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Monday, Jul 12, 2004

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Banking on remittances

K.G. Kumar

THE Union Budget has brought little cheer for Kerala. The main grouse is the proposal to impose a tax on interests earned from NRI deposits.

Non-resident deposits have long dominated inflows into Kerala banks. The share of non-resident deposits in the State rose steadily over the years from 27.4 per cent during the second half of the 1980s to 35.5 per cent during the first half of the 1990s and further to 44.1 per cent during the second half of the 1990s.

During 2001-03, the average share reached 47.9 per cent. The growth of non-resident deposits was significantly higher than the growth of domestic deposits, especially during the 1990s.

Not only in percentage share but also in rate of growth, non-resident external deposits have shown robustness. The NRE deposits mobilised by the banks in Kerala increased to 17 per cent in 2003 from 14.5 per cent in 2002. The amount of deposit increased by Rs 4,162 crore from Rs 2,4534 crore in March 2002 to Rs 28,696 crore in March 2003. Out of the total NRE deposits of Rs 28,696 crore, the major share of Rs 10,124 crore (37.49 per cent) was mobilised by the State Bank Group, followed by the group of other nationalised banks with Rs 9,507 crore (35.20 per cent) and private banks with Rs 8,641 crore (32 per cent).

It was in this context that the Chief Minister, Mr A.K. Antony, reminded the State Assembly that NRI remittances had helped the State tide over the economic crisis it passed through in recent years on account of poor prices for its cash crops and lack of industrial development.

What Mr Antony, however, failed to mention was how, in its dependence on NRIs to prop up its economy, Kerala seemed to be stricken with its own peculiar variant of "Dutch disease." Classically, economists have used this term to refer to the deindustrialisation of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports.

The term, which originated in Holland after the discovery of North Sea gas, broadly refers to the harmful consequences of large increases in a country's income. In the 1960s, the Netherlands experienced a vast increase in its wealth after discovering large natural gas deposits in the North Sea.

Though this was supposed to be a godsend, the development had serious repercussions on important segments of the country's economy, as the Dutch guilder became stronger, making Dutch non-oil exports less competitive.

Although the disease is generally associated with a natural resource discovery, economists say it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment.

How much longer can Kerala remain a victim of its own - less charitable critics would add, self-created - morbid form of Dutch disease?

The writer can be contacted at

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