Chapter Ill

REVIEW OF THE KERALA ECONOMY

3.1 The State of Kerala

The State of Kerala is a small, narrow strip of land on the

extreme west coast of India. With a coastline of 590 Kms it does

not exceed 100 Kms at its widest point. It has a total area of about

39,000 sq krns. Constituted on November 1, 1956 it comprised of

the erstwhile Malabar district in the North, the whole of the former

Cochin, part of the former Travancore-Cochin State in the centre

and the major part of the then Travancore State in the South.

Among the three, Travancore was the largest accounting for more

than half of the area. While the first was directly administered

by the British in the pre-independence period, the last two had

been princely states and hence under indirect colonial rule.

The differential nature of colonial rule, for instance differences

in state policy regarding land regulations,' education and health2

had its impact on the subsequent development of the regions.

' K.N. Raj i.t ai. (1983). "Agrarian reform in Kerala and its impact on Rural Econom!-4 Prelim~nary Assessment," Ghose (ed.) Agrarian Reform in ('ontemporary i ) rve /op ing Cuuntries, St.Martin's Press, New York, p.68.

' M. Kabir c! a / . (1991). "Social Intermediation and Health Transition: Lessons from Kcrala." paper presented at a seminar on Health and Development in India. Ne\\ D e l h ~ . Jan 2-4.

48 \

Malabar inherited a relatively backward economy vis-a-vis the other

two at the time of the state's f ~ r m a t i o n . ~ However Malabar played

a critical role in Kerala's development through its numerous mass

movements against economic and social oppression. At present

the state is administratively divided into 14 districts, which in turn

are divided into 152 blocks, 1384 villages, 990 grama (Village)

panchayats. 54 Municipalities and 3 Corporations. Many

panchayats cover more than one revenue village.

In terms of its physical features, the land is divided into four

distinct types: ( i ) the highlands vouching the Western Ghats (ii) the

midlands (iii) the lowland plains and (iv) the coastal belt. Over 40

rivers feed it. The undulating topography of the state, the tropical

climate (high incidence of sunlight, rainfall and warm temperature)

as also the cool temperature of the hills generate variety of agro-

climatic conditions which lead to the growth of a range of crop

specie^.^ The State has a fairly high proportion of area under

spices, ginger, tea, coconut and rubber. Kerala with its 29 million

inhabitants in 1991, in a limited geographical area, has become

one of the most densely populated regions in India, particularly in

the lowland and midland regions.' The density of population as

' T N. Kr~shnan (1991). "Wages, Employment and Output in Interrelated Labour Markets In an Agrarian Economy-A study of Kerala," Economic and Political Weekly; 26 (26).

" I.; N . Shyarnsundaran Nair (1994). "Constraints to Kerala's Agricultural Development or What Ails Kerala's Agriculture," A.K.G. Centre for Research and Studies, lutemational Congress on Kerala Studies, Abstracts, Vo1.2.

I; C Zachariah et al. (1967). "Urbanization and Urban development," Asian Economic Hrvrcu. VolJ.no.2, November.

recorded in the census of 1991 (749 persons per square kilometre)

was nearly three times that of lndia. This had an impact on the size

of Kerala's villages; at the 1991 Census, the average size of a

village in the State was almost 16,000 persons compared to a little

over 1,800 persons for all lndia.

3.2 Economic Aspects in Larger Perspect ive

3.2.1 (a) The State Domestic Product

Kerala has performed rather poorly on the economic front

when v~ewed in aggregate terms. However its pattern of

development with strong government intervention in the social

sectors has been unique and has drawn considerable attention. Its

basic characteristic is the paradox of high social development such

as life expectancy, birth rates, infant mortality rates, sex ratio and

literacy levels especially of the female population, where its

performance is rated very high. It is not only high in comparison

with other states and developing economies but also in relation to

developed countries. However, its per capita income is low and

growth in State Domestic Product (SDP) has generally lagged

behind the all-India average.

Up to the mid-sixties the state failed to reflect the general

buoyancy of the Indian economy with growth rate of the State

Domestic product (SDP) lower than the all-India average. However,

in the post mid-sixties period when the national growth rate

stagnated, for Kerala it was significantly higher but per capita

income still remained lower than all lndia average due to the higher

population growth rate. Since the mid-seventies when the growth

rate of the National Domestic Product (NDP) picked up, there was

again a decline of the SDP growth rate, barely managing to grow

faster than the rate of growth of population, which had started

dec~ in ing .~ During the eighties 1980-81 to 1989-90, SDP growth

rate was hardly two per cent for Kerala compared to 5.2% at the

national level. In this period growth in per capita income would

have been negative but for the steep decline in the rate of growth

of population. The share of Kerala's SDP in NDP declined from

3.5% to 2.8% between 1981-91. The growth rate of SDP in Kerala

was marginally higher at 5% compared to 4% at the national level

in 1990-91 to 1994-95.

State income i.e. Net State Domestic Product at factor cost,

at current prices. registered a growth of 16.81% during 1999-2000

compared to 15.97% in 1998-99.

Contrary to the general belief that the economy of the state is

growing at a rate lower than that of other states, the publication of

the Reserve Bank of India, 'Handbook of Statistics on Indian

economy 2000,' shows that the Net Domestic Product of

Kerala registered a growth of 59.08% during the period 1989-90 to

" David Isaac er al . (1992). "Regional Terms of Trade for the State of Kerala." Work~ng paper no. 247, Centre for Development Studies, Thiruvananthapura~n

1997-98. This is higher than that of Tamil Nadu (58.64%) and a

good deal higher than that of Karnataka (51.26%) and several other

states. In fact Kerala ranks fifth among the major states with regard

to growth rate of state income during this period. State-wise

comparison is given in Table III.1

Table Ill. 1

State-wise Growth of Net State Domestic Product

(At Factor Cost: Constant Prices) (Percentage) (Base: 1980-81)

States

Maharashtra

3. Andhra Pradesh

4. West Bengal

5. Kerala

6. Madhya Pradesh

I 7. Tamil Nadu

1 8. Rajasthan

1 9. Karnataka I

Growth

1980-81 to 1989-90

63.14

71.81

57.61

43.16

27.96

38.69

58.88

77.51

61.91

Rate

1989-90 to 1997-98

72.58

64.80

72.82

65.76

59.08

51.65

58.64

52.08

51.26

70.78

65.54

52.02

1 1 3 Uttar pradesh 53.45 ! I 14 Bihar L

47.50.

Source Handbook of Statistics on Indian Economy

45.71

37.7 1

14.88

27.27

13.74

2000, Reserve bank of India

3.2.2 (b) Remittance Incomes and State Domestic Product

Since income estimates refer to incomes originating in the

region only and they do not take into account incomes accruing,

Kerala's SDP is underestimated due to the non-inclusion of

remittances received from Keralites working abroad. This inflow

started growing substantially since the mid-seventies in the wake

of large-scale migration of Kerala workers to the Gulf Countries.

That it made a quantum improvement to the standard of living in

Kerala is ev~dent from the anomalous situation of per capita

consumption being higher than per capita income in certain years

since the post-Gulf migration phase. For instance in 1986-87 while

per capita income was Rs. 2371 at current prices, per capita

consumption expenditure was Rs. 2436.

