Punjab and Kerala: Regional Development in India

This write-up will look at the challenges two Indian States (Punjab and Kerala) have and will be facing in the future in their quest to provide a better quality of living for their inhabitants. After years of protectionism, India started opening up its economy in the early 1990s. The success of opening up parts of India's economy contributed to an economic growth that increased the size of Gross National Income with a factor of 2.75 from 1989 to 2010 (see figure 1). The change in economic policy had also given the 28 Indian States the possibility to undertake more independent socio-economic development strategies. The chosen economic strategies from Punjab (also known as the breadbasket of India and the land of five waters) and Kerala (known as God's own country) are a good example on how local characteristics influenced the direction of each State's economic development since 2000. Economic policy: Punjab's economic history is a typical one in the sense that it tried to shift from a heavy reliance on the agriculture to a more industrial economy. It has done so recently by making huge investments in its infrastructure which also benefitted the agricultural sector. The investments did not result in a shift towards a more industrial-based economy. Instead the service sector has become the more dominant sector (see figure 2). Kerala's socialist economic model had historically relied heavily on the tourist service sector and since 1990 this reliance has become more pronounced. As States were competing over FDI and the lucrative IT-investments, the presence of a strong labor-union and pro-labor policies deterred investors to come to Kerala. In contrast to Punjab, Kerala did not have a clearly defined industrial policy which contributed to lackluster infrastructure investments. Kerala did not feel the full brunt of this as around 25% of the Kerala's revenues are accounted for by remittances.i The heavy reliance on tourism and remittances make Kerala more vulnerable to external shocks than Punjab. However, a slumping Rupee could on the other hand result in an increase of disposable income for relatives of overseas workers.ii Human development policy: Kerala's population of roughly 32 million has been benefiting from leftist redistributive policies. These policies have contributed to Kerala "achieving highest literacy rate, quality health services and consumption expenditure of people" in India.iii The pro-people policies have contributed to reducing the difference between men and women. Punjab has over the years made efforts to increase the access to education and health care and but has only had limited success in doing so. In the field of education for example the difference between literacy between men and women is 5% in Kerala whilst in Punjab it is 13%.iv State's Finances: Both Punjab and Kerala have made thankful use of the space to borrow money to fill budget deficits. From 2000 to 2006 the outstanding liabilities annually grew for Punjab with an average 13% and for Kerala with 15%. Both States were very generous towards their citizens. In Punjab free electricity and minimum support prices were available for farmers and Kerala continued its

Punjab and Kerala: Regional Development in India

high expenditure on social programs and employing a huge force of government employees. Both States relied heavily on borrowing from State-owned banks' obligation to buy government securities. Furthermore, the focus on the electoral-cycle and the expectation that the central government would bailout distressed States in one way or another created insufficient incentives reduce the growing debt of the States. Growth perspectives: In 2011, Punjab ranked the 6th richest State based on per-capita income whereas in 2001 it was ranked number one. Punjab's failure to transform its economy to become manufacturing oriented and its reliance on the agricultural sector with a low productivity has contributed to its comparatively economic decline. The highly disputed irrigation water issuev, the years of heavy farming and the fragile political landscape in Punjab are likely to result in lower than average economic growth in the near future. Kerala's focus over the years on improving the living conditions of its citizens has not resulted in an innovative industrious economy. Instead Kerala relies heavily on the tourist sector and remittances. Despite making sound investments in its population it has not been able to attract investments that would bank on Kerala's educated work-force and it only has the 10th largest per-capita income.vi Both States' economic households are not in order and the State Governments continue to heavily influence the economy. Punjab does this through subsidies and Kerala's highly regulated economy and ideological anti-capitalist attitude hinders the arrival of industries that want to tap on Kerala's relative higher educated population. Placing a bet: In the near future, Kerala and Punjab will both encounter considerable problems in obtaining a balanced budget and reduce their States' debt. Punjab's future looks dim. It is likely to encounter political upheaval when the unsustainable subsidies will have to be reduced or better yet abolished. To compensate for this Punjab's agricultural sector would need to make considerable productivity improvements but the bickering about the ownership of Punjab's water resources and cashstrapped small-farmers are considerable obstacles to make these necessary adjustments. Kerala's human, geographic and natural endowments put it in a significantly better place to continue to grow over the next decennia faster than Punjab's economy. Kerala will benefit from a steady income from tourism and from remittances. If Kerala will more actively promote a sustainable economic model that would benefit both its inhabitants and businesses, Kerala could await a prosperous future. To achieve this it needs to shrink its government apparatus. It can do so while still maintaining its unique focus on HDI and equality by for example introducing the education voucher-system and by allowing private health providers to directly compete with public health providers. To reduce the debt-burden, Kerala could explore the careful and well-planned privatization of some of the State's interests in the tourist sector and by applying the BOT system in the infrastructure sector.vii

Punjab and Kerala: Regional Development in India

1,000,000,000,000 800,000,000,000 600,000,000,000 400,000,000,000 200,000,000,000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 India GNI (constant 2000 US$) India Annual Percentage change

11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

Source; http://databank.worldbank.org/ddp/home.do?Step=2&id=4&hActiveDimensionId=WDI_Series
100% 29% 33% 36% 37% 39% 39% 39% 65% 63% 62% 61% 60% 49% 80% 60% 40% 47% 44% 20% 0% 45%

24%

23%

24%

23%

24%

24%

24%

15% 21%

17% 21%

18% 20%

19% 20%

19% 21%

29% 22%

40%

40%

37%

37%

37%

Punjab
1990

Punjab
1995

Punjab
2000

Punjab
2001

Punjab
2002

Punjab
2003

Punjab
2004

Kerala
2004 Industry

Kerala
2003

Kerala
2002

Kerala
2001

Kerala
2000

Kerala
1995

Kerala
1990

Agricultural sector

Service

Source; Case study

32%

24%

Punjab and Kerala: Regional Development in India

http://blogs.wsj.com/indiarealtime/2011/04/11/economics-journal-can-kerala-kick-remittance-curse/ http://www.business-standard.com/india/news/rupee-fall-spells-windfall-for-kerala/456860/ iii http://www.firstpost.com/india/hdi-in-india-rises-by-21-kerala-leads-gujarat-far-behind-114044.html iv http://www.ncaer.org/downloads/Reports/HumanDevelopmentinIndia.pdf v A number of States received water from rivers running through Punjab vi http://unidow.com/india%20home%20eng/statewise_gdp.html
ii
vii

Only for roads, bridges and newly build power plants but Kerala should maintain ownership of the existing distribution system and should not engage in water privatization.