The Telegraph
Wednesday , May 4 , 2011
Since 1st March, 1999
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- Of a unique route to development

Since Amartya Sen has popularized the term “Kerala model” to refer to the extensive welfare measures adopted in the state, I am constrained to use a different term, “strategy”, for yet another unique aspect of the Kerala story, namely, its development policy. The standard view on development policy at the state level is as follows: if a state is to develop then there must be substantial investment within it; since state government resources are limited, such investment must come from private investors who must be attracted to the state through suitable inducements; and since all states must do this they must compete against each other to be attractive for private, especially corporate, capital. What is unique about Kerala under the recent Left Democratic Front rule is that it did not follow this policy.

It did not join this competitive struggle with other states to make itself attractive for private corporate capital, for which it was much criticized by personages from the prime minister downwards as being “anti-development”. Not that it frowned upon or discouraged private investment, but such investment was welcomed within a policy framework, which offered no competitive concession for attracting it, which insisted upon a degree of government supervision (for example, 26 per cent equity in the setting up of information technology parks), and which eschewed coercion in land acquisition, to a point where projects often got delayed or even aborted for absence of land. (By the same token when projects did come up it was not uncommon for those on whose lands they were located to participate in the inaugural functions.) Kerala, not surprisingly, did not acquire fame like Gujarat as a destination for private capital, to the chagrin of many pundits sympathetic to the state.

What the government did do, however, was a substantial step-up in its own outlay. The plan size, which had been less than Rs 6,000 crore in 2006-07, almost doubled to over Rs 11,000 crore in 2011-12. And a fair proportion of this increase went for education, health, revival of foodgrain production, income support for traditional sector workers, a health insurance scheme covering half the population of the state for which the state government paid the premium, an equally ambitious housing scheme, and subsidies for providing essential commodities at controlled prices through state-run shops. Since many of these are not even capital account items, conventional wisdom of recent vintage would accuse the LDF government of “frittering away precious resources on populist schemes, to the detriment of economic growth”.

Remarkably, however, Kerala in the recent past has shown a slightly higher growth rate than the Indian economy as a whole, and only a slightly lower growth rate than Gujarat with which it is always compared unfavourably as a destination for private capital. The gross domestic product at factor cost in constant (2004-5) prices in 2009-10 was 25 per cent higher than in 2006-07 for the country as a whole; for Kerala the gross state domestic product was 28 per cent higher and for Gujarat 31 per cent higher. Growth rate, though much advertised these days by Central government spokesmen, is an utterly inadequate index for judging economic progress. Even by this criterion, however, Kerala, despite not joining the rat race for attracting capital, has performed quite creditably.

Some may argue that Kerala would have done even better if it had also exerted itself to be hospitable to private capital; but that is erroneous. A state cannot both expand welfare expenditure significantly and be generous in providing inducements to private capital. State government resources being limited, a strategy of providing inducements to private capital takes up so much of these resources that little is left for increasing welfare expenditures noticeably. According to a report in The Hindu, for instance, the Gujarat government promised to give out Rs 31,000 crore, no doubt spread over several years, to induce the Tatas to shift their Nano plant to that state. With such largesse, clearly the scope for increasing welfare expenditure gets severely constricted.

Putting it differently, we have here two alternative development strategies, which cannot really be combined. One uses the public exchequer to induce capitalists to invest in the state in the belief that this investment will generate growth. The other uses the exchequer to increase government expenditure on a variety of schemes, in particular welfare schemes, in the belief that this will not only directly benefit the people, but also, as a consequence, enlarge the domestic market, to cater to which there will be an automatic increase in investment, not necessarily of big capitalists but of a range of small entrepreneurs.

The point of this second strategy is that it directly benefits the people. Even if it did not give rise to much growth, people would still be better off as a consequence of it; and if it did generate growth, as it has done in the case of Kerala and as it would normally be expected to do, then it would kill two birds with one stone. The advantage of achieving growth in this manner is that, with growth, the revenue of the state government would also grow, permitting an even larger increase in welfare expenditure and in state plan outlay, as has happened in the case of Kerala. We would thus get on to a virtuous cycle with the second strategy.

Besides, by calling forth investment from a dispersed group of relatively small entrepreneurs, including cooperatives and women’s self-help groups (Kudumbasree) rather than relying exclusively on big ticket projects, this strategy is both more employment-intensive and less power-concentrating.

By contrast, the first strategy, if successful, can generate growth, but little of its benefits will “trickle down” to the people. Some may think that even if “trickle down” does not occur immediately or automatically, with a high rate of growth, the state government’s revenue will grow rapidly, making it possible for the government to spend more on welfare schemes at a later date. But typically big-ticket projects generate little employment, so that much of the revenue they earn accrues as surplus or as incomes for a small number of well-paid professionals. The demand generated by such incomes is for “sophisticated goods” not already available in the economy. The pressure is to start the production of such goods, for which fresh investment has to be attracted to the state and fresh concessions given to big capitalists to entice them to the state. In other words, the process of attracting investors to the state with blandishments is a never-ending process. Hence, even though high growth may lead to a rapid increase in the state government’s revenue, the drain on this revenue for providing “incentives” to the capitalists is a perennial one, which leaves little scope for undertaking welfare schemes even at a later date. The people at large never get the opportunity to reap the rewards of high growth. The instant when at last the benefits of high growth can be made to accrue to the ordinary people (they never “trickle down” automatically) never comes with this first strategy. The superiority of the Kerala-style welfarist strategy remains indubitable.

But then is there not a clash of interests between the people at large and the emerging middle class whose interests are better served with the first strategy? Saying this amounts to putting the cart before the horse: the first strategy actually spawns the self-seeking middle class that then begins to demand it. In a relatively egalitarian society, before the middle class has split itself off from the rest, welfare measures also benefit the “uncles” and “aunts” and “poor cousins” of the middle class itself. This and also the fact that big-ticket projects inevitably spawn corruption which the middle class abhors, imply that a constituency for the second strategy can always be found in the middle class. Of course if it cannot be, then so be it. But it is never too unwise to embark upon a Kerala-style strategy.

The author is a former professor, Centre for Economic Studies, Jawaharlal Nehru University, New Delhi
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