The opening sentence of United Nations, World Economic Situation and Prospects, 2016 is prognostic: “The world economy stumbled in 2015”. The downward revision of world gross product to a mere 2.4 per cent in 2015 from the 2.8 per cent forecast in mid- 2015 is a clear indication that the global economy is yet to see a revival. Growth has been low at 2.4 per cent (2012), 2.5 per cent (2013), and 2.6 per cent (2014) and has now reverted to the level of 2012. The forecast for 2016 and 2017 at 2.9 per cent and 3.2 per cent too are laced with hope, based on the better than average growth numbers in the high income countries; from 1.4 per cent each in 2012 and 2013 rising to 1.8 per cent in 2014 and estimated to grow at 2.0 per cent in 2015 and 2.4 per cent in 2016. The pick up in the advanced economies is predicated on the expected robust activity in the United States, supported by strengthening housing and labour markets, stronger private consumption in the euro area and the revival in Japan.
Downward risks are higher in the emerging market developing economies (EMDE), which as a group are home to 85 per cent of the world’s population and account for 60 per cent of the global GDP. They were the prime movers of growth in the aftermath of the financial crisis as advanced countries were grappling with the after effects of the crisis. The situation has reversed. While there are signs of mild revival in the developed economies, the EMDEs are saddled with lower commodity prices and diminished trade and capital flows. The worrying dimension of global growth is the simultaneous slowing of four of the largest emerging economies- Brazil, China, Russia and South Africa. Developing countries have witnessed growth falling from 4.9 and 5.1 per cent in 2012 and 2013 respectively to 4.6 and 4.4 per cent in the next two years. Among the developing countries, Chinese growth is on a downward slide, growth in 2015 estimated at 7.1 per cent earlier has now been revised downwards by the World Bank at 6.9 per cent and the forecast for 2016-17 have been downgraded from around 7 per cent to reach 6.5 per cent. Indian growth, after the sharp 2 percentage point rise between 2012 and 2013 (following the revision of the base year) has not shown much of a rise since then.
World trade volume that has been growing at double digits between 2005 and 2011 fell steeply in 2012 and there has been no sign of revival in trade since then. World merchandise exports have grown at 7 per cent per annum during 2005-14 (World Trade Report 2015) but the last three years of the period 2012-14 reported growth rates of 0, 2 and 1 per cent respectively. World merchandise imports fared no better: import growth averaged 6 per cent during 2005-14 but the last three years reported growth rates of 0, 1 and 1 per cent respectively. Indian merchandise exports had outperformed world exports by a huge margin by growing at 14 per cent during 2005-14. But the last three years, 2012-14, showed worse performance at -2, 6 and 2 per cent respectively. Indian merchandise imports followed exports with 14 per cent growth during 2005-14 and 5, -5 and -1 per cent growth respectively in the three years ending 2014.
World commercial services trade performed better than merchandise trade in recent years. The growth rate of services exports was 7 per cent during 2005-14 and 3, 5, and 4 per cent respectively during the three years ending 2014. Services imports too showed 7 per cent growth during 2005-14 but growth fell to 4, 6 and 5 per cent respectively in the three years, 2012 to 2014. Indian services trade compares well with the merchandise trade with exports and imports growing at 13 and 11 per cent respectively during 2005-14. The last three years-2012 to 2014- however, showed significantly lower growth rates of 5, 2 and 4 per cent respectively for exports and 4, -3 and -1 per cent respectively for imports.
Among trade in services, tourism has grown into a major economic sector and an important source of foreign currency revenue for many countries. That is the reason sustainable tourism is firmly positioned in the 2030 Agenda for Sustainable Development of the United Nations. Tourism continues to grow at rates higher than many other sectors despite the weak economic conditions at the global level. But visitor growth has decelerated from about 7 per cent in 2010 and 6 per cent in 2011 to about 4 per cent in 2014 and it is expected to grow at 2.8 per cent in 2015. While overall growth has begun sliding, variation across regions of the world is large. In Asia, while North East and South East Asia each recorded 5 per cent increase in international arrivals in the first half of 2015, South Asia recorded a comparatively modest 4 per cent increase after two years of double digit growth. Within South Asia, Sri Lankan growth was closer to 20 per cent in 2014 compared to the Indian growth of 10 per cent. And within India, Kerala’s growth of international tourist arrivals has been less than expected in 2014 and in the first half of 2015 (See Chapter 6 for details).
