terms of References of the Finance Commission is reexamined to
accommodate the new realities. We also call for better coordination between the
Centre and the state Governments in implementing the mitigation measures.
Impact on Employment
This section attempts to present approximate number of persons whose livelihood
may be affected by the possible downturn in various sectors of the economy. We have
already identified the sectors likely to be hit by the crisis. Persons engaged in these
vulnerable sectors may be affected in two ways, (1) income loss arising out of the
plummeting output prices, such as rubber, because of lower demand - both domestic
74
and export, and (2) job loss arising out of the possible decline in the level of
production in these sectors. Given the unfolding nature of the crisis and paucity of
detailed and up-to-date information on various aspects of the state’s economy, we are
unable to estimate how many people will face income loss and how many will loose
their job. However, in the case of income loss all persons engaged in the unorganised
segment of the economy would be affected seriously. With this logic we can arrive at
an approximate number of persons who may be affected by the crisis, either by
income loss or job loss, by taking the number of persons engaged in most vulnerable
sectors. The most vulnerable sectors/activities we have identified include (1)
commercial crops and plantations such as pepper, rubber, tea and coffee, (2) fishing,
particularly that part of the industry which is involved in export, (3) industries such as
cashew, coir, handloom, (4) construction and (5) trade, hotel and restaurants. The
livelihood of small and marginal farmers doing commercial crops is also equally
vulnerable to the crisis as labourers. Therefore, in our enumeration of the potential
number of persons whose livelihood will be affected by the crisis we include small
farmers also.
75
Table 18 provides approximate number of people who may be affected by the
crisis across sectors/activities.
Table 18: Number of Persons whose livelihood may be affected by crisis
Industry/Category Number of Persons
1 Small Farmers (doing only commercial crops) 499667
2 Agricultural Labourers 824581
3 Construction 970405
4 Hotels and Restaurants 233570
5 Cashew Processing Industry 210000
6 Rubber Plantation and other related work 230785
7 Coconut Plantation 134349
8 Export related employment in Fishery 280000
9 Tea Plantation 74640
10 Coffee Plantation 32326
11 Coir Industry 159986
12 Handloom 175000
Total 3825309Notes:
(1) To arrive at the number of small cultivators doing commercial crops we took the total number ofcultivators in 2001 census and multiplied this number by 0.85, the share of small holders (having landless than one hector) in the total number of cultivators. To arrive at the number of small holders doingcommercial crops, this number is again multiplied by 0.8026, the share of commercial crops in the totalcropped area of Kerala.
(2) To arrive at the approximate number of agricultural labours engaged in the commercial cropscultivation, we multiplied the number of total agricultural labours by the share of commercial crops inthe total cropped area of Kerala (of course labour intensity varies between commercial crops and othercrops, but we don’t have any other option). The category of agricultural labourers does not includelabourers working in rubber, tea and coffee plantations, which are given separately.
76
Chapter 4
MITIGATION MEASURES
4.1 Introduction
While designing the mitigation measures, we take the view that cyclical fluctuations
in market economies are not something uncommon, particularly in a globalised
economy that lacks a global regulator. Given the highly integrated nature of the state
economy and the increasing role that we are now assigning to market forces, Kerala’s
economy is also (highly?) vulnerable to economic problems arising in regions with
which it has economic ties. By now it has been recognised that in a slow down phase
market cannot recover itself and needs state’s help in the form of expansionary fiscal
policy. Given the increasing role that we are now assigning to market forces and
private sector, it is more important that state should be in a position to perform this
role more effectively. This implies that we have to redesign our economic policies and
institutions so that state is better equipped to face any crisis. In a recessionary phase
state’s role can be grouped into those measures to stimulate the economy and social
security measures to help those who are badly affected by the crisis.
The measures to minimize the negative impact of the global financial crisis on Kerala
economy need to be thought of by keeping in mind the specificities of state economy.
Some sectors which are likely to be affected like the production of commercial crops
or traditional industries like cashew, coir and even fishery, do not significantly depend
on demand within the state. This limits the set of actions that the state government
may take. In the case of exports too, measures to reduce the cost of exports (for
example through any adjustments in taxes) can also be taken only by the Government
of India and the state government has very little space for action here. There are other
sectors like construction and real estate, where in the demand for the final product
(house/flat or space for industrial/service firms) is something which Government of
Kerala cannot hope to change significantly through its interventions, and thus it may
have to focus its action on reducing the cost of such economic activities. Yet another
important dimension is that of remittances, on which too, GOK may not be able to
77
make any measures that may have a decisive impact. In order to sort out the issues
regarding the availability of credit within the state, policies pursued by the
Government of India and Reserve Bank are more crucial than what can be done by the
GOK.
However the state government can try to reduce the cost of economic activities,
especially if such cost reduction does not lead to a reduction of its tax revenues. There
can be changes in tax policies too, if these aim at rationalization - achieving tax
reduction per unit of economic activity without much reduction in the aggregate
revenue (thus the loss in tax per unit of activity is compensated by the increase in
economic activities.) However more attempts should be made to reduce those costs
imposed on economy arising out of the institutional rigidities, the inadequacy of
public goods and infrastructure and the inefficiencies of the system. Though the
attempts to solve these problems are needed irrespective of the crisis, such a
contingent situation makes the need for such changes very urgent. Thus the
mitigation measures designed in this context should take into account the structural
and institutional constraints of the state economy, and the long term requirement of
the society in terms of its livelihood, welfare and growth.
It is in this context that some mitigation measures are discussed here. First we take up
some measures specifically addressing the negative impacts through specific channels
identified in previous chapters. This is followed by three sets of long term measures
which are essential to make the economy vibrant and livelihood support system strong
to enhance Kerala society’s capability to confront similar crises, if any, in future.
