Kerala’s 500 days challenge: Can ‘God’s own country’ become a Gujarat?

Developed by Adani Ports and Logistics, the port’s trial run began in July this year. Its record since then has been impressive, going by its handling of what the industry calls twenty-foot equivalent unit or TEUs, a measure of the size of containers.

In just a couple of months, the port has unloaded 75,000 TEU containers from large mother vessels and loaded them into smaller feeder vessels—they sailed to smaller ports. It has already exceeded the 60,000 TEUs target it had set for itself till March 2025.

Now, the bad news. Connectivity to the port is not ready yet. A narrow single-lane road links the port to the Thiruvananthapuram-Kanyakumari highway a few kilometres away. This road is incapable of carrying even large trucks, let alone container trailers. “It will take another 12 to 18 months for proper connectivity," says an Adani Vizhinjamport spokesperson.

The Vizhinjam port, in a way, is a reflection of Kerala’s problem today and the hope it holds for its future.

The state’s economy is in a crisis. Its gross state domestic product (GSDP) is not growing fast enough (see chart). Its unproductive expenses far exceed its revenues. Borrowings bridge the gap. This has put the state perpetually in debt.

The famed Kerala Model of Development that ensured significant improvement in human development parameters such as life expectancy, literacy levels and population control is now throwing up demographic changes that are beginning to hurt. Society is ageing and people live longer. This is adding pressure to the pension payouts and healthcare budget. The nature of migration from the state is changing and this is impacting the remittances that oil the state’s economy.

“High levels of debt, higher elderly population and the low retirement age have resulted in high-interest payments, pension and salary outflows, thereby curbing the fiscal space of the state to expend on development activities," says Paras Jasrai, economist, India Ratings and Research.

Kerala is realizing the need for a new model of development and the Pinarayi Vijayan-led Left Democratic Front government is attempting a course correction. It is wooing investors hoping to boost industrial development. It wants to take advantage of projects such as the Vizhinjam port. A few weeks back, the state surprised many by topping the ease of doing business (EoDB) ranking for 2021-22. Can Kerala shake off its anti-investor image, attract investments and extract itself from the quagmire it finds itself in?

Money order economy

Soon after its formation in 1956, Kerala implemented efficient policies that transformed its social parameters. “Literacy rate, life expectancy, maternal mortality rate, infant mortality rate and total fertility rate improved way ahead of India average and were even on par with some South-East Asian countries," says K.P. Kannan, former director, Centre for Development Studies, Thiruvananthapuram. This gave birth to the Kerala Model of Development–one that delivered significant human development and welfare despite low per capita income.

However, the strong social sector achievements did not translate into immediate economic growth. Lack of jobs triggered migration in the 1970s, especially to the Gulf States which were experiencing an oil boom. By 1998, 1.4 million Keralites were living outside the country, 93.8% of them in the Gulf States. As per the Kerala Migration Survey (KMS) 2023, it reached a peak of 2.4 million by 2013.

“Migration turned out to be a boon for the state. With the countries in West Asia not allowing Indians to own assets or settle down permanently, they sent their earnings back to Kerala as remittances," says S. Irudaya Rajan, chair at International Institute of Migration and Development (IIMAD) at Thiruvananthapuram and author of KMS 2023.

Remittances soon became an important source of revenue for the state, earning it the monicker ‘money order economy’. In 1998, it aggregated ₹13,652 crore, equivalent to a quarter of the state’s economy and 1.9 times its revenue receipts. The huge inflow of remittances triggered a consumption boom. Money went into buying gold, consumer goods and building houses. This boosted Kerala’s economic growth but in a skewed manner.

Dutch disease effect

Strong remittance inflow triggered the ‘Dutch Disease Effect’. In 1959, the Groningen natural gas field, the largest gas field in Europe, was discovered in the Netherlands. This discovery, and the consequent export of gas, led to a strong foreign exchange inflow, which strengthened the guilder, the local currency. It also made imports cheaper. Eventually, this led to the decline of the Dutch manufacturing sector.

“In Kerala’s case, the strong remittances flow and the consumption boom it triggered, especially in the construction sector, pushed up the wages significantly. This hurt the agriculture and manufacturing sectors in a big way," says K.N. Harilal, chairman of the seventh State Finance Commission. Agriculture became unremunerative and many industries shifted to neighbouring states. As of 2022-23, agriculture accounted for just 9% while industry contributed 28% (construction and not manufacturing accounted for a large share here) followed by services (63%). “Scope to raise taxes was thus low as services were not effectively taxed prior to the advent of goods and services tax (GST)," says Harilal.

Poor government, rich people

But successive governments have failed to raise taxes where they could and take advantage of the consumption boom the remittances created. “It is a clear case of poor economic management. The state’s collection efficiency is poor and the system reeks of rent-seeking behaviour," says Kannan. This is a travesty for a state which consumes 20% of India’s gold but with just 2.7% of the country’s population, he adds.

The state’s tax revenue between 2017-18 and 2023-24 grew by 6.5% which is less than the state’s nominal gross domestic product (GSDP) growth of 8.5%.

