The Hindu : An unsustainable model

Online edition of India's National Newspaper
Saturday, Jun 07, 2003

Opinion

Opinion - Leader Page Articles

An unsustainable model

By Subramanian Swamy

If an economy cannot increase its revenues to meet its rising commitment, or becomes dependent on sources of funds over which it has no control in deployment, then clearly it is unsustainable. Kerala is in such a state.

DURING THE last 20 years, we have heard nothing but how appropriate the communist-inspired "Kerala economic model'' was for application on an all-India basis. Resident Leftists and winter migratory expatriate intellectuals would converge in faraway Delhi and lecture to captive audiences and failed academics perched in the media, about how Kerala under scientific and Fabian socialism (read Marxists and Congress ideology respectively) had shown how wonderfully even with low per capita income, Kerala has had the highest Human Development Index (HDI), because of its highest literacy, life expectancy and lowest infant mortality.

Now, two decades later, a study by economist P. D. Jeromi subjecting Kerala statistics to rigorous analysis has exposed it all. Kerala has been burning the candle at both ends, much like Enron had by fiddling with its accounts. It is now clear that unless Kerala puts its house in order, its economy is going to end up bankrupt. Salaried persons and pensioners may then one hot summer when the monsoon fails, roam the streets looking for communists much like in Russia in 1991. The winter migratory intellectuals, of course, would have flown to the U.S., the secure refuge of Indian Leftist academicians.

The Kerala model is now simply unsustainable because it is not possible to fund forever social welfare programmes to achieve the high HDI, while tolerating low growth rate, high cost, poor labour productivity, and inadequate investment. It will inevitably lead to a financial holocaust. It is iron cast law that no entity can live for long beyond its means. Kerala has already reached a stage where the State Government is unable to pay on time its bills and make payment to the public. Salaries, pensions and interest due already account for 71 per cent of the total expenditure, up from 56 per cent in 1980-81. Since the revenue deficit is about 74 per cent of the gross fiscal deficit, we can take it to mean that salaries, pensions, and interest are being paid by borrowings or overdrafts with the RBI, an extraordinarily precarious situation and a sure storm signal of imminent bankruptcy. Thus, in the name of jacking up the HDI to show off, the communists and socialists have mortgaged the future of Keralites hopelessly with unredeemable loans. Kerala's HDI is like Saddam Hussein's palaces in Iraq — gold-plated toilet seats and taps, but no investment in the nation's future.

An economy can be considered sustainable only if it can maintain its essential programmes and discharge its credit responsibility without sharply increasing its debt. If such an economy cannot increase its revenues to meet its rising commitment, or becomes dependent on sources of funds over which it has no control in deployment, then clearly it is unsustainable. Kerala is in such an unsustainable state.

As the White Paper on State Finances (Government of Kerala, June 2001) reveals, the State's own tax revenue grew by a mere 11 per cent during the five years since 1996, while revenue expenditure grew by 23 per cent. Hence, the Kerala Government has drawn from the public account consisting of mandatory deposits of State-owned enterprises and of cooperatives, funds which it is no position to pay back since all the withdrawals are for financing revenue expenditure. This is the height of irresponsibility and a crime against the future generations of Kerala. In 1999-2000, 63.3 per cent of the gross fiscal deficit was financed this way compared with a national average (which includes Bihar and Andhra Pradesh) of 22 per cent. As a consequence, Kerala is on the brink of a debt trap since of all fresh borrowings, 91 per cent goes back to pay off old loans. By 2006, this will rise to 104 per cent!

With bankruptcy staring in the face of the Chief Minister, the State has been dipping into the capital account for funds and curtailing capital expenditure. While capital expenditure during 1990-95 was growing at 14.3 per cent annually, in the period since 1996, the growth rate has sharply decelerated to 3.6 per cent. Not even Ferdinand Marcos can match this dissoluteness.

Much of the capital receipts in the State come from remittances from abroad. Deposits of domestic account holders in banks in Kerala are growing at a mere 14 per cent while NRI deposits in commercial banks in the State are growing at 45 per cent per year. This inflow is not being used because the credit deposit ratio in Kerala is the lowest in India at 41 per cent, against a national average of 63 per cent. Hence these funds have gone to other States by leveraging. Advances in Kerala of banks is also at a crawl — 15 per cent per year. No wonder, Kerala has the largest number of finance frauds through the so-called blade companies that fly by night. These sharks cater to the Keralite thirsting for funds, whom socialist regulations have left frustrated and desperate.

All this is happening because of Kerala's five decades of faulty and socialist growth strategy. This strategy has meant loss-making public sector, pampering communist-dominated unions and promoting social justice without healthy growth or proper resource mobilisation. Kerala has the highest number of State public sector undertakings (at 111, which is 10.5 per cent of 1,082 in the nation). That is, India has one state-level PSU per 9.6 lakh people, but Kerala has one per 3.2 lakhs, i.e., three times. And yet, the value added in the factory sector has grown at the lowest rate for each and every southern State, including Maharashtra. The Kerala PSUs have accumulated losses of Rs.1,600 crores, which is smaller than it is because Kerala takes subsidies as PSU revenue. The Kerala State Electricity Board reports a profit, but if we net out the subsidy, the KSEB registers a loss of Rs.300 crores (another accounting fraud like Enron). No wonder, Karnataka and Tamil Nadu attract more FDI (8 per cent each of the national total) than Kerala (0.6 per cent) despite the latter's much-touted HDI.

Can Kerala be rescued ? Only if the Keralites grow out of their socialist mindset and seek liberation from their socialist politicians' mendacity. Otherwise, financial collapse and WTO-induced agricultural crisis will make Kerala an economic SARS-afflicted State. The cure is known, just as it was for the nation in 1990-91, when I prepared the reform blue prints, which the former Prime Minister, P.V. Narasimha Rao, had the guts to adopt and Manmohan Singh sincerely implement. And now, the A. K. Antony Committee of the Congress on economic policy has disowned it all. So how can the Chief Minister go back to the Rao-implemented reforms without loss of face?

People of Kerala have to declare in words and commit in deed, especially in elections, that they are fully for market economy, and support globalisation as well as privatisation. The State also needs labour reforms and to induce FDI for infrastructural development. Thereafter, agricultural exports and service industries can be developed for which Kerala has a comparative advantage. Only then will Kerala have a hope, otherwise it will slide further and become another Bihar. Figures can never lie.

(The writer is a former Union Minister of Commerce.)

Printer friendly page
Send this article to Friends by E-Mail

Opinion

Stories in this Section

Handshake in the desert

Off with dowry

An unsustainable model

China's great leap westward