These long term measures are identified under the following three categories (a)
enhancing social security; (b) stimulating economy; (c) improving governance.
4.2 Mitigation measures specifically addressing channels of impact
In the previous chapter, we have summarized the major negative impacts as follows:
(a) there can be a negative decline in credit availability despite attempts made by the
Government of India; (b) there may not be any immediate fall in remittances, but
caution is needed with regard to any possible reduction in investment activity in the
Middle East countries due to reduction in price of oil; (c) there is a perceptible impact
78
on exports from traditional industries and commercial crop agriculture; and (d) there
can be a decline in the number of tourists and tourism revenue. These impacts can
reduce the growth rate of state economy by around 2 to 3 percent, and there can also
be consequent increase in the revenue deficit of the state government.
Thus possible reduction in credit availability requires monitoring by the Government
of Kerala, through mechanisms such as state level bankers committee. However,
GOK may not be able to take more pro-active strategies in this regard. The state may
also consider using the co-operative banking network to extend credit to small and
medium enterprises and exporters such as cashew exporters. This depends on the
viability of co-operative banking system in Kerala, and its ability to meet future
challenges. A more pragmatic approach to the reforms suggested by the Vaidyanathan
Committee may be in order in this regard.
Given that the decline in credit availability is likely to hit the construction and real
estate sector most – a sector having more spill-over effects in Kerala economy - more
pro-active measures can be taken in this regard. (Though the decline in credit
availability is likely to affect auto sales, this is unlikely to have a major effect on
state’s economy since there are not many auto or spare parts (barring tyres) producing
units in Kerala). It is well known that the construction sector has a major role in
employment creation (though a part of this employment is going to non-Keralites).
Thus whatever steps that GOK can take to minimize the impact of the crisis on this
sector is beneficial for the state economy. The rationalization of stamp duty, promised
by this government a couple of years ago, needs to be implemented at the earliest.
Government of Kerala may not be in a position to do much with regard to the demand
for exported commodities from traditional industries like coir, cashew or fishery, and
also commercial crop production. However GOK may have to take more effective
steps in enhancing the ability of workers and commercial crop growers to withstand
the price decline in export markets. The crises should not lead to panic reactions like
suicides by the affected people. However knee jerk reactions like writing off credits at
the time of such crises are not sustainable. The role of crop insurance and other
mechanisms that limits the costs of price fluctuations in such export crops, needs to be
reevaluated. A recent study found that such crop insurance is indeed viable for pepper
79
(Zant, 2008). Yet another strategy of minimizing the impact of price fluctuation is
crop diversification. There is evidence that such diversification (cultivating other
crops, practicing different forms of animal husbandry, etc.) indeed is being used as a
strategy by many farmers who cop up with price declines. However, there can be
more effective and coordinated intervention by the Government of Kerala to
strengthen this process of diversification. It may be noted that productivity enhancing
schemes are being announced by the Government of India for plantation and other
crops in districts like Idukki and Wayanad, and also in Kuttanad. The effective
implementation of such schemes is also important in this regard.
Those affected by the decline of the price of commercial crops (which can include
farm/plantation workers) or by the low demand for cashew, coir, and fish from
Kerala, are likely to join the unemployed temporarily. They need social security
measures. The most important social security can be ensuring alternative employment.
In this regard, implementing NREGA more effectively covering all areas of the state
may provide an effective social protection not only to those who are unemployed in
general, but also to those who are likely to join them due to the crisis. There should be
urgent steps taken to effectively implement NREGA in all districts, especially in those
areas where such traditional industries and fishing/fish processing units are located. In
addition to NREGA, there is a need for a well grounded social security system as a
fall back livelihood strategy for the people affected by the crises, (and this is
discussed in a following sub-section).
No immediate reduction in remittances is envisaged. However, there can be problems
if there is a reduction in investment activity in the middle-east countries due to the
decline of oil prices. This needs to be monitored by the Government of Kerala. One
long term measure is to facilitate the upgrading of skill sets of those who seek to
migrate to these countries. These programmes can help migrants (and potential
migrants) position themselves at vantage points for re-entry into the global value
chains, as and when conditions improve in the labour markets of their host countries.
Some negative impact in tourism sector is to be expected. However, this may be an
opportunity to correct those policies that work against the competitive advantage of
tourism operators and service providers in Kerala. We can think of rationalization of
80
taxes charged on tourist services like hotels and license regulations on bars/beer
parlors aimed at foreign tourists, to make Kerala comparable with other tourist
destinations within and oustide the country.
Some of the conventional measures suggested across the world to stimulate economy
may not be appropriate for Kerala economy. For example, if Government of India
transfers a fixed amount of money (say 1000 Rupees) per person to all Indians to
spend (as attempted in US at a different level), this can stimulate Indian economy.
However such a transfer to Keralites by the Government of Kerala need not stimulate
Kerala economy. This is mainly due to the fact that the commodities, bought with
such transferred money in Kerala, are likely to be produced outside the state. Thus
public spending induced demand as a stimulant to economy may not work well in
Kerala. On the other hand, sectors which are affected by demand slump like exports
or construction sector are unlikely to be stimulated by a transfer of small amounts of
money per person, within the domestic economy.
One area where more public spending can be beneficial during the crisis, either to
provide fall back employment, or to serve as a long term support to economic
activities, is that of infrastructure. Moreover, Kerala has crucial gaps in quality
infrastructure. However, this cannot be completely tagged on to the NREGA schemes,
as the type and quality of infrastructure required may need technology and skill-
intensive methods of investment. The state may need more resources for such
infrastructure-oriented public spending. However, the greater constraint in this regard
seems to be the inability of the state in project planning and implementation, and also
the slow pace of decision-making in general. This prevents the effective use of
external resources available (like those from multilateral agencies). Some of these are
addressed in the governance related long-term measures later on.