Attempts have been made to estimate the remittance

incomes indirectly since data on the actual inflows into Kerala are

non-existent. In a pioneering attempt to estimate income from a

consumption function, it was found that the flow of remittance

incomes varied between 15-22 per cent of SDP during 1972-73 to

1989-90, it peaked to 30% in 1978-79 and there was another high

of 26% in 1986.87.' These remittances made possible a moderate

increase in the rate of growth of per capita incomes in Kerala,

' T N Krislinan ( 1 9 9 4 ) "Social Intermediation and Human Development, Kcrnla State. India 4 Retrospective study, 1960-1993," World Summit on Social Dcvelovmcnt. 1lNICEF

from 0.45% to 0.90% between 1972-73 and 1989-90. Whatever be

the growth rate in per capita incomes, it is significant that Kerala

experienced a steady growth in per capita (real) consumption

during this period, at 1.8% per a n n ~ m . ~ A notable fact is that the

remittances did not result in a greater inequality of per capita

consumer expenditure within the State; rather its growth was

reasonably broad based.g Between 1977-78 and 1987-88 there was

an increase in the share of the bottom 30 per cent of the rural

population in the per capita consumption of all items, food, non-

food grains and industrial goods and services. In fact, the period

witnessed a significant decline in the incidence of poverty in Kerala

from its high level in the sixties.I0

However the relatively higher consumption expenditures in

the post-migration period did not seem to have had much impact on

the commodity producing sectors of the economy which continued

to grow much slower than the tertiary sector. The economy was

unable to take full advantage of the growth in consumption

expenditures despite a potential increase in productive capacity by

way of savings generated from the remittance inflows. Most of the

increase in investment that occurred was in housing. While this did

V.N. Krishnan (1994). "Social Intermediation and Human Development, Kerala Statc, India. A Retrospective study, 1960-1993," World Summit on Social Devclopment. UNICEF

I David Isaac ci al. (1997). Economic Consequences of Gulf Migration: Kerala's Uemogrnphrc Trunsifion, its Determinants and Consequences. Sage publications, Delh~. p 63.

111 T . N . Krlshnal. lbid.

open up a major avenue of non-agricultural employment in rural

areas in construction, it failed to generate adequate backward

linkages in terms of manufacture of building materials. This implied

a growth in import dependence of the regional economy, the

requirements being met almost entirely from other Indian states."

The major factors, which influenced Kerala's economy during

the 1990's, were economic policy reforms, increase in exports and

favourable climatic conditions. Though the State did not make

major changes in market intervention policies, policy changes at

the national level, especially the external sector policies, generated

favourable conditions for the promotion of foreign migration

and export^.'^

A major impact of economic reforms was the revival of

emigration to the Middle East, and the consequent increase in the

flow of foreign remittances to Kerala. The devaluation of the Indian

Rupee by 18.3 per cent in July 1991, partial convertibility of the

rupee in March 1992 and full convertibility in March 1993 helped

migrants to earn more Rupees in exchange of foreign currencies.

These measures helped the low wage categories of unskilled

Keralite migrants in the Middle East to remain there and face the

I ' Isaac et ui (1992) "Regional Terms of Trade for the State of Kerala," Working papcr no 247. Centre for Development Studies, Thiruvananthapuram.

" B A Prakash (1999) Econom~c Development-Issues and Problems, Sage publ~catioiis. Neu Delhl. p 53

5 5

competition of cheap labour from other Asian countries. It also

encouraged fresh migration. Evidence suggests that the total stock

of Keralite migrants in the Middle East increased from 8.25 lakhs in

1991 to 14 lakhs rn 1996. Worker remittances from the Middle East

also increased from Rs. 2,335 crore in 1991 to Rs. 5,539 crore in

199.5.'~ The spurt in emigration and flow of remittances resulted in

major changes in the economy. It led to a spurt in the price of land,

real estate and a boom in construction activity. The boom in

construction further resulted in increase in the demand for

construction workers, construction materials, hikes in wages of

workers and promoted emigration of Tamil construction workers to

Kerala. It also accelerated the growth of trade, commerce, transport

and other tertiary activities.

Economic reforms also helped exporters to earn more profits.

Kerala exports a number of agricultural and marine products to

foreign countries. Kerala accounted for nearly 40% of the export

earnings of spices, 94% of coir and coir products, 49% of

cashew kernels and 25% of marine products of the country during

1995-96.14 Almost the entire quantity of pepper and more than half

the cardamom exported from India are from Kerala. Other important

13 B A Prakash (1999) Economrc Development-Issues and Problems, Sage pi~bl icat lons Nen D e l h ~ . p 64

'"tatc P l a n n ~ n g Board. Economrc R e v ~ e w , 2000

56

agricultural exports from Kerala are tea and coffee. Commodity-

wise exports through Kochi Port show that there has been a steady

increase in the value of exports. The increase in exports gave a

boost to the production, processing and trading of these products

during the first half of the 1990s. Kerala also experienced favorable

climate during the first half of the 1990s.

3.2.3 Agricultural Performance in Kerala

A country without sound agricultural system may not be

capable of producing adequate food materials and other crops.

Agriculture is the backbone for the survival of any community. As in

the case elsewhere, the people of Kerala also had been depending

on agriculture for their livelihood and Kerala continues, to be a

predominantly agricultural State. Kerala was known in the past for

her agricultural produces like pepper, cardamom and other spices.

These produces had enticed many foreigners to this land and this

led to many historical events culminating in the colonization of the

country and thereafter decades long struggle for freedom. Having

yoked the country under colonialism, the foreign forces plundered

the natural resources including the much-wanted agricultural

produces,

57

The post independence period witnessed the end of the

exploitation by foreign countries and beginning of a new phase

of planning and development in India. The fifty years witnessed

several developments in domestic, national and international

scenario.

3.2.4 Cropping Pattern

Both topographical and economic factors in terms of a

favorable export market encouraged the growth of commercial

crops in Kerala some of which were processed further, even when

the State was deficit in food. Demand for food was met through

imports. A study of the Travancore region showed that the area

under commercial crops among which coconut and rubber were the

more important ones, increased continually since at least the

1920 's . '~ There was a rapid expansion of the external trade of the

region that increased nearly ten fold between the latter half of the

lgih century and 1938-39. While the trend of a relative decline in

paddy acreage continued in the post-Independence period; and

absolute shift in its acreage had been halted between 1952-53 to

1974-75, a period which witnessed a sharp increase in paddy

'' P C i K Panikar er 01. (1977). "Population growth and Agricultural Dcvelopn~cnt A case study of Kerala," Centre for Development Studies, Thiruvatlanthapuram. p.42

5 8

prices and state policy emphasized the need for some degree of

self-sufficiency in food.I6 However since 1975-76 there was again

a sharp shift away from paddy, the latter losing acreage even in

absolute terms. While area under paddy grew at an annual rate of

0.8 per cent during 1962-63 to 1974-75, in the subsequent decade.

the rate of growth, 2.1 per cent per annum, was negative." Paddy

acreage continued to decline and by early nineties, almost 70 per

cent of the gross cropped area was under non-food crops in Kerala

compared to about 30 per cent for all India. The significance of

cash crops for Kerala gained momentum from the 1980's.

However, the fact that commercialisation is extensive in

Kerala, and the pace of it has accelerated since the mid-seventies

cannot be denied. What is rather unique in the spread of cash

crops is that historically such crops are grown even in very

smallholdings in Kerala; both poor and middle peasants are

engaged to a large extent in their cultivation. In fact over 80

percent of the rubber is grown on small holdings.''

I h Panikar er a / . (1977). "Population Growth and Agricultural Development: A case study of Kcrala." Centre for Development Studies, Thiruvananthapuram.

'' K P Kannan e t a/. (1988). "Agricultural Stagnation and Economic Growth in Kerala. An exploratory Analysis," working paper no. 227, Centre for Development Studies. Thiruvananthapuram.