World trade growth slowed from 1.8 per cent in the fourth quarter of 2014 to 0.7 per cent in the first quarter of 2015. Some of the slowdown originated in Asia, where import growth decelerated from 2.1 per cent in the fourth quarter of 2014 to -0.3 per cent in the first quarter of 2015, but North America and other regions also saw import demand slowing. Recent months have seen a further slowdown in global trade flows and “total volumes of imports and exports are projected to grow by only 2.6 per cent in 2015, the lowest rate since the Great Recession” (WESP, 2016: p.6). Overall, trade growth continues to be weak and is not expected to pick up in the near future. The slowing of GDP growth and the declining trade flows have led to the decline in commodity prices. Following global financial crisis, the non-oil commodity price index had almost doubled between 2009 and 2011. The slump began soon after and has been continuing during the last four years. From the beginning of 2015 almost all commodity prices have fallen across the board- the exceptions are cocoa, cotton and tea- and the trend is expected to continue into 2016. The largest fall has been recorded by nickel, coffee, sugar and natural rubber. Coconut and coconut oil too has seen a decline in the last two years (WESP, Figure II.10). The global commodity rout is negatively impacting the macroeconomic performance of economies dependent on commodities. Regional economies, such as Kerala, the agriculture of which is dominated by rubber and coconut too fall in this category.
Crude oil price remained below $ 20 per barrel over the long period from 1986 to 1999, except for two spikes of short duration. Since 1999, the price of oil saw a steady increase until hit by the global financial crisis. But the sharp fall in 2008-09 was short lived and the upward movement resumed. But 2014 saw a precipitous fall and by the beginning of 2016 price of crude has fallen by over 70 per cent from its peak at the end of 2013. The expectation is that the price of oil will rule low for some time to come as the low GDP growth and the structural changes taking place in the fuel and power sector the world over will change the demand for oil significantly. The steady fall in the price of solar panels and the rapid expansion of renewable power is expected to change the demand for oil.
The slump in oil price combined with a slowing world economy has adversely affected economic growth in West Asia. Average GDP growth has slowed to 2.0 per cent in 2015. Although some recovery is expected in 2016 and 2017, economic activity in the region will remain weak during the next few years. Given the low prices, growth prospects in the oil exporting countries will rely on non-oil economic activities and countries will be forced to draw on their reserves. Balance on current account (%GDP) that ranged between 6.0 (Oman) and 36.80 per cent (Kuwait) in 2007, before the global financial crisis, showed sharp pickup post-2009 and ruled high till 2013. With the slump in oil price began the adverse movement of the current account balance and in 2015 they have turned negative in all but two countries, namely Kuwait and United Arab Emirates. The current account of oil exporters are expected to remain stressed in 2016 as well. Governments have been forced to cut spending and investment. Cut in spending has started affecting subsidies and taxation has also been thought of for mobilising revenues. Cut in investment will affect real estate, finance and oil investments. These reductions may not be immediate and large as drawing from the reserves built over the previous five years cushion the finances of many of the governments. But expatriate numbers and their incomes are likely to come under pressure and regions like Kerala that has over two million of its people working in West Asia could be impacted by the developments.
Stumbling world economy, low growth of merchandise and services trade and slump in the commodity prices has begun hurting developing country growth hard. The dream of continued high growth is turning into a distant mirage for many developing countries. And economies with external orientation, such as that of Kerala, have become vulnerable. The simultaneous downturn in tourism and commodity prices and the fall in remittances are likely to affect Kerala economy.
Kerala economy has been growing at rates higher than the national economy the last three years (based on the GDP at 2004-05 prices). GSDP growth rate of Kerala was over one percentage point higher than the national growth rate. Last fiscal Government of India changed the base year from 2004-05 to 2011-12 and with the change in base the growth rate showed a jump of close to two percentage point over the rate computed using the earlier base. As regards Kerala, while the GSDP growth rate with the new series for 2012-13 was not very different from that of the old series, for the next two years the new series showed significantly lower growth rates. The net result is that Kerala which was apparently performing better than the national economy seems not doing so. Which is the true measure? There cannot be an answer to that question as GSDP is more an indicator than an exact measure.