We should note that the crisis provides an opportunity to make more investments in
infrastructure through the reduction of the costs of intermediate inputs. The prices of
oil, steel, cement, and many others come down due to the tapering (or decline) of
demand for such inputs all over the world. Thus the real cost of construction of
physical infrastructure like roads, ports, bridges, railway lines, etc. may come down.
81
Thus if public spending can be directed to infrastructure, the net benefit could be
much higher during the crisis compared to the situation before.
4.3 Measures to enhance the crisis-facing capacity of the society and economy
Such measures required to enhance the social security and livelihoods of people
affected by crisis, and to stimulate economy to achieve higher growth rates on a
sustainable basis are taken up here. However these can be achieved effectively only
when the governance of the state is responsive, quick and efficient. Measures needed
to tone up governance are also discussed.
4.3.1 Strengthening social security
It is likely that some sections of society who have just adequate income may fall into
the category of poor or vulnerable sections due to the impact of crisis in Kerala. These
include those who work in traditional industries like coir and cashew, and fishing/fish
processing, and also marginal farmers and workers depending on cash crops like
pepper. We need to discuss social security measures for them. However it is difficult
to design social security for such crisis affected people exclusively. Thus we need to
enhance, and strengthen general social security measures, which can benefit poor and
vulnerable sections in general, including those who are likely to join these sections
due to the current crisis or any such crises in future.
Strengthening basic public distribution system (ration shops but not `maveli’ stores)
can add to the livelihood support required during the periods of crisis. Given that own
food production is insignificant for the majority of households in Kerala, availability
of basic food at affordable prices in ration shops can be an important component of
state support available during the periods of crisis.
Though food self-sufficiency cannot be achieved, food production can be increased by
utilizing the land left fallow or under-cultivated. Such measures of enhancing food
security are important in a context of declining price of commercial crops, and
possible adverse effect on state’s terms of trade. The fact that Kudumbasree units
could take up paddy cultivation in significant areas indicates this possibility. This may
82
require more explicit changes in legal restrictions that discourage leasing of land.
Moreover it should be seen whether group or cooperative mechanisms can be utilized
to reduce the transaction costs involved in procurement of inputs and marketing of
outputs.
Expenditure on healthcare is a major drain on vulnerable families – the ones affected
by price decline of their commercial crops. Currently debated models on health
insurance can be worked out to see whether these meet the requirements of
commercial crop cultivators. Commercial farmers are in a position to pay the
premiums at the time of price hikes of their crops.
The expansion of the coverage of NREGA to the whole state, and ensuring the
availability of work for all those who demand it, can be the other important form of
social security. A clear understanding of the problems faced in implementing NREGA
in Kasargode and Wayanad is needed for the effective implementation of the
programme in other areas.
The quantum and coverage of the pension schemes aimed at aged workers from
agriculture, and in other sectors where statutory or provident fund pensions are not
available, and also to the physically and mentally disabled and widows from poor
households, need to be enhanced. Their disbursement has to be made timely.
4.3.2 Measures to stimulate economy
There is a need to reduce the cost of investments in Kerala so as to attract more
private investments to generate more employment and income within the state. This is
to revitalize the economy during the crisis, and to minimize the impact of such
potential crises in future. Two major strategies are unavoidable for further
development of Kerala’s economy. Public investments are simply inadequate to give a
momentum to the economic development, and hence a strategy to attract massive
private investments on a sustainable basis is unavoidable. The state should be in a
position to foster the development of industries and to invite more resources for direct
investment from a whole spectrum of potential investors, especially those from the
non-resident Indian communities. Though in rhetoric and policy pronouncements,
83
nobody is against private investments per se, the reality is that there are several
hurdles in making significant private investments in Kerala. These hurdles can include
formal and informal institutional rigidities including those regarding land and labour,
infrastructural limitations, social attitudes which are linked to the interests of
dominant sections of society, and also the archaic procedures and systems of
administration. Removing these hurdles, though acknowledged as necessary in many
quarters, is turning out to be much tougher than expected. Reforms oriented to
minimize the impact of these hurdles should be the second important strategy needed
for stimulating the economy, and here the window of opportunity provided by the
global financial crisis should be used. We propose some specific measures in the
following paragraphs.
Construction is the important part of the industrial activity taking place in Kerala.
This caters to requirements of residence, commerce, entertainment, and so on. To
some extent, private industrial estates with possible recognition as SEZ can also be
considered under this category. (Though there can be objections to the concept of
SEZ, there is little option for Kerala in this regard other than allowing SEZ since the
concessions granted to SEZ may discourage industrial units from being set up in non-
SEZ parks. Moreover, the objection to land acquisition in general and the changed
policy of GOI of not allowing SEZ status to parks coming on land newly `acquired’
by the governments, will also necessitate allowing private industrial parks with SEZ
status. Given the other comparative disadvantages that Kerala has in term of
manufacturing, parks established in the state may have to use a greater part of the
space for residential, commercial, entertainment and service oriented activities.) There
are institutional (and attitudinal) restraints that make the buying of land `costly’ for
the construction and realty firms. These have to be removed. Efforts can be made to
see whether the non-forest land owned by the government, which is used inefficiently
either for cultivation or other purpose, can be made available to private investors at
competitive rates. The proposal to use the land held by KSRTC to develop under PPP
model can be extended to use the land under government ownership in urban areas for
government and commercial use, through appropriate models of attracting private
investments. There may be significant demand for multi-storied parking lots,
entertainment complexes (including multiplexes), and shopping malls in the major
and small cities and towns of Kerala. Some parts of government land can also be
84
developed through PPP models for housing in urban and municipal areas. This can be
used for housing poorer families, as part of the schemes to provide `houses to all’ in
Kerala. There are also small pieces of land (like where a single story government
office is located) under the government. There are sizable properties lying unused by
public sector units that are unviable and loss making and these can also be used for
such development. Such lands can be developed through PPP models. These may not
require any investments from the government, but can become sustainable sources of
income for the government.