" K T George et ul. (1992). "Rubber Based Industrialisation in Kerala-An Assessment of Missed Linkages," Economic and Political Weekly, Vo1.27, nos. 1 and 2. 4-1 1 J a n _ pp.47-56

3.2.5 Agricultural Income

The ten years from mid-seventies is considered as a period.

when the Kerala agricultural front was in stagnation. The nineties in

general showed positive signs of recovery. The trends in

agricultural income in Kerala are given in Table 111.2. The growth

rate during 2000-01 was 3.73 per cent.

Table 111. 2

Growth of Agricultural lncorne in Kerala

~ 0 0 - 0 ' * * I 7425 3.73

Source: D~rectorate of Economics and Statistics

*Provis~onal **quick estimate

(Base year 1993-94)

'I. No.

1

1.

2.

Rate of change over previous

year (%)

4

-

10.25

0.72

year

2

1993-94

1994-95

Percentage contribution to State income

5

26.23

26.62

25.78

Agricultural Income (Rs. in

I crore)

3

6256

6897

1995-96 6947

Table 111.3

Land Use Pattern in Kerala (Area in ha.)

SI. 1 No Classification of Land

1. 1 Total Geographical Area

2. / Forest

Land put to non agricultural

3. ~ uses

4. / Barren and uncultivated land

5. Permanent pastures & I Grazing land

7. 1 Cultivable waste I

6.

8 1 Fallow other than current

fallow

Land under miscellaneous

tree crops not included in net

area sown

9. 1 Current fallow

10. / Net area sown

11. i Area sown more than once

12. Total cropped area

Actual 1 % Actual

3

3885497

1081 509

333822

28341

682

%

4

-

27.80

8.6

0.70

0.02

13.

Source: Directorate of Economics & Statistics

Cropping intensities 129 134 - .

6 1

3.2.6 Land Use

Data on land use pattern for the year 1999-2000 is given in

Table 111.3. Out of a total geographical area of 38.85 lakh ha, forest

occupies around 28 per cent. In view of the high density of

population, the pressure for non-agricultural uses is increasing.

Land under non-agricultural uses was 8.6 per cent in 1998-99 and

has increased to 9.1 per cent in 1999-00. The net-cropped area has

marginally declined from 22.59 lakh to 22.39 lakh ha and the

cropping intensity has increased from 129 to 134. There was an

increase in the area under current fallow (4144ha) and fallow other

than current fallow (601 ha). But there was a decrease in the area

under cultivable wastes (-4431 ha).

I Forest

I rUT* a r e a w n " ?Ihers

I !

Figure 111.1 Source: Table 111.3

Land use pattern (1 999-2000)

3.3 Crop-wise Analys is

A review of the long-term performance of the crop sector,

over the last decade shows that the total output from the sector

has recorded an average annual growth of around 2.5 per cent.

There was a large scale shift from high volume, low value crops like

tapioca and rice to low volume, high value crops like pepper

and rubber.

3.3.1 Rice

Rice, which is the principal food crop of Kerala, has been

subject to persistent pressure for replacement by more

remunerative crops during the last two decades. The production of

rice touched its peak of around 14 lakh tonnes in the mid-

seventies. However this was not sufficient to meet 50 per cent of

the state's requ~rements. Area under paddy has declined from its

peak coverage of 8.81 lakh ha in mid-seventies to 4.31 lakh ha in

1996-97. This was mainly due to the enormous pressure exerted by

high-value crops like coconut, banana, pineapple etc. The average

annual decl~ne in area under rice during the eighth-Five year

Plan was around 22,000 ha, whereas it has come down during

the last three years. The annual production of rice, which was 7.27

lakh tonnes in 1998-99, improved slightly to 7.51 lakh tonnes

dur~ng 2000-01

Table 111.4

Area, Production and Productivi ty of Rice in Kerala and lndia

Year

- --

Area ('000 ha) I Production ('OOOt) 4

Productivity (kglha)

Kerala 7 India

2000-01. , 347 I

i

Kerala 1 lndia

I

* Provisional

Kerala

Source: Directorate of Economic and Statistics, CMlE

NA

lndia

751 N A

/ . Area Production Productivity 1

. . 1 , . , , , '.,\ ... , - - . . . . . . -- - . . . . . . . . . . . : . . : . . . ' r.:,,.' , . . ,,v : . - 1 . , ; . i.: ',*

. , _ . . 1 : 8 . . . , p i : ? ':. '., :..... 2. Fig. 111.2 " . . . \ 1 . . ~ 2 --

<..>A, $: **,, - ':.:!;.. &&;' ~ r o d d ~ t i o n and Productiv~ty of Ric&#k . . Kerala

3.3.2 Coconut

In vlew of coconut's multifarious contribution to income and

employment, coconut is regarded as the mainstay of Kerala's rural

economy. Coconut is widely regarded as the principal competitive

crop of paddy and as the two crops show opposite growth trends in

area, it IS the conversion of paddy lands to coconut that is often

mentioned in the Kerala context. With coverage of nearly 9 lakh

ha, coconut occupies 42 per cent of the net-cropped area and

provides livelihood for over 3.5 million families in Kerala.

Table 111.5

Area, Production and Productivity of Coconut in Kerala and lndia

Area ('000 ha) Production Productivity (million units) (nutslha)

India Kerala India Kerala India

1 2000-01' 936 N A 5496 N A

Source: Directorate of Economic and Statistics, CMIE 5870 1 NA

Provisional

Area Production g Productiity

r I.. 92 93- 94 95 96 97 98 99 00 01 . - - . . .

.. . ' . . - , .

I . . - t -

' > . ,. . . , . - , . . , . , - ' . I " . < . y . a - :.;-:;>.,:<.,' , , , , ' A , : ' - - ., . . - ! .v.u.... ..-. %+. . .. i . . . . . - . ; . 7

Fig.lll. 3 . Area, Production and Productivity of Coconut in Kerala

Source: Table 111.5

68

During 2000-01 coconut cultivators faced a very severe crisis

in view of the sharp decline in prices. The price of coconut, which

was normally in the range of Rs. 4.50 to 5, a nut during 1999

sharply fell to Rs. 2.80 a nut during 2000-01. This sharp fall in the

price of coconut combined with a wide-spread attack of coconut

mite thereby depressing the yield considerably, affected the

livelihood of a large number of small and marginal farmers in

the state.

3.3.3 Pepper

Pepper IS basically a mixed crop grown in garden lands

consisting of coconut and / or other tree crops such as arecanut.

Pepper is one of the major export oriented commodities in which

the state has certain inherent and established strengths over other

producing regions. Kerala has almost near monopoly in area and

production of pepper, accounting for 97 per cent in the country. The

crop product~vity achieved its peak level of 376 kg per ha during

1998-99. Pepper produced in Kerala fetches a premium price in

international market because of its intrinsic quality.

Table 111.6

The pattern of global demand for the crop is undergoing

changes. The consumer preference is for value-added forms of

pepper such as white pepper, pepper in brine, oleoresin etc. Kerala

could take advantage of the emerging opportunities by enhancing

its processing facilities to process the commodity for export in

the desired form

Area, Production and Productivity o f Pepper in Kerala and lndia

3.3.4 Cashew

Cashew is by and large, not a cultivated crop although efforts

to expand area under cash crop for export has been initiated since

1 Area ('000 ha) I [ ; - ~ ~

lndia

3

184

189

191

193

198

190

182

240

Production ('000 t )

~ ~

; Year Kerala

i 1999-00 1 198 1 192

2000-OI* 199 i

N A

Source: Directorate of Economics

Kerala

4

50.31

49.67

49.55

59.26

68.57

56.55

46.04

68.51

47.5

47.48

and Statistics,

Productivity (kg/ha)

c- ----- . ...