Agriculture in Kerala has been hit by declining commodity prices. Agricultural growth rates in 2013-14 and 2014-15 have turned negative, largely owing to the sharp fall in the prices of rubber and coconut and the related fall in production (see Chapter 2). Rubber and coconut account for almost two thirds the total area under crops and the global commodity price fall has hit Kerala hard. The growth rate shown for the sector would have been much lower but for the higher growth of milk and meat production in the State.
Construction was a high growth sector till recently but has not shown much growth during the last three years (see Chapter 1). Along with construction, mining and quarrying has also taken a hit reporting growth rates of -16 and -21 per cent in 2012-13 and 2013-14 respectively. There was a slight reversal in the fortunes of quarrying in 2014-15 but it was not adequate to compensate the large declines of the previous two years. It may be recalled that the analysis of growth drivers by the Kerala Perspective Plan 2030 had identified construction as one of the drivers. It was stated that the period beyond 2001 saw construction, transport, storage and communication, trade, hotel and restaurants, real estate ownership, business and legal services, and other services boosting growth. These sectors witnessed high growth riding on the strength of tourism and remittances.
Remittances have not yet started falling but threats loom large on the horizon as the employment situation in West Asia has been stressed with the drastic fall in the price of crude oil. Interestingly, these changes in growth rates of the different sectors correspond to the analysis carried out in the Kerala Perspective Plan 2030 (KPP2030). It was shown that any fall in remittances, tourism and welfare spending will take growth to lower levels and that the magnitude of the fall in growth can be large. Three different growth scenarios were visualized: (i) Growth in banking and communication sectors slow down; (ii) Growth in banking, communication and construction sectors slow down; and (iii) Growth in remittances slows down. The results would be: Scenario1- overall growth rate in Kerala expected to fall to 5.1 per cent in 2012−16, and later this growth rate could reach a new low of 4.6 per cent in 2027−31; Scenario 2- a range of growth rate from 3 to 4 per cent; Scenario 3- growth rate of 3.3 per cent. These are extremely low growth rates under which sustaining the welfare gains of the ageing population would pose major problems. Kerala has to prepare itself to face these challenges (see Chapter 9).
Kerala Perspective Plan 2030 did not envisage the impact of terms of trade shock. With the precipitous fall in commodity prices and with many of them hitting historic lows of recent decades, the dependence of the State on a few commodities has made it vulnerable to external shock. While the crop sector accounts for only around 10 per cent of the Gross State Value Added, the ability of the State Government to support crisis ridden agriculture is rather limited. Also, it may be worth remembering the Brazilian coffee experience of yore: the more the government supports the more is produced and both the sector and government wade into deeper crisis. Kerala has become a high cost producer and the market rule is that they may find it difficult to survive unless productivity increases. Government support has to be redesigned to encourage productivity growth.
The lower growth of the economy and the fall of commodity prices have begun playing out in the mobilisation of tax revenue by the State. Revenue receipts have fallen below expectations for three years in a row and the coming years are going to be difficult, given the external environment. While 2015-16 has seen larger flow of Central resources following the larger award of the Fourteenth Finance Commission- both the share in Central taxes and grants- it may not be as bountiful in the next fiscal (see Chapter 1). Firstly, Revenue Deficit grant will be lower by over Rupees 1000 crore in 2016-17. Secondly, tax revenue of the Central Government may not show the increase seen in 2015-16. Gross Tax Revenue this fiscal has been growing at a rate higher than forecast in the last budget largely on account of the higher excise duties on the back of falling crude prices and service tax collections. Direct tax collection has fallen below the forecast reflecting the general slowing down of the economy and wholesale price increase being in negative territory. Further, the tax revenue increases are decelerating, cumulative increases till November of both income tax and corporation tax trending to below 10 per cent whereas it was between 12 and 14 per cent till September and October.
Overall, the economy of Kerala is facing headwinds both domestic and international. The external environment that has spurred the economy for over two decades has turned distinctively negative with the commodity prices hitting historic lows and decline in foreign tourist arrivals. More pain may yet come if remittances start their southward movement with oil exporters dipping into their reserves. On the expenditure side, the cumulative burden of pay arrears will eat into whatever resources that can be mobilised, leaving little room for manoeuvres of any kind.
