Is the famed ‘Kerala Model’ of development — characterized by high government spending on health and education — unsustainable in the long run? Even the state’s then ruling Communists were not sure it was, according to a detailed report of a visit by US officials to the South Indian state in late 2007.
The visit by the Chennai Consul General David Hopper halfway through the last Left-government’s tenure, found ministers and officials “glum” and at a loss to figure out how to fund the state’s public spending programs.
“The state’s bureaucrats were particularly gloomy. Chief Secretary Lizzie Jacob (the state’s highest bureaucrat) told post “the money is not there” to continue the current levels of spending on health, education, and pension programs,” Hopper noted in his report on his Kerala visit.
He did not find the state finance minister much more cheerful either. “Finance Minister Thomas Isaac described the state’s dire financial situation. When we met, he glumly admitted the state was on the thirteenth day of a fourteen-day revolving line of credit.
“He kept a brave face saying it was largely “a liquidity question” and the Finance Ministry would need to shuffle some accounts to avoid overdrafting the line of credit.
“Isaac also said Kerala had reached out to the central government for support, requesting reimbursement for a 750 million USD shortfall in its budget due to decreased revenues from its postal deposit scheme. The shortfall, he explained, had resulted from the central Finance Ministry’s decision to reduce interest rates paid on these accounts,” the cable, authored by Hopper in September that year, said.
When the Americans got up to leave, Hopper noted, the minister advised them against travelling to the next town by road as the government had not been able to carry out repairs after the initial monsoon downpour.
“Isaac obliquely acknowledged that spending on social programs prevents the state from adequately addressing other critical needs when he advised against traveling to nearby Kottayam by road, saying that the state had not been able to adequately tackle road repairs,” he noted.
He pointed out that the famed ‘Kerala Model’ of development (similar to the Scandinavian model) was being called into question. The model, he pointed out, depended on maintaining very high amounts of government spending and a large public sector.
“Kerala regularly ranks highest among Indian states on various indices of human development, including literacy, average lifespan, and infant mortality. Life expectancy is 76 years (11 years higher than India’s national average); literacy is 91 percent (26 percentage points higher than the rest of India).
“The state’s achievements are credited to robust spending on social programs. According to media reports, it spends 36 percent more on education than the average Indian state and 46 percent more on health.
“This spending is sustained by the high level of remittances the state receives. Overseas Keralites send home 5 billion USD per year in remittances, augmenting the state’s GDP by 25 percent. These remittances, though not taxed, lead to increased revenue through sales taxes paid on remittance-driven consumption…
..salary, pension, and interest payments consume more than 80% of the government’s total revenue,” he noted.
Hopper noted that the Kerala government is trying very hard to encourage companies based outside the state, but also noted that the state is unlikely to succeed against even more aggressive plans by its neighbours.
“Education Minister M.A. Baby, who is also a member of the [Communist Party of India – Marxist] CPI-M’s policy-making Central Committee, brushed aside the possibility of reducing spending.
“He told us higher revenues derived from increased investment, including foreign investment, are the answer to the state’s problems. Baby said “we want investment.”
“As if to insulate himself from questions about a Communist party seeking FDI, he added “Even Castro wants investment but your government’s restrictions are holding it back.”
He also found the other ministers singing praises for modern industry and capitalist ventures.
“Industries Secretary Balakrishnan and P.H. Kurian, Managing Director of the Kerala State Industrial Development Corporation said Kerala was eager for foreign investment, especially in the IT sector.
“The investment promotion efforts they described — tax breaks, establishment of special economic zones, and bureaucratic facilitation — are similar to those offered by the other south Indian states. But they admitted it was difficult to compete with their neighbors.
“The biggest problem Kerala has with prospective investors, according to Balakrishnan and Kurian, is land acquisition. Extreme sensitivity over land ownership by corporations means that typically companies lease space in government-established technology parks.
“Balakrishnan said companies prefer to locate in the other south Indian states because they are able to buy property there, which in India’s hot real estate markets usually appreciates in value, rather than rent,” he noted.
Kerala regularly elects communists to power every other term, resulting in a very strong program of state spending in core social sectors. Despite having a fraction of the income compared to states like Delhi, Kerala boasts of relatively low levels of poverty, homelessness and mortality etc..
In this respect, Kerala is often compared to the Scandinavian countries, which too have very high levels of state-spending and relatively ‘softer’ forms of capitalism combined with strong social health indicators.
Thanks to the abundance of educated talent in the state, many IT companies have started opening branches in cities like Kochi and Thiruvananthapuram, the state capital.