1 1991 -92

1 1992-93

lndia

5

52.0

50.8

51.3

60.7

61.6

55.6

57.3

75.7

58.3

N A CMlE

Kerala

6

282

271

269

31 7

357

309

255

376

240

238

. .- -. . . .

2

178

183

lndia

7

282

268

269

31 0

31 0

31 0

320

31 6

303

N A -

Provisional

1993-94 1 184

1994-95 1 187

1995-96 192

1996-97 183

1997-98 1 I80 i 1998-99 182

the mid-seventies. Since it does not allow for mix cropping and the

income generated per unit of land is considerably less than most

other crops, the area under cashew is characterised by soils that

are not generally suitable for other crops. This probably explains

why there has been a declining growth in area. During the last

two decades the decline in area has been to the tune of around

30,000 ha. Productivity of the crop, which was lingering at around

800 kg per ha has also started declining from 1995-96 onwards.

The State's share in All-India production is 13%. The cashew

processing industry is finding it extremely difficult even to maintain

the present level of capacity utilization because of the lower

availability of local raw material

Table 111.7

Area, Production and Productivity of Cashew in Kerala and lndia

Area J000 ha) ( Production ('000 t) Kerala India Kerala 1 India

1 1216 5274 81.5 1 260.3

1 2000-OI* 1 86.2 1 N A

Productivity (kglha) Kerala I India 670

J Source: Directorate of Economics and Statistics, Directorate of Cashew.

62.1

494

N A 720 N A

Source: Table IiI.7

Figure 111.4 Area under cashew in ~ e i a l a and India

3.3.5 Plantation Crops

Kerala has a substantial share in the four plantation crops of

rubber, tea coffee and cardamom. Plantation crops in general are

either export oriented or import substituting and therefore assume

special significance from the national point of view. It is estimated

that nearly 14 lakh families are dependent on the plantation

sector for livelihood.

3.3.6 Rubber

Among the plantation crops, rubber is the dominant crop. The

production of natural rubber in Kerala during the year 2000-01 was

5.80 lakh tonnes against all lndia production of 6.30 lakh tonnes.

The price of rubber which was as high as Rs. 51 per kg in 1995

drastically fell to about Rs. 39 in 1997. It further declined to Rs. 30

in 2001. lndia is the fourth largest producer as well as consumer of

natural rubber in the world. In spite of domestic prices of natural

rubber being at par with international prices, the industrial sector

still resorts to imports in bulk quantities since the import duty is

only 25% which is lower than the additional transport cost which

they have to incur for procurement and transport.

Table 111.8

Price trend of Rubber During 2000-01

May 2000

June 2000

July 2000

August 2000

September 2000

October 2000

November 2000

December 2000

January 2001

February 2001

March 2001

Average (2000-01 )

Source Rubber Bc

F M i n t h - ~ . I

April 2000

3356

3253

3253

31 98

31 22

3061

2909

2867

2853

2694

2667

3036

'd, Kottayam

i

India (Rs. per 100 kg. of RSS 4)

31 99

World (Rs. per 100 kg. of RSS 3 (Kualalumpur)

3073

Year I Figure 111.5

Price movement of natural rubber (RSS 4) in Kerala

Source: Rubber Board, Kottayam

3.3.7 Coffee

As against the all lndia area of 3.5 lakh ha of coffee in

2000-01, Kerala's share was 0.85 lakh ha. (24%). Production of

coffee during the year 2000-01 was only 0.60 lakh tonnes against

2.92 lakh tonnes for the country. The major variety grown in Kerala

is robusta, which accounts for 95 per cent of the area.

The average price of coffee, which was in the range of Rs. 65

to Rs. 75 kg during 1993-1998,came down to Rs. 59 per kg

75

during 1999. There was no recovery in the prices during the year

2000 and 2001. The international trends were fully reflected in the

domestic auction prices also. The main reason attributed is the

spurt in production compared to the increase in demand.

Consumpt~on of coffee has remained more or less unchanged at

around 55,000 tonnes for the past one and a half decades in spite

of the growth in incomes as well as population.

3.3.8 Tea

Tea plantations owned by big companies employ a labour

force of over 84,000 in the organised sector. Small plantations of

tea have also started emerging in ldukki and Wayanad districts.

The price of tea was buoyant during 1998 but started

declining thereafter. Tea is a traditional item of export and the most

commonly consumed beverage.

3.4 Current Problems of Agr icu l ture in Kerala

Declining profitability of crops, shortage of farm labourers,

abnormal increases in land prices and high rate of conversion of

agricultural land for other uses are the major problems in the

state's agricultural sector.

3.4.1 Low Profitability

Labour and fertiliser costs together account for more than 75

per cent of the paid out cost of cultivation for all major crops

cultivated in the state. Within a period of five years from 1990-91 to

1995-96, average daily wages of male and female farm labourers in

the state increased by 115.74 per cent and 142.40 per cent.

Aggregate increase in farm prices of the major crops paddy,

coconut, rubber, tapioca and cashewnut was 82.33 per cent, 9.97

per cent, 144.43 per cent, 67.55 per cent and 95.65 per cent

respectively. Rapid increase in the daily wages of farm labourers

and fertiliser prices, along with relatively lower growth rates in the

farm prices of agricultural products in the absence of any major

improvement in farm technology have adversely affected the

profitability of crops. As can be observed from Table 111.9 within

the last 15 years from 1986, indices of the cost of cultivation of crops

and prices paid by farmers in the state have increased. The index of

prices received by farmers show a relatively lower growth rate.

Table 111.9

Index Number o f pr ices Received and Prices pa id b y farmers

I Pr~ces Year rece~ved by

farmers

Price paid by farmers

I 2907 2246 1999

2000* 1 2619 1 2368

Parity as col.

Farm Cultivation

cost

5556

61 11

3.4.2 Shortage of Farm Labourers

Domestic expenditure

Source. Department o f Economics and Statistics

*Average from January to August

In spite of the substantial increase in wage rates, the gap

between demand and supply in the agricultural labour market has

been widening in recent years. Growing deficiency in the supply of

farm labourers can be attributed to many factors. First the

widespread implementation of various poverty alleviation

programmes like IRDP, JRY, TRYSEM and DWCRA in the state

has rendered substantial employment opportunities to the rural

people outside the farm sector. Secondly many small scale and

auxiliary industrial units are sprouting in rural and semi-urban areas

throughout the state and the rural people largely meet their labour

requirements. Thlrdly the hectic construction work going on in and

around rural areas and the fast growing tertiary sector absorb a

major portion of the new generation of rural labourers. Fourthly, the

large-scale m~gration of rural youth to foreign countries and to other

states has also reduced the supply of farm labourers within the

state. Finally the slow pace of mechanisation in the farm sector and

the growing dislike of rural youth to take up farm labour as their

full-time occupation have worsened the labour shortage problem in

the agricultural sector.lg

3.4.3 Conversion of Agricultural Land for other uses

Compared to the 1980s annual rate of increase in the

proportion of land put to non-agricultural uses has been relatively

T.A. Thomas (1994). "Changing Agricultural Practices, Structural Changes and Labour Supply A study with special reference to Kuttanad," M.Phil Dissertat~on. Univcrs~ty of Kerala, Thiruvananthapuran~.