“Only a crisis- actual or perceived- produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That,
I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable” (Friedman, 1962)
To sustain growth we have to “develop alternatives to existing policies”. The Kerala Perspective Plan 2030 has developed a framework aimed at overcoming possible roadblocks. Many of the ’ideas propounded have been lying around’ for a while but lacked a coherent frame to offer a perspective. The Perspective Plan filled the gap.
Kerala is part of a globalised world in which rapid change is a constant. The State’s growth hinges on ensuring that it is competitive, accessible, liveable and safe. To achieve this, Kerala needs to foster an economic environment that helps businesses succeed, simultaneously holding on to the gains in human development. A free, open and innovation-embracing economy can lay the foundation for thriving businesses, markets and investors, which, in turn, will create an impetus for development. The imperative for Kerala is to create an international business climate, clearly prioritise investments and link spatial development and infrastructure. The State needs to work towards this goal alongside the central government and local governments, spelling out clearly defined responsibilities, simple rules and selective government involvement and by creating freedom of choice for individuals and companies. This new approach will require an overhaul of the State’s policies and programmes and is set out in the Kerala Perspective Plan 2030.
The trajectory of encouraging, sustaining and enhancing growth will require decisive action to boost Kerala’s competitiveness and improve its future economic outlook. Reforms and the right set of investments to enhance competitiveness are crucial for the economic transformation that can lead to sustained higher growth and development over the long term. It is, therefore, imperative that competitiveness - the set of institutions, policies and factors that determine a country’s level of productivity - features high on the economic reform agenda. A competitive economic environment is built on eight pillars, of which the first is the institutional environment determined by the legal and administrative framework within which individuals, firms and governments interact to generate wealth. The quality of institutions has a strong bearing on competitiveness and growth. The role of institutions goes beyond the legal framework. Government attitudes toward markets and freedoms and the efficiency of its operations are also very important. Excessive bureaucracy and red tape, overregulation, corruption, lack of transparency and trustworthiness and the inability to provide appropriate services can considerably slow down the process of economic development. In this context, the Comprehensive Mission for Employment Generation (MEGA), formulated by the State Planning Board in consultation with stakeholders in industry and business, can greatly help in improving ease of doing business in Kerala.
Infrastructure, health and primary education, quality higher education and training, technological readiness, local governance (increasingly urban governance, as the State is urbanising rapidly) are some of the other pillars for enhancing the competitiveness of the State (see Chapter 9 for elaboration). Sustainable competitiveness is the keystone of rapid economic growth in a globalising era. The need to consider sustainability along with competitiveness has become all the more relevant. Combining the ideas of competitiveness and sustainability, sustainable competitiveness may be defined as “the set of institutions, policies and factors that make a nation remain productive over the longer term while ensuring social and environmental sustainability,” (Schwab, 2013: 61). It is a combination of competitiveness or high quality growth, an equitable society and sustainable environment that creates the ideal conditions for life. Kerala wishes to be one such society by 2030 and KPP 2030 sets its contours.
The framework for the development of the Kerala Perspective Plan 2030 has been conceived in terms of innovation-embracing entrepreneurs at the centre of the economy, with eight pillars of institutional elements, infrastructure, health and primary education built on the foundational elements of environmental sustainability and social sustainability.
As already mentioned, while the Perspective Plan brought in coherence, many of the ‘ideas propounded have been lying around’ for a while. And some have been converted into action plans. Kerala has been urbanising rapidly with the level of urbanisation reaching 48 per cent by 2011 and is expected to reach 70 per cent by 2030. With rising incomes and rising urbanisation, infrastructure demand has grown rapidly. While Kerala has a vast network of roads of all types, the infrastructure deficit is yet to be bridged. Infrastructure assets have their life and many built before the 1960s have to be replaced and improved. Government has taken up projects to meet the replacement demand as well as the new demand in the road sector. The highly acclaimed Thiruvananthapuram City Improvement Project is sought to be extended to Kozhikode, Kannur, Malappuram and Kottayam (Chapter 5). New National Highway projects are under implementation.