An important pre-condition for ensuring a free flow of investible resources into any
country or region in any part of the world is the development of appropriate
infrastructure facilities. In this case too, public investments alone are grossly
inadequate. There exists a wide gap between what GOK can spend in this regard
realistically, and what is required for the state in terms of infrastructure. Thus private
investments in infrastructure are unavoidable. In addition, public-private partnership
can also make infrastructural investment more effective, and efficient through better
management and technologies. The problems that discourage private investments (for
private good production) work against private investments for public goods (or
infrastructure) too. In addition, PPP in infrastructure can be fruitful only if long
standing cost and benefit sharing agreements (or contracts) could be arrived at
between state and private investors, and also when state provide clear signals that
such contracts will not become the victims of political tussle and administrative
corruption. There are serious limitations in the administrative and political space of
Kerala which discourage the shaping of mutually beneficial contracts and their
enforcement (though GOK in the past have worked out some models of PPP
successfully). These issues have to be addressed.
However a pro-industrialization policy should be cautious on two dimensions, and
otherwise it can reduce social welfare rather than enhancing it. Recent debates on land
acquisition has brought to light that there is no economic justification for government
acquiring land for industrial projects (producing private goods). This has been
recognized by the Government of India too, and hence the new bill tabled in
parliament has limited land acquisition for companies to only those cases where they
have already bought three-fourths of the land, and getting the remaining part very
85
important for the project but buying is difficult (or transaction costs are very high).
Thus the long term policy for the government should be to ease restrictions that
prevent companies and investors from buying adequate size of land on their own.
Land acquisition should be limited to public good (including infrastructure) projects
carried out by public or private agencies (or through PPP), where connected stretch of
land is necessary, and when the transaction costs of negotiated purchase is very high.
Second point on which industrial policy needs to be careful is with regard to the
concessions offered. It is much better to offer across the board concessions, and firm-
specific design of concessions should be avoided. Firm-specific design of concessions
not only causes opportunities for corruption and rent seeking, but can also give
uncertain signals to potential investors.
More private and PPP investments are needed not only for physical infrastructure but
also in the provision of services such as water and electricity supply, and waste
management. In addition to attracting investments to generate these services of
adequate quantity and quality, their appropriate pricing is also important. The case of
electricity in Kerala indicates that there is a tendency to impose high charges on
industry to meet the cost of subsidy provided to middle class consumers
(Santhakumar, 2008). All industrial firms (both small and big) in Kerala perceive lack
of adequate power and its high charge as major constraints. In fact it is the subsidy
which indirectly affects the availability of power too. The state electricity company is
unwilling to buy enough power, and there are generation capacities left unutilized
even with Kerala, because buying more power would mean more losses for the
company (since they cannot recover costs through tariff from domestic consumers).
This problem affects the whole set of electricity consumers including industry which
is willing to pay a cost-based tariff. This is a direct disincentive for industrialization
in the state, and the society should consider seriously the comparative merits of
industrialization verses the subsidized consumption of the middle class. The
prevailing rules and practices seem to discourage industries from generating or
acquiring electricity on their own. The state electricity company and the regulatory
commission are yet to take a favorable view on open access. The option of captive
generation is also made costlier. In the long run, industries in Kerala should be able to
receive electricity at cost based charges, and should not be forced to bear the burden
of cross subsidy (the subsidy given to the domestic consumers). Though the removal
86
of cross subsidy is envisaged under the Electricity Act 2003, the state electricity
regulatory commission is yet to come out with a road map for it.
The crisis is likely to increase the revenue deficit of the state, and reduce its spending
power. Though public spending financed through deficits is generally accepted during
crisis, some judgment on what kind of spending can boost Kerala economy is needed.
For example, if public spending means more cash through subsidy (say 500 Rupees as
electricity subsidy) in the hands of middle class consumers, their spending of this
money may not stimulate economy. Thus even if spending on infrastructure and other
public goods are needed (which can be financed through more deficits if needed),
there is no justification for increasing deficits to continue or increase a major part of
the subsidy that the middle class enjoy in Kerala, even during the crisis situation.
Moreover the rationalization of such subsidies can be one way of reducing the
financial pressure on the state government. It has been noted by studies that non-poor
sections enjoy a greater part of the subsidy given to electricity, water supply, and so
on. There is a need to target these subsidies to the poor and vulnerable sections.
Even if formal sector trade unionism may have declined in its ability to affect
industrial investments, anti-industrial attitude prevails in many forms. Though trade
unions need to be vigilant against labour hostile practices, they should educate
workers on the need to enhance productivity, especially during the crisis. On the
employers part, they should try to minimize lay offs since such lay offs can adversely
affect the revival of the economy, and also work against political support for a pro-
industrialization (fiscal) policy. The law and order machinery is not adequately
responding to the conflicts between industry and local people, and to minimize the
negative impact of forced close downs like `hartals’. Though the labour legislations
have lost much of their tooth, occasional inspections (as in the case of the software
company which had to fire some employees recently) can scare off investors, and they
may reduce future investments, given the ample opportunities for investments in
nearby states with many more concessions and fewer hassles.
In summary, one can see `abundant instances’ of underutilization of resources,
whether it is land, other natural resources (like minerals, water, etc.) or human capital.