79

higher since the beginning of the 1990s. Within a period of four

years from 1990-91 to 1994-95, absolute land area used for non-

agricultural purposes increased from 2,97,000 ha to 3,23,000 ha

and this increase was primarily responsible for the decline in net

area sown in the state during this period. With the growing pressure

of population and development of the secondary and tertiary

sectors, agricultural land throughout the state is being converted

for the construction of residential buildings, commercial

establishments, roads, health and educational institutions etc. and

that in turn reduces the total area under cultivation. The poor

achievements in agricultural research, drawbacks in the formulation

and implementation of agricultural development programmes,

environmental degradation, poor social management, inadequate

plant protection measures etc have played their own roles in

bringing down the pace of agricultural development in the state.

Shortage of farm labourers and the rapid increase in their daily

wages have also induced farmers to convert their lands from the

c~lltivation of highly labour intensive food crops to commercial

crops. Again in Kerala prices of land under food crops like paddy

and tapioca are found to be relatively lower than the prices of land

under cash crops. Thus the mere conversion of land from the

cultivation of food crops to cash crops in itself enhances the

property value. The comparatively lower prices of land under food

crops leads to its widespread conversion for non-agricultural uses.

80

Changes in land use pattern can also be attributed to the

growing number of absentee landowners in the state. Since the

food crops need more care and personal supervision than cash

crops, these absentee landowners are more inclined to cultivate the

latter which tends to the decline of area under food crops.

3.4.4 Abnormal Increase in Land Prices

Agricultural land prices are so high in Kerala that if interest

on land value is added to the paid out costs of cultivation, none of

the major crops cultivated in the state is economically viable. Thus

land is not always treated as a means of production in the state but

is often regarded as an asset that can be used for speculative

exchange.'' Therefore many speculative investors without any

genuine interest in farming have already entered the land market

as buyers. This observation is vindicated by the fact that

immediately after the crash of the share market in the early 1990s

land prices in the State skyrocketed. Again as land is a safe asset

with fair liquidity, a considerable portion of foreign remittances

coming ~ n t o the state every year is used for the purchase of land,

which leads to a sustained increase in its prices.

~ . .. . -

" M A Oo~nlllcn (1994). "Kerala and the New World Order: Some Tentative Hypothesc~." paper presented at the First International Congress on Kerala Studies, Thiruvananthapurarn. Aug. 27-29.

Thus it can be seen that agricultural lands have been converted

into real estate investments because of the following reasons.

Agricultural land is the most popular of tax planning devices used for

laundering black money since agricultural income is exempted from

income tax. However, under the Kerala Agricultural Income Tax Act,

agricultural income is taxable.

Value of agricultural land has been continuously rising in

most parts of Kerala as has been the case in other states of India

also. In certain places they have recorded a ten fold or even

twenty fold increase over a period of about 10 years. In the case of

sale of agricultural land, the transferor is not liable to pay tax on

capital gains, if any, as certain types of agricultural land are not

capital assets for the purpose of capital gains tax.

Agricultural land is also exempt from wealth tax. It is widely

known that only a fraction of the actual value of the investment is

recorded at the time of registration of the deed. This is done with

an intention to evade stamp dutylregistration charges etc, which

come to be about 15% of the value recorded and also to cover up

black money.

Because of the various tax advantages and also due to the

prospects of capital appreciation, agricultural land has become an

important investment area. Over the years cost of agricultural

inputs like seeds, fertilisers, pesticides, labour, tractors etc. have

gone up considerably. Unremunerative market prices coupled with

the high cost of inputs make farming an uneconomic proposition in

many cases.

3.5 Kerala's Industrial Backwardness

The sluggish growth of the manufacturing sector in Kerala in

the post-independence period when the country was embarked on

a path of rapid industrialisation and the state was under severe

pressure to generate productive employment opportunities, has

drawn considerable attention in academic and official c i r c~es .~ '

While the explanation in terms of lack of minerals like coal and iron

is recognised as inadequate," a number of other substantive

explanations have been put forward. These are:

t The gross neglect of Kerala in the country's heavy

industrialisation strategy in terms of allocation of central

resources.""

Certain infrastructure bottlenecks such as railway transport

and power and the absence of a concerted attempt to

implement an attractive state industrial

~

' l; K . Subrahmanian er a1 (1986). .'Kerala's Industrial Backwardness: Exploration of Alternative Hypotheses," Economic and Political Weekly. April, 1 5 .

" .4 Rudra (1961). .'Industrial Backwardness of Kerala: Planning for Prosper~ty In Kerala." Malayalee Association, Delhi.

*. -' E.M.S. Narnboodiripad (1964). "Third Plan For Kerala," Pillai (ed.),

I'ionning irir I ' rus /~rr i /~ i in Kerala, Malayalee Association, Delhi. P S . Loknnathan (1961). "Industrialisat~on, Kerala's Need Greater,"

P~ l l a i (ed.) . Piunningf ir Prusperrfy in Kerala, Malayalee Association, De1hi.p. 46.

4 The lack of an industrial entrepreneurship both due to the

scale of capital required as also existence of other more

attractive projects promising quick and easy returns.''

4 The widely held notion of the absence of industrial peace in

Kerala, with an active trade union movement tending to push

up wage costs in organised industry;26 and

4 The industrial structure hypothesis.

It is argued that the industrial backwardness of Kerala is

related to its industrial structure characterised by a concentration of

agro-based and processing industries with weak inter-industry

linkages. It results in a process of 'cumulative causation' that tends

to keep the economy industrially backward." The same study also

persuas~vely demonstrates the inefficacy of the hypothesis

regarding militant unionism and high wage cost. It was found to be

empirically unsubstantiated for the organised sector. However, that

the relatively higher degree of political awareness and working

class consciousness among the workers in Kerala has impacted

adversely on the small sector and more importantly created

a feeling among entrepreneurs of labour being difficult to

~~ ~ p - ~ ~ -

-< - li N Ral (1961) .'Approach to Planning of Kerala's Economy," Pillai

( c d . ) . J'ic~nning / i ~ r l ' r o i p e r i i , ~ in Keraln, Malayalee Association, De1hi.p. 67 . "' V K R V Rno (1961) .'Industrialisation: Crux of Kerala's Economic

S n l v a t ~ o n . P I I I ~ I (cd.) . Planningfor Prosperity in Kerala, Malayalee Association; D c l h ~ p 0 8

' li li Subrahniantan e l a/. (1986). .'Kerala's Industrial Backwardness: Esplorat~on of Alternr~t~ve Hypotheses," Econum~c a n d Pulirtcnl Weekly, April 5 .

84

manage cannot be denied." Hence the "psychic" cost of industrial

location would be high in era la."

As is true of most social processes there is very rarely a

simple component explaining a phenomenon; rather "the answer

lies in the cumulative interaction of a number of factors which

acquire a collective force much greater than the mere sum of each

taken separately."30 The same is true of the various hypotheses put

forward to explain Kerala's industrial backwardness.

Studies have also tried to trace the historical roots of the

industrial structure in the state and its relation to the size and

nature of capital.

3.5.1 The Evolving Industrial Structure i n Kerala, Historical

Perspective

The unique cropping pattern in Kerala and its impact on the

occupational structure through intense commercialisation of the

economy had been noted as far back as the beginning of the

twentieth century.3' About 65 per cent of the male work force in

'W.M. Thampy (1990). "Wage, Cost and Kerala's Industrial Stagnation, stud>. of organised small scale sector," Economic and Political Weekly, 25(37).

'k K Subrahmanian (1990). "Development Paradox in Kerala: Analysis of Industrial Stagnation,'' Economic and Political Weekly, 25(37).

"' W. Thomas et a1 (1959). "Barriers to Economic Development in Traditional Socicties Malabar, A Case Study," .Journal of Economic History, 19(4)_ Dccembcr

" V Nagan cr nl (1906). The Travancore Stale Manual, Vol. 3, Govt. press, Th~mvananthapurarn, p.48.