As regards Railways, a suburban train service in the Thiruvananthapuram- Chengannur sector has been finalised and a special purpose vehicle is expected to implement the project with the State Government and the Ministry of Railways as partners. Kochi Metro has been making steady progress and the first phase of the project is expected to be completed in a few months. Detailed project reports have been prepared for setting up light metro projects in Thiruvananthapuram and Kozhikode and these are now under the consideration of the Government of India for joint funding. Detailed Project Report for the High Speed Rail corridor is under preparation for transmission to the Government of India for financing. Vizhinjam International Sea Port, Kannur Airport and the expansion of Kochi airport too fall in this category and are part of the vision to take the big leap. Inland Waterway 3 is almost complete and Kollam and Azheekkal ports have begun brisk coastal traffic.
The State Planning Board and the Finance Department jointly have worked out an apparatus for harnessing investible resources for financing infrastructure. The Kerala Infrastructure Investment Fund set up a few years ago, will be the vehicle for attracting resources into investment in infrastructure through an array of financial instruments. The stage is being set for the implementation of this scheme in the years to come.
Transmission and distribution of quality electricity has been a problem in all the Indian states for long. Recent years have seen states making concerted efforts to bring down distribution losses and Kerala stands in the forefront. Distribution has been improved by extending lines and installing transformers. Consumers have been the centre of attention of the distribution company. Their concerns have been addressed by introducing speedy rectification systems and e-payment facilities. Through Case I bidding and through renewable energy projects, the State has secured the power needed for the next few years. The lack of production capacity within the State, however, continues to remain a concern. Much more needs to be done as Kerala does not generate adequate power and transmission has to improve where land acquisition has been a problem. The solution to the problem of land acquisition depends on the society at large and cooperation of all (Chapter 5).
Manufacturing growth during the last four years in India has been moderate. Manufacturing in Kerala-never a strong point of the State- had shown some sparks in 2012-13 but along with the general decline at the national level growth in Kerala too has suffered. While the number of Public Sector Enterprises has been large in Kerala, there has hardly been any increase in their value of production or turnover during the last four years. The thrust of recent years has been to create an institutional and economic environment for the promotion of Micro, Small and Medium Enterprises (MSME) the results of which have been encouraging. The number of MSMEs registered has increased from just over 10,000 a year in 2011-12 to over 15,000 in 2014-15. Along with the promotion of MSMEs, recent years have also seen the promotion of entrepreneurship and skill development (Chapter 4).
An entrepreneurial ecosystem cannot be sustained without a knowledge base. Kerala needs to be transformed into a key node in the global knowledge network. Higher education and scientific research institutions will be the engine for new ideas for sustaining innovative enterprises. Srinivasa Ramanujan Institute for Basic Sciences, State Centre Resource Institute for Partnership in Technologies and Critical Mineral Research Institute have all been conceived and established with this objective. To transform ideas into innovative enterprises and production centres skilled human potential is indispensable. The severe mismatch between the skill sets possessed by the workforce and those required by the industry are sought to be addressed by setting up skill acquisition and enhancement programmes. Kerala Academy for Skills Excellence, a section 25 company has been set up for this purpose (Chapter 7). The Additional Skill Acquisition Programme (ASAP) meant for those studying in various colleges in the State has taken root and has grown phenomenally. ASAP strives to transform the State as a human resource hub of the region. It aims to impart industry specific skills to the needy students in selected schools and colleges along with their regular studies through modular courses with the active participation of industry partners. Along with skill development initiatives, Kerala was also amongst the earliest states to encourage and nurture a start-up culture.
Kerala Startup Mission (formerly known as Technopark-Technology Business Incubator) has been set up with a vision to support and nurture startups in Kerala. It was initially established in 2006 by the Department of Science and Technology (DST), Government of India and Technopark. Since 2012, the Mission is designated as the nodal agency for establishing startup ecosystem in the State. The Mission has been incubating on average 50 companies every year. It has signed MOUs with many business incubators for facilitating support to startups. It has distributed 10,000 raspberry kits among 8th standard students across Kerala during the last two years, launched technology innovation fellowship programmes, implemented many startup boot camps and distributed numerous startup boxes.
Declining agriculture has to be revived by transformative initiatives. In this context two initiatives taken in the last three years need necessarily to be mentioned. Hi-tech agriculture has been given priority by promoting protected agriculture and open precision farming as part of vegetable development programme. The poly houses established as part of the programme of protected cultivation are useful in combating both biotic and abiotic stress that limits productivity and quality of produce. They have evinced good response from the farming community. A new approach on crop health management has also been initiated that brings together management of sustainable ecosystems and people’s health through good plant protection practices (Chapter 2). A significant achievement has been the huge increase in vegetable cultivation.