The possibilities in agricultural (including food production) and industrial
87
development are under-explored not mainly due to the optimal use of resources in
service sector or in other avenues (though one can see some instances of under use of
a particular resource because the complimentary resource is rationally used
elsewhere). There are institutional rigidities that prevent the optimal use of resources
including the human capital of Kerala. One can cite many examples in this regard,
including the restriction on leasing land, institutional problems that discourage the use
of water and mineral resources, unwanted restrictions on the use of land in plantations
for other commercial uses, inability to sort out the conflicts between industry and
local people, and so on. Urgent reforms are needed in each of them to effectively and
efficiently utilize the resources of the state. Global financial crisis should not
discourage planners and policy makers from pursuing such reforms. Though the crisis
has created genuine doubts on the appropriate pace of financial sector reforms, there
is widespread consensus among economists on the need for reforms in real economy.
Thus the global financial crisis should be seen as an opportunity to pursue reforms in
real economy with vigor. This is especially so due to the likely decline of prices of
many commodities during the recession of the developed world. Carrying out reforms
is difficult when prices are on rise, since more people are likely to perceive a higher
short-term loss due to reform. (For example reducing 100 Rupees subsidy given to the
middle class, when the prices of many commodities go up can be costlier socially and
politically, where as it is relatively less difficult during a period of price decline. This
is also due to that a major part of the middle class – barring commercial crop
cultivators – is less likely to encounter a significant reduction of their direct income
during the crisis). This window of opportunity provided by the financial crisis should
be used to implement much needed reforms to stimulate economy by creating
facilitating conditions to attract massive amounts of private investment.
4.3.3 Measures to improve governance
We have mentioned earlier that the crisis requires effective state support and fiscal
policy, but this can be delivered only when the government and its administrative
mechanisms are quick, responsive, effective, and efficient. However the most
important bottleneck in Kerala currently seems to be the weak governance of the state.
It has already been noted by the policy makers that even when resources are allocated,
the administrative mechanism is not capable to implement projects effectively,
88
efficiently and in time. Lack of project management capacity at the administrative
level has worked against developing viable proposals which can be funded by external
sources and through PPP models. (This can be due to the administrative set up within
which trained and capable people are underutilized, where as the burden on project
management falls on not so capable or trained – an issue pointing to the need for
administrative reforms). Moreover it works against the timely completion (without
cost overrun) of projects which attained financial closure through the funding by
multilateral and central government agencies. The recent track record of projects
funded by the Asian Development Bank, World Bank, and JNNURM, etc. is
testimony to this weakness. Mechanisms to minimize corruption in public projects too
seem to be woefully inadequate. Administrative reforms and capacity building aimed
at enhancing quality of project planning and implementation is the most important
step needed to solve the infrastructure problem of the state. There should be more
transparent, speedier and effective mechanisms to hire quality consultants to prepare
projects and monitor their implementation.
There seems to be a lack of quick decision-making and coordination at the state-level
to facilitate the approval of the projects and their monitoring to ensure timely
implementation. This is also true with regard to the sanctioning of private sector or
PPP projects. Without solving these issues, efforts to get more resources for public
spending for infrastructure may not yield successful results. It is high time that
coordination mechanisms at the level of different ministries (like industry, revenue,
finance, water, power, local government, etc.) are established, and made functional.
Such mechanisms exist in Government of India and in other states. These
`empowered’ group of ministers and top officials should meet once or twice a month
to take decisions and also to review (and to take corrective measures, if required for)
the project implementation. All investment proposals for an amount more than 100
crores Rupees can be considered by this empowered committee. Decision on such
proposals should be taken within a specific period, and once such decisions are taken
lower level functionaries of any other department should not be allowed to block the
implementation.
Despite having an educated public and achieving higher levels of social development,
the nature and technology of governance in the state of Kerala is fairly rudimentary.
89
This is true even when we take into account the achievements made in terms of
decentralization. The use of ICT for governance is yet to achieve a significant dent in
the process of governance. Most attempts made to have changes in the administrative
procedures to enable speedy decision-making, have been stalled on the way. With
regard to the responsiveness of administrative machinery, and quickness of decision-
making, Kerala is behind some other Indian states which have lower levels of social
development. Ability to face any crisis depends on the administrative/institutional
ability of the state. Revamping the administration of the state and the widespread and
deeper use of e-governance should be another important long term strategy. This can
also be a strategy to revitalize the software industry (especially the small players)
which is likely to be hit by the demand slump due to recession in the developed
world.
After the decentralization of powers the responsibility of the local governments has
gone up but they suffer from lack of adequate staff. On the other hand, state level
offices and government secretariate suffer from multiple layers of decision-making
and lengthy procedure. Though many plans for redeployment of adequate staff to
local governments and administrative reforms of state level offices are on paper, their
implementation is tardy. This crisis can also be an opportunity to reinitiate such
administrative reforms to enhance the crisis-facing preparedness of the economy and
society.
It may be noted that what is written above on the nature of and factors that determine,
(weak or slow) governance in Kerala, is based on our impressions, based on informal
consultations and anecdotal evidences. However detailed explorations are required in
this regard. It is better if Government of Kerala institute a mechanism to monitor
regularly the impact of the global financial crisis and recession of the developed
world, and to coordinate actions of different department.
90
References
Ahluwaia M S (2000) “economic Performance of Atares in Post Reforms Period”Economic and Political Weekly, Vol 35, No. 19, May 6.
Balakrishnan Pulapre (1999) “Land Reforms and the Question of Food in Kerala” ,Economic and Political Weekly, May 22.