1911 in Travancore-Cochin was recorded as engaged in

agriculture, l~vestock, fishing etc compared to over 70 per cent for

India. Similar was the case in Malabar where the significance of

commercial crops in particular pepper and its links with the external

markets is of even older origin.32 In the beginning of the twentieth

century only about 62 per cent of the population in Malabar was

supported by agriculture.33 This, it was pointed out, was not due to

the infertility of the soil but due to the exploitation of other natural

resource endowments of the region. Such economic activity was

primarily for export purposes given the channelisation of private

foreign (colonial) capital into plantations and agro-processing

industries like coir. The share of manufacturing in the male work

force increased in Kerala from abut 11.6 per cent to over 15 per

cent in the period 1911 to 1951 while for India i t remained constant

at around 9.5 per cent during the entire period.34

In terms of total invested capital too, the plantation sector

accounted for more than half, until the mid-forties. It is only since

then there occurred a significant change in the industrial structure

as reflected in the composition of invested capital. By 1946-47,

for the first time, the share of manufacturing in the total invested

'' Dtllp M . Menon el al. (1994). Caste, Nationalism and Communism in South India Maiahar, 1900-1948. Cambridge University Press, p. 112.

33 C A. Innes ( I 45 1). F.B. Evans (ed.), Malabar, Madras, p. 37. '' JKrishnamurthy (1971). "The Industrial Distribution of the working force in

India: 1901- 196 1 : A study of Selected aspects," Ph.D Thesis, University of Delhi.

capital exceeded that of the plantation sector due to the setting up

of three relatively capital intensive modern industrial units. Since

then there was an increase in investment in modern industries,

most of which came to be promoted by immigrant capital as also a

spurt in the plantat~on sector with the growing importance of rubber.

Investment by local and other Indian capital was growing in the

plantation sector particularly in rubber. Travancore emerged as the

princely state with the highest total corporate paid-up capital by

1947-48. However the average capital of a company was the

smallest suggestive to some extend of the relatively small size of

capital in the region.35 A number of traditional industries, like coir,

oil milling, tile making and cashew were being organised on a joint-

stock basis displaying considerable dynamism.

3.5.2 The Nature of Industrial Entrepreneurship

The Travancore government under British paramountcy by

the end of the eighteenth century initiated a series of reforms in

relation to land holdings to augment revenue. These measures

created the necessary environment for investment in agriculture,

enabling communities outside the Hindu Caste hierarchy to acquire

land and accumulate wealth. This opened up opportunities for an

" K Mahnde\an (1988). "Some Aspects of Pattern of Industrial Investment and Entrcprencursh~p In Travancore During the 1930s and 1940s," G.N. Rao el al. (ed ) The .South indinn Economy, Oxford University Press, p. 17.

indigenous entrepreneurial class to emerge by the 1920s. The

communities were the Syrian Christians and backward castes like

the Ezhavas in the South. However given the fact that most cash

crops like coconuts, pepper, ginger, arecanut and cardamom unlike

those grown largely on plantations like tea and coffee under

European dominance, were to a significant extent raised on small

holdings, the surpluses generated tended to be Hence

growth of indigenous capital was restrained. For instance, the

capital structure of the early coir firms was rather small ranging

from Rs. 20,000 to 70,000 in the 1920s and 30s. Compared to

Rs. 2,00,000 to 5,00,000 on average in industrial firms in

neighbouring Madras, around the same period, firms in Travancore

were indeed sma11.~' With the introduction of natural rubber, locat

capital entered more actively into the plantation sector and over a

time managed to consolidate its position. Most of these cash crops

were exported and hence external trade expanded very rapidly

while food and also other manufactured goods were imported into

Travancore and Malabar. To facilitate trade, the infrastructure in

terms of port facilities and roads were developed, connecting the

highland to midlands and the coast. However trade in plantations

were moving into agro-processing with surpluses earned in

'%. Mahadevan (1959). "Some Aspects of Pattern of Industrial Investment and Entrcpreneurship In Travancore During the 1930s and 1940s," G.N. Rao el al. (ed.) The .South lndiirn Economy, Oxford University Press, p.21

" Dilip M Rilenon rr a/ . (1994). Caste, Nationalism and Communism in South India Mrrlohnr. 1400- 1 948. Cambridge University Press, p. 12 1

88

commercial agriculture - coir and coconut oil mills in the south and

handloom weaving and coconut mills in the north (of Kerala). Two

leading Syrian Christian business houses consolidated their gains

from commercial agriculture by diversifying into banking and were

able to make large profits which formed the basis of further

diversification into insurance. Centres of commercial agriculture

became centres of banking which expanded rapidly as a result of

sharp increase in prices of commercial crops and the consequent

increase in farmers' incomes.

The rapid growth of commercial agriculture and a boom in the

demand for its processed products was an incentive for the growth

of a number of agro-processing industries, the first phase of

industrial development. The most important were tea and coir, tile

and brick-making. However machinery, equipments and fuel

required for these industries were imported. The tea industry was in

the nature of enclave development, inputs were mostly imported

and output almost entirely exported. Copra making, oil milling and

coir industry were dispersed through the coastal and midland

regions.

With the increase in international demand for the commercial

crops, local entrepreneurs invested further in cultivation. Even the

cultivation of rice was highly commercialised. Two sectors of

commercial agriculture required high capital investment - large scale

paddy cultivation on land reclaimed from the backwaters and

plantation agriculture primarily in rubber in which indigenous capital

got a foothold. By the early 40s some of the indigenous

entrepreneurs were acquiring the holding, which were being

abandoned by British capital. While rubber cultivation had its start

on a plantation scale by British planters, the greater part of the

increase in area is attributable to Indian capital, predominantly

small holders who came into the field later. Spinning was dispersed

but coir weaving was more concentrated and primarily due to the

large numbers employed in the former this industry employed the

bulk of the manufacturing work force, mostly women. Cashew

appeared as a major industry only around the 1920s and grew

rapidly in the forties. These industries involved elementary

processing and had a low technological basis, which meant very

little linkage for the development of engineering industries; nor was

there much interdependence between these industries.

The government also played a limited role in industrial

development till about the mid 30s and in fact appeared to be

apathetic towards the setting up of large-scale industries in

Travancore, perhaps because some early experiments had failed.

Only since the mid 30s was there a change in government policy

in terms of active encouragement and incentives being given.

The government made direct investments too in industries in which

private capital was not forthcoming or was inadequate. This change

90

in policy did have an impact in terms of the emergence of a modern

industrial sector, chemicals, rayon, aluminium and cement. There

was a spurt of joint stock company activity in Travancore and its

composttion also changed. While the early phase of industrial

development was characterised by a dominance of plantation and

banking companies, the recent one was more in favour of

manufacturing companies. Hence not only did the corporate sector

expand rapidly in Travancore it also diversified towards modern

industries by the late 40s. Moreover indigenous capital did not play

much of a role in the development of modern industry; most of it

was initiated by capital from other states. While the plantation

"boom" in the forties enabled considerable accretion of surplus with

the indigenous Syrian Christian community, it is generally argued

that its potential investment into industry was thwarted due to

political reasons.38 However, this has been refuted on the basis of

evidence which shows the rapid growth of profitability of investment

in rubber plantations, with increase in its prices since the mid

1930s. The amount invested in rubber planting companies between

1941-42 to 1946-47 increased more than four fold since the latter

half of the 1930s.