It is this, that has left the state government poor despite its people being rich. The state does not have the funds to meet its routine expenses. In 2024-25, the revenue deficit is estimated at ₹27,845 crore (2.1% of GSDP). The government borrows to bridge the gap. As much as 50% of its borrowings, which is 34% of its GSDP, go to meet its revenue expenses and has left the state in a debt trap.

“With 71% of its revenue receipts going towards meeting committed expenditure such as payment of salaries, pensions and interest, productive expenditure like building roads and other infrastructure has been ignored, says K.J. Joseph, director, Gulati Institute of Finance and Taxation.

Kerala’s capital expenditure as a share of GSDP, at 1.4%, is far lower than many states (see chart). “This has caused the state’s economic growth to underperform," he adds.

Nonetheless, K.N. Balagopal, the state’s finance minister, remains hopeful of things turning around soon. “There are a lot of small enterprises in Kerala, and we are trying to bring them into the tax net to improve the tax efficiency," he toldMint.

Balagopal blames the state’s fiscal challenges on the Centre’s wrong devolution criteria. “Kerala accounts for 3.8% of India’s GDP but gets only 1.9% of the divisible pool. That apart, in the last three years, the quantum of grants has dropped by 56%," he claims.

Mint couldn’t verify this claim.

Geriatric capital

Even as the state battles the fiscal crisis, past successes, thanks to the Kerala Model of Development, are throwing up new challenges which will further worsen its already fragile finances.

The state saw significant success in population control decades ago. This has meant that the share of the elderly population in society is much higher than the rest of the country. The government estimates those above 60 years of age to account for 17% of the population as against the Indian average of 7%. “Kerala is fast becoming the geriatric capital of the country," says Harilal. The state’s pension bill and social security spending are on the rise. So are the healthcare expenses as Kerala offers free universal healthcare for its people.

Migration and the remittances that ensued were a boon to the Kerala economy over the years. That boon is on the wane. For one, the number of migrants is declining. As per KMS 2023, 1.8 million of them have returned.

Gulf states are today home to just 81% of the migrants, down from 94% in 1998. While remittances in absolute terms continue to rise ( ₹2.16 trillion in 2023), it has fluctuated as a share of net state domestic product(NSDP).

What is worse is that the nature of migration is changing. “Earlier, people used to migrate for work. Today, youngsters are migrating for education, and they are going to the US, Europe, Canada, Australia and New Zealand where they intend to settle down. They will not be sending remittances back to Kerala," explains IIMAD’s Rajan.

KMS 2023 estimates that 250,000 students left the state to study abroad that year, spending at least ₹50,000 core in different countries.

That is not the only outflow.

This writer met Sachin Das (27), a native of Cooch Behar in West Bengal, at a tea stall in Ulloor area of Thiruvananthapuram. He had decided to rest after a sudden burst of rain disrupted work.

“I have never climbed a coconut tree back home in West Bengal. These days, that’s my job. I earn ₹23,000 a month climbing 40 trees a day," he says, sipping tea.

He is one among 3.5 milliondomestic migrants who have come to Kerala to take up menial jobs that locals refuse to do. “They send back at least ₹40,000 crore every year and that money is not spent in Kerala," says Rajan.

Remittances into Kerala, going ahead, are expected to fall.

“We can’t solve this problem overnight. We are planning for an environment where more money will come into the state through tourism and investments," says Balagopal.

License-free

A large television in the Thiruvananthapuram office of P.Rajeeve, Kerala’s industryand lawminister, runs a countdown timer. On a mid-October evening, it read ‘512 days, 12,298 hours and 737,909 minutes.

“It reminds me and my team of the time we have (before the next state election is notified) to get our work done," the minister explains. He wants to make Kerala an investor-friendly state.

Rajeev has already met over 4,000 entrepreneurs and sought their suggestions. A committee was set up to review the advice and bring about necessary amendment of rules.

“Today, anyone can start and run a business with an investment of ₹50 crore or less without a license," the minister says. For larger investments, a bureau has been set up to give composite licenses within seven days of application, he adds.

In addition, the state has identified 22 knowledge economy-based priority sectors—such as global capability centres, food processing and medical device manufacturing. Medium and small enterprises (MSMEs) are another focus area. “Between 2022-23 and now (September 2024), over 300,000 MSMEs started operations, involving an investment of ₹19,876 crore. They employ 654,000 people," says Rajeeve.

What about large manufacturing companies? “We do not want large-scale manufacturing. They need a large parcel of land and may not suit Kerala’s sensitive ecology. We want to attract knowledge-based industries that can employ our highly skilled local youth," he adds.

There’s yet another bottleneck—Kerala’s virulent trade unions. “That is a perception issue. No company has been affected by labour issues in the last three decades," Rajeeve explains. If such fear was true, the state would not have topped the EoDB ranking for 2021-22 as it was entirely based on investor feedback, he adds.

If Rajeeve has his way, the Vizhinjam port, going ahead, will not only have road connectivity but also a large manufacturing cluster nearby. That cluster someday will be able to import components, assemble them and export the finished product. In other words, a model of industrialization Kerala isn’t that familiar with.