Centre for Development Studies (1998), Kerala Migration Surveys, CDS, PrasanthNagar, Ulloor, Medical College P.O
Centre for Development Studies (2003), Kerala Migration Surveys, CDS, PrasanthNagar, Ulloor, Medical College P.O
Centre for Development Studies (2007), Kerala Migration Surveys, CDS, PrasanthNagar, Ulloor, Medical College P.O
Eapen M , J. Jeyaranjan, K.N. Harilal, Padmini Swaminathan and Nazneen Kanji(2003) Liberalisation, Gender, and Livelihoods: the cashew nut case, IIED Workingpaper available athttp://www.iied.org/pubs/display.php?o=14510IIED&n=2&l=3&k=harilal
Harilal K N, Nazneen Kanji, J. Jeyaranjan, Mridul Eapen and Padmini Swaminathan(2006) Power in Global Value Chains: Implications for employment and livelihoodsin the cashew nut industry in India IIED Working paper available athttp://www.iied.org/pubs/display.php?o=14514IIED&n=1&l=3&k=harilal
Harilal, K.N. and Joseph, K.J (2003): “Stagnation and Revival of Kerala Economy-An Open Economy Perspective”, Economic and Political Weekly, Vol 38, No. 23, June7, 2003.
Jain, Teena (2008), ‘For banks, bad debts a growing burden’, The Mint, November 13.Joseph Brigit and Joseph K J (2005) “Commercial Agriculture in Kerala after WTO”,South Asia Economic Journal, Vol 6 No1, 2005, pp 37-57
Isaac TMT and Rammanohar Reddy (1992) “Estimates of External Trade Flows ofKerala 1975-76 and 1980-81”, CDS Working paper No. 246, Centre for DevelopmentStudies Trivandrum, available at http://www.cds.edu/
Kannan K P (2005) “Kerala’s Turnaround in Growth: Role of Social Development,Remittances and Reform”, Economic and Political Weekly, February 5.
Kannan K.P and Pushpangadan K. (1990) “Dissecting Agricultural Stagnation inKerala: An analysis across Crops, Seasons and Regions”, Economic and PoliticalWeekly, Sept.
Nair, KN and Vineetha Menon(2004), “Reforming Agriculture in a GlobalisingWorld: The Road Ahead for Kerala”, IP6 Working Paper No.3, NCCR-North-South(Swiss National Science Foundation, Berne)
91
Nair K.N and Vineetha Menon (2007), “Distress Debt and Suicides among AgrarianHouseholds: Findings from three Village Studies in Kerala”, CDS Working Paper No397, Centre for Development Studies, Thiruvananthapuram
Nair K.N, Antonyto Paul, and Vineetha Menon (2007a) “Livelihood Risks andCoping Strategies: A Case Study in the Agriarian Village of Cherumad, Kerala” CDSWorking Paper No. 394, Centre for Development Studies, Thiruvananthapuram.
Nair K.N, Vinod CP, and Vineetha Menon(2007b), “Agrarian Distress and LivelihoodStrategies: A Study in Pulpalli Panchayat, Wayanad District, Kerala”, CDS WorkingPaper No. 396, Centre for Development Studies, Thiruvananthapuram.
Noble Group (2008), Asset Liability mismatch in the Indian Banking Sector cited inNesil Staney, “Growth in credit seen shrinking”, The Mint, November 8
Patnaik Prabhat (2008) “The Present Crisis and the way Forward”, in Kerala StatePlanning Board, Speeches Delivered by theUN Panel Members on Global FinancialCrisis in the UN General Assembly on 30-103008 at New York, State Planning Board,Thiruvananthapuram;
Reserve Bank of India (2007), Trends and Progress of Banking in India 2006-2007,Mumbai, Reserve Bank of India.
Reserve Bank of India (2008), India’s Balance of Payments Developments during theFirst Quarter of 2008-09(April-June 2008), RBI Bulletin, October 2008, 99, pp.1677-1692
Santhakumar, V (2008), Analysing social opposition to reforms: The case ofelectricity sector in India, Sage Publication.
State Level Banker’s Committee (2008), Agenda and Background notes for State levelreview meeting, Trivandrum, SLBC, Circle Office, Canara Bank
Stiglitz Josepph E (2008) “Towards a New Global Economic Compact-Principles forAddressing the current Global Financial Crisis and Beyond”, in Kerala StatePlanning Board, Speeches Delivered by theUN Panel Members on Global FinancialCrisis in the UN General Assembly on 30-103008 at New York, State Planning Board,Thiruvananthapuram;
UPASI (2002) “Plantations in South India: A Synoptic Perspective”, United PlantersAssociation of South India, Coonoor.
Zant, Wouter(2008) Hot stuff: Index Insurance for Indian Smallholder PepperGrowers, World Development, Volume 36, no 9, pp. 1885-1606
92
Appendix
Methodology of projecting growth rates of SDP and revenue deficits
The methodology consists of two steps. In the first step, we projected the sectoral
growth rates that would have prevailed in the absence of financial crisis or any other
negative shock. This we have done by assuming the same log-linear trend for the two
years -- 2008-09 and 2009-10. The projected growth rates for the two years are
averages of the log differences of previous six years. This projected growth rates are
reported in Tables A3.1 and A3.2 (in Appendix 3). These growth rates are the
benchmark estimates from which we may expect a decline due to the crisis.
