Long read: How Kerala got rich

When one goes on holiday to Kerala, long before one reaches the backwaters, the Nilgiris or the beaches of ‘God’s Own Country’ one is stunned by cleanliness of the streets, the quality of the roads and the pleasant demeanour of the people. At that point one is compelled to ask the same question that Tirthankar Roy of the LSE and K Ravi Raman of the Kerala State Planning Board ask, namely, “Fifty years ago it was one of India’s poorest states, now it is now one of the richest. How did Kerala do it?…

In the 1970s, Kerala’s average income was about two-thirds of the Indian average, making it among the poorest states in India. This difference persisted through the 1980s. In the coming decades, a miracle occurred. Kerala, one of the poorest regions in India, became one of the richest. In 2022, Kerala’s per-capita income was 50-60 per cent higher than the national average. What happened?”

Messrs Roy & Raman start their essay with a point which is well-known to development economists but might not be understood outside such circles: “Even when it was poor, Kerala was different. Though income-poor, Kerala enjoyed the highest average literacy levels, health conditions and life expectancy – components of human development – in all of India. Among economists in the 1970s and ’80s and among locals, ‘Kerala is different’ became a catchphrase. But why, and different from whom? One big difference Kerala presented was with North India, which had an abysmal record of education and healthcare. While the population grew at more than 2 per cent per year in the rest of India, Kerala’s population growth rates remained significantly lower in the 1970s. High literacy and healthcare levels contributed to this transition.

Kerala’s unusual mix of high levels of human development and low incomes drew wide attention, including from leading scholars….In a series of influential works, the Nobel-laureate Amartya Sen and his co-author the economist Jean Drèze praised Kerala’s development model for prioritising health and education, even with limited resources, and claimed that this pathway led to significant improvements in quality of life. Kerala vindicated the intuition that Sen and others held that health and education improved wellbeing and shaped economic change by enhancing choices and capabilities.

Why do Kerala’s differences matter? What lessons did the economists draw from the state’s unique record? Around 1975, India’s economic growth had faltered, and a debate started over whether the country should give up its socialist economic policy in favour of a more market-oriented one, in which the government would take a backseat. Kerala suggested three lessons for those engaged in the debate: (a) income growth rate was a weak measure of standards of living; (b) what mattered was quality of life, including education, good health and longer lives; and (c) the government was necessary to ensure investment in schools and hospitals. The three lessons would coalesce into the Kerala Model, an alternative recipe for development to the neoliberal model then being pushed by Right-wing lobbies.”

Then Roy & Raman make a point which even the economists at Marcellus had not appreciated until they read this long essay: “Kerala was about to grow even more different, confounding orthodoxies in political science and economics. In the 2000s, average income in the state forged ahead of the Indian average. Compared with Indian averages, the post-1990 growth record was less impressive regarding human development, as India caught up with Kerala. The forging-ahead in income was offbeat and is still poorly understood. This question remains unanswered because, so far, the attention of economists has been elsewhere – welfare policies – whereas the income turnaround suggests an emerging pattern of private investment that strides in basic health and literacy alone cannot explain.” [Underlining is ours]

So what can explain the economic miracle that has unfolded in Kerala over the past two decades? In case you are too busy to read Roy & Raman’s fine essay, here is the crux of it: “Not long ago, Kerala was celebrated for its exceptional human development indices in education and healthcare, with many scholars attributing this to an enlightened political ideology and communist influence. These advances also resulted from factors like the princely states’ higher fiscal capacity, favourable environmental conditions, and a globally connected capitalism. During the 1970s and ’80s, government interventions weakened market activity and growth, making human development look even more striking than otherwise. Since previous commitments to social infrastructure were maintained, the state was heading toward a fiscal crisis.

In the 2000s, an economic revival came through mass migration and remittances, initially supporting consumption and construction. At the same time, a wealthier and technically skilled diaspora invested in the state, in services and manufacturing. New sectors like tourism, hotels, spice extracts, ayurvedic products, rubber products and information technology drove this revival. Remittances also flowed into new forms of consumption. The urban landscape transformed, with towns developing shopping malls, restaurants and modern businesses. While earlier regimes discouraged private investment, now there is a symbiosis between the private sector and the state, as market activity supports public welfare commitments.

The New Left, unlike the Old Left, is open to private capital and acknowledges the importance of the market, including the global market. Without compromising welfare expenditure, the state has expanded the hitherto neglected infrastructure projects, crowding in private investments. This is the second turnaround in the development trajectories of the state. The first turnaround happened during the early 1980s fuelled by remittance money. The second turnaround happened in the 2010s, when social growth, always Kerala’s strength, joined unprecedented levels of capital expenditure. If both the Left and non-Left political parties could take credit for the first turnaround, the credit for the second one should rest with the New Left.”

Digging deeper into Kerala’s success story, Roy & Raman explain how the state government and private capital have successfully interplayed with each other: “From 2000, the Left turned friendly towards private capital and shed the rhetoric of class struggle. In practical terms, the state retreated from regulating private capital and strengthening trade unions, and focused on infrastructure investment to strengthen small businesses. The reinvention was a success and delivered election victories. As the private sector took charge of investment in education and healthcare, the state could afford to focus on decentralised governance, corruption-free administration, improved public services and urban infrastructure. The class-based politics of the 1960s and ’70s died. With private investment rising, the state had more capacity to fund welfare schemes and public administration. Tourism promotion is an excellent example of a new form of synergy: the state builds roads, private capital builds hotels, and lakes and mountains supply the landscape.

Third, investment in Kerala revived. Over the past three decades, the private sector has increasingly driven education and healthcare. Since 1990, many new types of small-scale businesses have flourished in the state. There is no single story of where the money came from and what these enterprises add to employment potential. We know much of it happened on the back of natural-resource processing. In all fields, value was added by accessing niche export markets, using new technologies, and forming many micro, medium and small enterprises. The state has one of the highest concentrations of startups. Natural resource extraction does not mean any more plantations packaging harvested spices but the extraction of nutraceuticals. Jewellery manufacture involves invention and experimentation with designs. Rubber products diversified from automotive tyres to surgical accessories.

Although foreign investment inflow, which supported business development in the princely areas, was revived via the Gulf route, most of the business development is concentrated in non-corporate family firms. Few raise significant equity capital or are publicly held. Most service sector enterprises in tourism, trade, transport, banking and real estate are relatively small. Family business remains a strong organisational model.”

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