. i s Dn\~d Isaac e t a1 (19x6). "An Enquiry Into the Historical Roots of

Industrial Backwardness of Kerala- A study of the Travancore Region," working paper no 2 15. Ccntrc for Development Studies, Thiruvananthapuram.

9 1

However, in the post-independence period, there was another

boom in plantation cultivation especially rubber during the Korean

War. Rubber plantations absorbed considerable investment funds

of indigenous capitalists. There was also the entry of indigenous

capital into trade, opportunities for which opened up after the exit of

foreign companies. During the second plan period of the state no

significant emphasis was given to modern industries due to the

emphasis on traditional industries in Kerala. The possibility of state

government's involvement in industrial development was severely

constrained due to the loss of the elastic customs and excise

revenue sources with its integration to the Indian union. The inflow

of imm~grant capital also appeared to stop in the post-

independence period.

Hence the following factors could possibly explain the tardy

investment by indigenous capital into modern manufacturing.

Given the peculiar geographical location of the state, the response

of indigenous capital to concentrate on plantations was in fact a

rational one.39

There was some local capital investment in modern

enterprises, primarily in the textile sector but the units were not

very successful. However, the traditional industries showed

"' Mahadevan (1988). "Some Aspects of Pattern of Industrial Investment and Entrepreneurship In Travancore During the 1930s and 1940s," G.N. Rao el al. (ed.) The .Yuir/h Indton Iiconomy, Oxford University Press, p.28.

92

considerable dynamism with substantial growth in their numbers

and capital invested. The cashew industry which began modestly in

1925 witnessed a spectacular growth in the 1940s; the later period

saw the entry of a number of middlemen traders. However a few

firms controlled the industry through a chain of factories. What is

of significance in Travancore's modern industrial history is the role

of immigrant capital during and after the second world war with the

entry of Gujarati and particularly Tamil capital. The latter had

already been associated with some industries in Travancore

like paper and sugar which however had not met with much

success. Some of the investments during the war were in rubber,

plywood and glass.

3.5.3 Structure of Manufacturing

The growth of modern manufacturing in the forties was

inadequate to alter the structure of manufacturing, despite an

increasing share of manufacturing in the male work force. Kerala's

industrial structure in terms of product group since the beginning of

the century was nearly constant. Even up to the early 40s almost

75-77 per cent of the male work force in manufacturing was in

plantation industries, primarily tea and in coir. Other industries

were cashewnut processing, tobacco, textiles, (primarily handloom

weaving and products) and non-metalic mineral products,

(primarily tileibrick making). The most phenomenal growth was in

93

the coir industry in which the number of workers quadrupled in the

decade of the thirties. The impact of large investments in modern

industries since the mid-forties did not alter the dominance of

natural resource based industries, except for a marginal increase

in the share of chemical and petroleum based industries.

Hence Kerala's large work force in manufacturing was

engaged mainly in labour intensive industries, closely related to

natural resource endowment. A significant proportion of this

production was linked to export demand. It is interesting to note

that while in another state, west Bengal, the period of expansion of

its most important agro-processing industry, jute was over by 191 1,

in Kerala many of the processing industries underwent an

expansion between 191 1-51 .40

The value of out put per capita of the manufacturing sector

in 1950 in Tranvancore was Rs.48 against an all India average of

Rs. 37 and the state ranked top among the princely states in

industrial d e v e ~ o ~ m e n t . ~ ' However in the following decade itself

that is, the fifties, the situation changed to one of industrial

stagnation for the state. While the proportion of the male work

force in manufacturing declined in Kerala from almost 16 per cent

10 J Krishnamurty (1971). "The Industrial Distribution of the working force in India: 1901-1961: A study of Selected aspects," Ph.D Thesis, University of Delhi, p.52.

41 David Isaac e / al. (1986). "An Enquiry into the Historical Roots of Industrial Backwardness of Kerala- A study of the Travancore Region," Working paper no. 2 1.5. Ccntre for Development Studies, Thiruvananthapuram.

94

in 1951 to about 14.6 per cent in 1961, for all India, the proportion

increased. albeit marginally from 9.7 per cent to 10.1 per cent.

The contribution of the manufacturing sector to the states SDP was

lower than its share in the work force. It is interesting to note that

in this period, 1951-61, the share of agriculture in the state's

income was higher than its share in the work force.

This situation was reversed to some extent in the seventies

with the growth rate in State Domestic product originating in

agriculture being negative while it was higher in the non-agricultural

sectors. However the gains were primarily taken up by the tertiary

sector. The rate of growth of manufacturing has been generally

lower then that of the tertiary sector and below the all-India level as

also lower than that of three neighbouring south Indian states in the

post-independence period. For instance between 1970-71 and

1986-87 the manufacturing sector in Kerala recorded a compound

annual growth rate of a mere 2.8 per cent (at 70-71 prices)

compared to over 5 per cent in both Tamil Nadu and Karnataka.

The period from 1986-89 to the early 90s shows a dramatic

improvement in the growth rate per annum to 12 per cent. In the

first half of the nineties, 1990-91 to 1995-96; the rate of change

was rather uneven varying from a low of 3 per cent to a high of 8

per cent, all at constant prices. Other indicators like productive

capital and gross output per capita in the factory sector are

consistently lower in Kerala than in lndia.

95

In terms of its product structure, the study by Subrahmanian

and Pillai (1986) revealed that the situation did not alter very radically.

Since the early decades of the century Kerala's factory employment

continued to be concentrated in resource based industries, with only

a small share of 'footlose' type industries, which has resulted in a

fragile industrial base. Some diversification of the industrial base is

necessary to ensure the required growth stimuli through inter-industry

linkages and agglomeration economies.

3.6 Tert iary Sector in t h e Kerala Economy

The share of the tertiary sector which comprises transport

and communication, storage, trade, hotels and restaurants, banking

and insurance, real estates and ownership of dwellings, public

administration and other services leaped up from 29.32% in

1950-51 to 36.40% in 1980-81. It further hiked to 43.88% in

1996-97 In 1998-99 the share of the tertiary sector was 49.42%,

which further ~ncreased to 50.64% in 1999-2000. The tertiary sector

is the one, which has consistently shown high growth rates.

Whatever growth in aggregate income has been achieved has been

due to the buoyancy of this sector.42

- - -.. -

'' K P Kannan et nl. (1988). '.Agricultural Stagnation and Economic Growth In Kcrala An exploratory Analysis," Working paper no. 227, Centre for Developnicnt Studics. Thiruvananthapuram.

The tertiary sector growth is due to the link between the

increased flow of money into the Kerala economy since the

mid-seventies, growth in consumption and the growth in service

sector as well as the growth in finance capital. The increased flow

of money first manifested itself in a construction boom but it did not

lead to industrial growth because the linkages with the existing

industrial structure were weak.43 It also increased the demand for

health and educational services and that is manifested in the

tremendous growth in the number of private health care as well as

educational institutions. The increase in the production and

circulation of goods and services in the tertiary sector was also

striking as manifested in the growth in the number of cinema

theatres, hotels, bars and restaurants, printing and publishing

centres etc. Thirdly it also led to increased demand for consumer

durables. All these contributed to an increase in the overall service

sector activity including trade, commerce, banking, transport and

other services. All these might have contributed to a growth in

profitability of such activities which are basically 'quick, money

venture's.44 This is reflected in the SDP growth in the service sector

of 5.32% during 1976-86 compared to 4.24 during 1962-75.

- 43 G. Gopikuttan (1997). "Casual Labour Market in ICerala," paper presented

at Dr. Krishnan Memorial Seminar, Centre for Development Studies, Thiruvananthapuram.