In the second step, given the projected growth rates in Tables A3.1 and A3.2, we
generated three possible scenarios regarding the degree of the financial crisis on
sectoral growth rates. These scenarios vary from worst to mild. Table A3.3, A3.4, and
A3.5 present them for NSDP (at constant and current prices) and GSDP in current
prices. The tables present the possible growth rates of sectors when the impact of the
crisis (both direct and indirect) is worst, moderate and mild. These three scenarios in
the context of each sector are nothing but informed guesses, came out of the gut
feeling of persons having good understanding of the sector in question and are also
able to assess the possible impact of the crisis on that sector. We have already
discussed the possible impact of the crisis on each of these sectors in the previous
section. The growth scenarios depicted in tables A3.3, A3.4, and A3.5 also match the
discussion in that section. It is quite logical to argue that the probability of realising
any one of the above three scenarios for all the sectors is very low, instead it is quite
probable that a combination of the above three scenarios may realise. It means that
worst outcome in one sector may be accompanied with mild outcome in another
sector and moderate outcome in some other sector. This possibility of higher growth
rate in one sector accompanied with growth disaster in some other sectors is quite
evident from the lack of correlation of growth rates across sectors as shown in Table
A3.6. Lack of sectoral growth correlation implies that sources of sectoral growth
stimulus vary from one sector to another and they also differ in their response to
common shocks. This feature of sectoral growth suggests that a mix of all the three
scenarios across sectors is quite possible and each combination produces a
93
corresponding aggregate SDP growth rate. Therefore, to accommodate this
possibility, we simulate 50000 different scenarios and compute corresponding growth
rates of three SDP measures, namely Net State Domestic Product (NSDP) in current
and constant prices and Gross State Domestic Product (GSDP) in current prices17.
Table A3.1. Projected Growth rate of NSDP without financial crisis
Constant Prices Current Prices
Industry 2008-09 2009-10 2008-09 2009-10
1 Agriculture and allied Activities 3.95 4.28 9.25 8.76
2 Forestry and Logging 7.86 7.98 -1.57 -1.00
3 Fishing -0.52 -0.51 9.06 12.35
4 Mining and Quarrying 3.55 2.47 3.33 2.47
5.1 Registered 0.16 -0.20 5.35 5.39
5.2 Unregistered 8.73 9.11 13.59 14.36
6.1 Electricity -7.58 -9.27 -2.92 -4.35
6.2 Gas 23.02 22.49 28.02 27.80
6.3 Water Supply -13.20 -19.92 -8.65 -15.13
7 Construction 11.67 11.59 13.46 13.42
8.1 Railways 13.16 12.53 14.99 13.99
8.2 Transport by other means 9.22 10.52 13.82 15.15
8.3 Communication 21.51 21.59 15.95 17.68
8.4 Storage 8.05 10.18 11.73 13.54
9 Trade, Hotel and Restaurants 4.76 4.36 8.54 7.85
10 Banking and Insurance 9.96 8.06 11.20 8.82
11Real Estate, Ownership, Businessservices 6.06 5.91 12.99 13.21
12 Public Administration 8.26 9.13 11.07 11.42
13 Other Services 4.32 4.54 9.14 9.46
NSDP 7.0 7.0 10.9 10.8
17 It should be noted that we are not considering all the possible different scenarios for the aggregategrowth rate coming out of various combinations of the three scenarios of individual sectors. With 19sectors and three scenarios for each sector, the number of possible different scenarios for the aggregategrowth rate is 1162261467. No need of saying that considering all these scenarios is quite difficult.Instead, we took a random sample of these scenarios and evaluated the outcome. We also noticed that,as one can expect from random sampling, the projected growth rates are invariant even if we evaluate 2lakhs scenarios.
94
Table A3.2. Projected Growth rate of GSDP without financial crisis(Current Price and Growth rates in percent)
Industry 2008-09 2009-10
1 Agriculture and allied Activities 7.58 7.99
2 Forestry and Logging 0.13 -1.14
3 Fishing 8.73 9.38
4 Mining and Quarrying 0.88 1.49
5 Manufacturing 8.03 9.59
5.1 Registered 4.54 5.92
5.2 Unregistered 11.89 13.58
6 Electricity, Gas and Water Supply 7.15 6.57
6.1 Electricity 7.14 6.61
6.2 Gas 26.46 28.04
6.3 Water Supply 1.95 -0.01
7 Construction 13.09 13.38
8Transport Storage and
Communication 14.41 14.97
8.1 Railways 13.94 14.58
8.2 Transport by other means 13.44 14.52
8.3 Communication 17.71 16.50
8.4 Storage 10.27 11.83
