GDP growth, high remittances and fragile Kerala economy

Kerala became a recipient of remittances from foreign countries, the earnings of the expatriates of Kerala working in foreign lands since the 1980s.
Image used for representative purposes only.
Image used for representative purposes only.

The GDP growth rate in Kerala at constant prices during 2021-22 has been 12.01 per cent. It was well above the all-India level. Kerala’s per capita net product at constant prices was Rs 1,48,790 against Rs 93,168 at the all-India level. However, the per capita income of Kerala was lower than that of the all-India level in the past. It was Rs 1,385 in 1980-81 at the then prices against Rs 1,537 at the all-India level. The upward trend could take place because of the growth of GDP at a faster rate. Such a trend has been in the offing since the 1980s. If so, how Kerala could surpass the all-India level in economic growth since the 1980s becomes an issue requiring serious examination.

The growth which Kerala exhibited contains certain peculiarities. Both agriculture and industry, the basic sectors, were exhibiting stagnation. The index of the increase in net value added in the agricultural sector in 2021-22 with 1980—81, as the base was only 1018, while the index of the economy as a whole was 20,148. Similarly, the index of the manufacturing sector was only 12,213. While the two basic sectors displayed only stunted growth, the indices of construction, trade, transport, banking and ownership of houses were exceptionally high. Except for construction, all these sectors form part of the service sector. The higher rate of growth of the economy was, by and large, due to the better performance of the service sector, whose index of the net addition to the value reached 36277 per cent in 2021-22. As a ratio to the total GDP, the share of the service sector accounted for 65 per cent in 2021-22 against 36 per cent in 1980-81. If so, how could the service sector exhibit such buoyancy in Kerala?

Kerala became a recipient of remittances from foreign countries, the earnings of the expatriates of Kerala working in foreign lands since the 1980s. It was around Rs 824 crore then. It began to increase steadily since. World Bank said India received $87 billion in 2020-21. It is reported that Kerala gets approximately 19 per cent of the remittances to India. If so, Kerala would have received around Rs 1,10,000 crore, accounting for about 15 per cent of the GDP against only about 3 per cent for the country.

The remittances do not form part of the GDP. They provide purchasing power for migrant households. If invested in agriculture or industry, they can promote the economy's growth. The utilisation of the remittances for various purposes, like the purchase of a commodity from a retailer, or construction of a house or hiring the service of a driver or beautician, can also facilitate the growth of the economy as such instances create value additions. In such cases, value creation ensues only when such activities or services are performed as utilisation. However, adding to value cannot be easily ascertained in such cases as the output consists of intangible service. As a way out, the earnings of “service providers” are taken as a proxy for ascertaining addition to value as adopted in the national income calculation.

Growth occurred only in those activities or purposes where remittances were utilised. The important purposes for which the migrant households spend the remittances are for better comforts, posh houses, education of children, purchase of gold, and depositing in the banks. Such purposes, directly or indirectly, are related to house construction, trade, transport, banking, etc. They form the channels through which remittances penetrate the economy and foster growth. Their contribution to the state domestic product, which was meagre in size when remittances were in the offing, has grown gigantic with the influx of remittances. The contribution of remittances to the buoyancy of these sectors is apparent. As these sectors expanded, the number of persons engaged in rendering their services has also gone up. The number of workers like masons, painters, plumbers, taxi drivers, auto drivers, beauticians, retail dealers, shop assistants etc., has recently increased in the state. The labour shortage met with the induction of labour from other states, should also be construed as the outcome of the expansion of such activities. Side by side, the remuneration of workers in the state has gone up to the highest in India. The remittances are being utilised to meet the growing volume of remuneration, and so, in turn, the economy could record a high growth rate.

The service sectors’ personnel transport, deliver or work on the commodities like food articles, consumer durables or construction materials, invariably imported from other states. The import bill totalled Rs 1,28,000 crore in 2021-22  against Rs 74,000 crore from exports. Apparently, the import bill could be met from the remittances. Since large-scale leakages from the state take place for imports, further growth of the economy on a multiplier basis is out of the question.

In sum, it is the inflated level of the earnings of the growing number of workers in the service sector which rules the roost in the GDP growth in Kerala well above the all-India level. By and large, it is an artificial one relying entirely on remittances with the least dependence on the productive sectors of Kerala. The seeming buoyancy is sure to crumble once the remittances fall. RBI says Kerala’s share came down to 10.5 per cent of the total inflow to India in 2021-22 from 19 per cent in 2020-21. The Gulf countries from where the bulk of the remittances arrives have already started steps to reduce the dependence on imported labour. It is time to revive agriculture and promote industry, the basic sectors marginalised in the wake of the remittance boom, to minimize any adverse impact arising from a fall in remittances.

Dr K V Joseph

Former member, Kerala Public Expenditure Committee and Director, International Institute of Migration and Development

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