As the LDF government in Kerala completes two years of its second consecutive term on May 20, an analysis of its economic performance could be useful as a reality check in taking corrective action. When the government started its current term in May 2021, the economy was still reeling from the devastating effects of Covid. Its two-pronged strategy has been to repair and rebuild the economy while also preparing the state for the future. To objectively measure its impact on the people, we can start with the so-called misery index created by economist Arthur Okun, which combines the inflation rate with the unemployment rate.
On consumer prices, the government has done reasonably well in keeping the inflation rate at just 4% in 2021-22. But the pace of price rise has gone up to 5.8% in 2022-23, in line with higher international oil prices that have affected the entire country since the Ukraine crisis.
However, the price rise has slowed down in Kerala and the rest of the country since the beginning of this year, bringing relief to the people. While inflation is mostly beyond the control of the state government, unemployment is directly impacted by its policies. The unemployment rate shot up to almost 9% in 2021-22 (as per data from the Centre for Monitoring Indian Economy), but in the last year, it has come down to 6%. However, the critical concern is that unemployment among the educated youth is rising.
The rate of joblessness among graduates shot up from the pre-Covid figure of 12.5% (in 2019-20) to 21% (in 2022-23). The decline in overall unemployment happened thanks to better job opportunities for workers with education up to the school level. It is possible that this segment represents low-value work, such as in the informal sector or construction sector, while the graduates are finding it increasingly hard to find jobs. This means that the quality of employment in the state is deteriorating. The government has to address this situation before it becomes alarming.
As real-time data on economic activity is not available anywhere in India, we can consider proxy indicators such as bank credit. The state government should be worried that bank credit growth in Kerala outpaced the rest of the country during the Covid years, but ever since the second LDF government assumed office, the state has fallen behind. The latest RBI data (for December 2022) shows that bank credit in Kerala grew by 13 per cent, while for the rest of the country, the figure was 17 per cent.
When banks are not lending enough, the government is forced to look at alternative options, such as KIIFB, to fund growth in the state. With the outstanding liabilities of KIIFB and the state growing every year, the government will find it increasingly difficult to raise money either directly or indirectly. Kerala’s debt to GDP ratio, which used to be 30 per cent in the pre-Covid years, shot up to 39% in the first Covid year and stayed there ever since.
Though the finance minister has lately tried to bring expenditure under control and projected a lower deficit, the slippage in own-revenue receipts could worsen the debt situation in the coming years. Overall, the government’s economic policies have shown intent but need to deliver more.
There is no other option but to increase private investments by improving the business environment, an area where Kerala languishes. The government’s focus on infrastructure, MSMEs, technology 4.0 and innovation are steps in the right direction to raise economic activity. The government, in a major break from the past, has welcomed private universities that could introduce high-quality academic programmes and improve employability.
(The author is a professor of economics at the Indian Institute of Management Kozhikode. The author acknowledges the support of Anju T, a research intern, in preparing this article)