9 Trade, Hotel and Restaurants 8.19 8.45
10 Banking and Insurance 12.47 11.32
11 Real Estate, Ownership, Business 13.01 12.97
12 Public Administration 12.62 14.33
13 Other Services 8.24 8.97
GSDP 10.06 10.49
95
Table A3.3 Financial crisis and NSDP Growth rates: ThreeScenarios
(Constant price and growth rates are in percent)
2008-09 2009-10Industry
WorstModerate Mild WorstModerate Mild
1 Agriculture and allied Activities 2.45 3.45 3.70 2.28 3.28 4.28
2 Forestry and Logging 7.61 7.86 7.86 5.98 6.98 7.98
3 Fishing -1.02 -0.52 -0.52 -1.51 -1.01 -0.51
4 Mining and Quarrying 2.55 3.05 3.55 1.47 1.97 2.22
5.1 Registered -2.84 -1.84 -0.84 -4.20 -2.20 -1.20
5.2 Unregistered 6.73 7.73 8.23 4.11 5.11 8.11
6.1 Electricity -7.58 -7.58 -7.58 -9.27 -9.27 -9.27
6.2 Gas 23.02 23.02 23.02 22.49 22.49 22.49
6.3 Water Supply-
13.20-13.20
-13.20
-19.92
-19.92 -19.92
7 Construction 7.67 9.67 10.67 11.59 11.59 11.59
8.1 Railways 13.16 13.16 13.16 7.53 8.53 10.53
8.2 Transport by other means 6.22 7.22 8.22 10.52 10.52 10.52
8.3 Communication 17.51 19.51 20.51 19.59 20.59 21.59
8.4 Storage 5.05 6.05 7.05 6.18 8.18 9.18
9 Trade, Hotel and Restaurants 1.76 2.76 3.76 2.36 3.36 3.86
10 Banking and Insurance 6.46 7.96 8.96 5.06 6.06 7.06
11Real Estate, Ownership,Business services
3.06 4.06 5.06 2.91 3.91 5.41
12 Public Administration 8.26 8.26 8.26 9.13 9.13 9.13
13 Other Services 1.32 2.32 3.82 2.54 3.54 4.29
96
Table A3.4. Financial Crisis and NSDP Growth rates: ThreeScenarios (Current price and growth rates are in percent)
2008-09 2009-10
Industry Worst Moderate Mild Worst Moderate Mild
1Agriculture and alliedActivities 3.25 4.25 5.25 3.76 4.76 5.76
2 Forestry and Logging -2.57 -2.07 -1.82 -1.25 -1.10 -1.00
3 Fishing 4.06 5.06 7.06 4.35 8.35 11.35
4 Mining and Quarrying 2.33 2.83 3.33 1.47 1.97 2.22
5.1 Registered 2.85 4.35 4.85 2.89 4.39 4.89
5.2 Unregistered 3.59 8.59 11.09 6.36 9.36 12.36
6.1 Electricity -2.92 -2.92 -2.92 -4.35 -4.35 -4.35
6.2 Gas 28.02 28.02 28.02 27.80 27.80 27.80
6.3 Water Supply -8.65 -8.65 -8.65-
15.13 -15.13-
15.13
7 Construction 5.46 7.46 10.46 5.42 7.42 10.42
8.1 Railways 14.99 14.99 14.99 13.99 13.99 13.99
8.2Transport by othermeans 3.82 7.82 9.82 5.15 9.15 11.15
8.3 Communication 7.95 10.95 12.95 9.68 12.68 14.68
8.4 Storage 4.73 6.73 9.73 6.54 8.54 11.54
9Trade, Hotel andRestaurants 2.54 5.54 7.54 2.85 4.85 6.85
10 Banking and Insurance 7.20 8.20 9.20 2.82 4.82 8.82
11Real Estate, Ownership,Business Services 2.99 5.99 8.99 3.21 7.21 10.71
12 Public Administration 8.57 10.07 11.07 8.92 10.92 11.42
13 Other Services 7.14 8.14 9.14 7.46 8.46 9.46
NSDP
97
Table A3.5. Financial Crisis and GSDP Growth rates: Three Scenarios(Current price and growth rates are in percent)
2008-09 2009-10Industry
Worst Moderate Mild Worst Moderate Mild
1Agriculture and alliedActivities
1.58 2.58 3.58 2.99 3.99 4.99
2 Forestry and Logging -0.87 -0.37 -0.12 -1.39 -1.24 -1.14
3 Fishing 3.73 4.73 6.73 1.38 5.38 8.38
4 Mining and Quarrying -0.12 0.38 0.88 0.49 0.99 1.24
5.1 Registered 2.04 3.54 4.04 3.42 4.92 5.42
5.2 Unregistered 1.89 6.89 9.39 5.58 8.58 11.58
6.1 Electricity 7.14 7.14 7.14 6.61 6.61 6.61
6.2 Gas 26.46 26.46 26.46 28.04 28.04 28.04
6.3 Water Supply 1.95 1.95 1.95 -0.01 -0.01 -0.01
7 Construction 5.09 7.09 10.09 5.38 7.38 10.38
8.1 Railways 13.94 13.94 13.94 14.58 14.58 14.58
8.2 Transport by other means 3.44 7.44 9.44 4.52 8.52 10.52
8.3 Communication 9.71 12.71 14.71 8.50 11.50 13.50
8.4 Storage 3.27 5.27 8.27 4.83 6.83 9.83
9Trade, Hotel andRestaurants
2.19 5.19 7.19 3.45 5.45 7.45
10 Banking and Insurance 8.47 9.47 10.47 5.32 7.32 11.32
11Real Estate, Ownership,Business
3.01 6.01 9.01 2.97 6.97 10.47
12 Public Administration 10.12 11.62 12.62 11.83 13.83 14.33
13 Other Services 6.24 7.24 8.24 6.97 7.97 8.97
98
Table A3.6. Correlation of Sectoral Growth rates
Industry
Code 1 2 3 4 5 6 7 8 9 10 11 12 13
1 1.00
2 -0.13 1.00
3 0.65 -0.48 1.00
4 0.04 -0.61 0.39 1.00
5 0.26 0.15 -0.13 -0.09 1.00
6 0.00 0.19 -0.05 -0.15 -0.13 1.00
7 -0.47 -0.25 -0.14 -0.16 0.00 -0.29 1.00
8 0.10 0.07 0.05 0.11 0.18 0.51 -0.04 1.00
9 -0.44 0.35 -0.28 0.05 0.34 0.04 -0.08 -0.11 1.00
10 0.12 -0.15 0.16 0.01 0.08 0.14 0.19 -0.29 -0.03 1.00
11 -0.05 -0.61 0.07 0.00 -0.03 0.18 0.36 -0.10 -0.21 0.42 1.00
12 -0.16 -0.21 0.07 0.23 -0.07 0.02 0.22 0.21 0.16 0.06 0.39 1.00
13 -0.12 0.04 -0.15 -0.08 0.19 -0.34 0.53 0.05 0.02 -0.11 0.09 0.56 1.00
Note: Correlation is over annual growth rates of sectors during 1990-91 to 2006-07.