The outlay to local governments has increased steadily in the five years starting from 2011-12 as, Rs 2574 crore, Rs. 3228 crore, Rs 4000 crore, Rs.4700 crore, and Rs 4800 crore. The proposed outlay in 2016-17 is Rs.5500 crore including the additional plan assistance of Rs 500 crore. Additional plan assistance is being started from 2016-17 to promote local governments to take up viable projects of vital interest to the State. The major areas of intervention include waste management and production of organic manure, certification of commercially produced organic products, construction of storm water/waste water drains, slaughter houses, crematorium and setting up of infrastructure facilities for industrial parks. This scheme is initially limited to District Panchayats and Corporations. The allocation from this fund will be purely demand based and release will be performance based on specific indicators. 50% of the fund is exclusively for solid and liquid waste management. The cost of the project is shared in the ratio between 70:30 between the State government and Local governments.
Major changes have been initiated in the plan formulation guidelines of local governments. Technical Advisory Group (TAG) mechanism has been discontinued. Instead of vetting the projects by the TAG concerned, it has been verified and certified by the implementing officer and then furnished to the officer of the same sector at the higher levels for getting it appraised and approved. Thus the local governments would get more time to implement projects. Project Formulation Committee (PFC) can be constituted, if required, for providing technical expertise to prepare and approve the projects for local governments. The Annual Plan Document of local bodies need only be approved by the District Planning Committee (DPC) instead of approving individual projects. Submission and approval of the projects through online software (SULEKHA) has made planning and implementation tasks easier. Introduction of Sevagram and Ayal Sabha has strengthened the participation in the grama/ward sabha.
As part of strengthening the Annual Plan review mechanism, an online plan monitoring system (planspace) was introduced by the State Planning Board. Regular review is being undertaken at various levels in Government using planspace data. PLANSPACE has been integrated with the Treasury network in respect of all Departments where payments are made on the basis of Bills. This facilitates comparison of figures as reported by Departments with treasury figures of outflow. District Roll Out of planspace, is on the anvil. As part of good governance initiative for strengthening the plan monitoring mechanism, it has been decided to introduce digitized documentation of the assets created in the Annual Plan.
The State Planning Board in October 2015 decided to introduce some systemic changes in the presentation of Plan document and Plan formulation process in the Annual Plan 2016-17 in order to facilitate speedy implementation of the schemes. The Annual Plan (2016-17) will now be presented in two separate volumes viz. Green Book & Amber Book. The schemes which require high priority and are ready for implementation will be included in the Green Book and the other schemes will be included in the Amber Book. The State Planning Board has also decided to introduce clubbing of schemes as ‘Umbrella Schemes’ with a single write up, to give more flexibility to departments in implementing schemes and reduce the need for re-appropriation or supplementary demand for grants.
Kerala has been a frontrunner in e-governance and mobile governance by promoting and developing core infrastructure and e-literacy programmes. The e-governance programme of the State has been exemplary with a strong infrastructure base in terms of State Wide Area Network, Secretariat Wide Area Network, State Data Centre and State Service Delivery Gateway. Kerala is the only state in the country where every Gram Panchayath is digitally connected; every district has implemented e-district programme and certificates are issued on line. Implementation of e-office has been started in several departments.
Overall, the Government has already taken many steps to boost competitiveness and improve the future economic outlook of the State. In some, initial steps have been taken as for example, in school education and health committees have been constituted to study the problems and suggest steps. Committees have submitted their reports and action plans are being developed. To promote health and well-being and to encourage preventive health care, a public health programme has been designed. With a clear vision of the future Kerala can turn the crisis into an opportunity.
Friedman, Milton. 1962. Capitalism and Freedom, University of Chicago Press, Chicago.
Schwab, Klaus. 2013. The Global Competitiveness Report 2013–2014: Full Data Edition, World Economic Forum, Geneva.
World Trade Organization. 2015. World Trade Report 2015, World Trade Organization, Geneva.
United Nations. 2016. World Economic Situation and Prospects 2016, United Nations, New York.