* K.P. Kannan et al. (1988). "Agricultural Stagnation and Econon~ic Growth in Kerala. An exploratory Analysis," Working paper no. 227, Centre for Development Studies. Thiruvananthapuram, p. 14.

Since there is significant underestimation of income in trade,

commerce etc, the real growth rate is likely to be far higher than what

is indicated in the official estimates. The multiplier effect of increased

expenditure might have also contributed to an expansion in the

circulation of money. Since this emerged as a 'quick money making'

sector savings from the agricultural sector and the mercantile

capitalists in the industrial sector as well the illegal money generated

in the economy might have also been at t ra~ted.~ ' Thus, the private

sector savings had to choose between investment in the low

profitability productive sectors and high profitability productive

sectors and high profitability-cum-quick money service sector.

This seems to have gone through two phases: from the mid-

seventies to the mid-eighties and thereafter. The construction boom

created a speculative market for land. But this has now tapered off.

So is the case of investment in health and educational sector and

other service sector activities such as cinema making, hotels and

publishing. In the financing of these ventures, private unregistered

banking institutions known as 'blade companies' played a major

role by mediating between the investors and the savers. Saturation

of investment as well as legal restrictions has put an end to this

intermediation. A phase has thus come to an end. In the second

'' K.P. Kannan er 01. (1988). "Agricultural Stagnation and Ecoliomic Growth In Kerala An esplorator) Analysis," Working paper no. 227, Centre for Development Studics. Thiruvananthapuram, p. 19.

98

phase, the increased financial resources have been channelised

through the stock market for both primary and secondary

investment depending on their risk preference. However, the motive

of the majority of such investors seems to be the same as before

i.e.. quick money making.

3.7 Economic Recession

Though the state witnessed a boom in economic activities

during the early 1990s, evidence suggests that the state's economy

began to face recession since the mid 1990s. The recession

tendency started with the collapse of the share market by the end

of 1994. The spurt in investment in land and real estate during the

early 1990s associated with the revival of Gulf migration came to

halt between 1994 and 1995. Prices of land and real estate

registered a sharp fall and the boom in business came to a halt.

There was a substantial fall in construction activity resulting in

heavy fall in demand for construction materials and construction

~abour.~"he large scale return of emigrants from the U.A.E in 1996

and Saudi Arabia, Bahrain and other Gulf countries in 1997

resulted in a big fall in the flow of workers' remittances and put an

end to the boom in economic activities. The big fall in the price of

rubber; spices and other commercial crops during 1996 and 1997

'I' B A Prakash (1999). Kerala's Economic Development: Issues and Prohlem.s_ Sage publications, New Delhi, p.89 .

99

further aggravated the situation affecting the income of lakhs of

small farmers. The restrictions imposed on marine exports by

foreign countries also created a crisis situation in the marine fish

production and processing fronts. Thus Kerala began to experience

a severe recession since the mid 1990s.

A major internal factor that contributed to the economic

recession is the plan strategies and development policies of the

state. Plan strategies and development policies pursued by

successive governments gave undue importance to state

intervention in economic activities and neglected the role of private

investment and the private sector. Even after the implementation of

economic reforms by the central government no major change was

made in Kerala with regard to development policies. Private

investment was not considered as a solution to solve the serious

infrastructure problems with regard to power, roads, water supply,

irrigation etc. No serious attempt was made to create a favourable

atmosphere to promote private industrial investment through

appropriate industrial, credit, labour and infrastructure policies.

Another internal factor was the changing preferences in the

investment of savings. Instead of investing in industry, agriculture

or the service sector, people were investing in shares and real

estate to earn big profits. This resulted in excessive speculative

it~vestments in shares and real estate during the early 1990s.

Lack of conducive atmosphere for private investment also

contributed to this. There was a steady boom in the share business

in Kerala between 1989 and 1994. Majority of the persons who

invested in shares were not aware of the complexities of the share

market. But the big fall in the price of shares since the end of 1994

resulted in a virtual collapse of the share market. The fall in the

market price of shares of a large number of companies was more

than 90 per cent between 1994 and 1997.~' This created a grave

situation and almost all the investors in shares suffered either

heavy losses or total loss of their investments.

Collapse of the real estate market is another notable factor.

The economic boom in the early 1990s had resulted in a spurt in

prices of land and real estate in anticipation of speculative profits.

Real estate investors spent a lot of money on constructing flats in

cities and towns in anticipation of windfall profits. But by 1995, the

artificially hiked prices registered a sudden fall. According to one

estimate, the prices fell by 30 to 40 per cent.48 In places where

there is a concentration of Gulf migrant households, the price fall

was more than 50 per cent during 1996 and 1997. The collapse of

the real estate market created severe shortage of cash as large

volumes of savings and borrowed money were invested in land and

real estate. There was a big fall in construction activity resulting in

a heavy fall in the demand for construction materials and labour.

This adversely affected the production of local construction

47 Mnthr~rhzimi . 25 December, 1997, Calicut. JX Malh ruhumi . 23 December 1997, Calicut.

>

materials, employment opportunities of construcfion workers and

trade and commerce of a large number of construction workers.

Acute electricity shortage during the 1990s is another factor

contributing to the recession. Frequent load shedding, imposition of

power cuts to industrial and commercial consumers and restrictions

on power use during peak hours became very common. Shortage of

electricity assumed serious proportions in 1996 and 1997. Three

hours load shedding, 30 minutes cyclic load shedding and 35% power

cuts were effected from January 1996.~' The shortage of electricity in

Kerala was estimated to be 23% in 1996-97.

A major factor that contributed to the economic recession is

the severe financial crisis of the state government. The crisis,

which started during the early 1980s, assumed serious proportions

during the 1990s and also in this new decade. Rising expenditures

mainly due to salary and pension commitments and interest

payments and sluggish growth of revenue due to low demand and

sub optimal tax compliance have combined to make the situation

very difficult during 2001-2002.~' Due to lack of resources, the state

government has been forced to cut expenditure on development

and non-development activities. There has been an inordinate

delay in the payment of bills of contractors who executed public

works and supplied materials to various government departments.

-1) Statc P l ~ ~ ~ l ~ i t l g Board. 1997 > I >

Ck~tc Plann~ng Board. I : ' ~ o n o m ~ c R e v ~ e w , 2001

It is reported that the state government had to pay an amount of

Rs. 500 crores as arrears to contractors in the Public Works and

Irrigation Departments in July 1997.~' On the eve of the Tenth Plan,

the government's financial situation was such that to improve

services in the public sphere and to renew the development effort,

it was absolutely essential to put in place and implement a

programme of expenditure control, efficient resource use and

aggressive revenue mobilisation.

During the mid 1990s the factor, which has had the biggest

~mpact on the state's economy, was migration to the Gulf and the

inflow of remittance^.^^ In several districts of Kerala, Gulf

remittances are the basic factor determining all economic activities.

But the return of a large number of migrants from the Gulf during

1996 and 1997 created a severe economic crisis in those areas

having large concentrations of migrant households. Due to

restrictions imposed on foreign workers, more than 40,000 migrant

workers were forced to return from the U.A.E. since October 1996.

Another 37,000 returned from Saudi Arabia since October 1 9 9 7 . ~ ~

The return of migrants created an acute recession in seven districts

with large concentration of migrant households. There has been a

big fall in the price of land and real estate, construction activities

and trade and commerce.

> I Mrrli~yulii Munoruma. 27 July 1997, Kottayam. '' B A Prakash (1999). Kerala's Economic Development: Issues and

/ ' roh /ems . Sage publ~cations, New Delhi, p. 109. " Mrrl~~.valo Manoruma. 12 December, 1997, Kottayam