The Hindu Business Line : A new development matrix for Kerala

Constrained by limited industrial raw materials and land, Kerala must rethink its approach and look at IT and biotechnology sectors that are booming.

KERALA HAS MORE of agro-based, traditional industries. — K. K. Mustafah

The signing of an agreement for setting up a mega information technology (IT) infrastructure project, under the brand name `Smart City', in Kochi has rekindled hopes of economic progress in Kerala. The project envisages creating all the infrastructure for IT companies, and generating 90,000 jobs. Kerala hopes this project will enable it to catch up with other States in economic development, by attracting large-scale private investment. It is also hoped that the positive mood will not fizzle out as it did after the Global Investors' Meet in the State in 2003.

Industrial Structure

Kerala has a significant educated workforce and is high on human development. But the State has barely leveraged these strengths for its economic development. Industrial ventures in the State have only been stories of distress or disaster. The industrial structure is not diversified with few modern units but mainly agro-based, small-scale/traditional and chemical-based outfitsindustries. Most of these industries, due to their low technological base, are becoming vulnerable to competition from both within and outside India. A chunk of Kerala's workforce toils outside the State/country, while its entrepreneurs have achieved success elsewhere. What has saved the State from any economic disaster is the remittance from these two sets.

Ironically, Kerala has been ranked `highly' competitive by several studies on States. For instance, in 1994, the National Productivity Council (NPC) rated Kerala the second most competitive State. In 2004, the NPC ranked Kerala fifth in terms of overall competitiveness, ahead of Tamil Nadu and Andhra Pradesh. Then, why is the State caught in a low private investment syndrome?

Hurdles to private investment

Kerala has poor resource endowment — it does not have reserves of coal, oil or natural gas worth mentioning. The availability of land for industrial purposes is limited due to the high population density. Hence, the cost of land is very high. Though in north Kerala the land cost is low, connectivity is a major problem here. Traditionally, private investment has not found immediate acceptance. A new private project invariably faces a variety of opposition from political parties and civic groups alike. The best example is the controversy that surrounded the Smart City project, which was signed nearly three years after it was first mooted.

The major infrastructure issues for Kerala are quality power, industrial water, and roads. The strong presence of trade unions and the poor work culture are widely perceived to have made Kerala unattractive for major private entrepreneurs. The 2004 NPC study identified industrial disputes, poor labour productivity and low capital intensity as the major drawbacks of the State.

The two political groupings that have alternated in power in Kerala follow contrasting development agendas — one fully supportive of private capital and the other relying on public sector investments.

This leaves the investing community in a quandary and reluctant to make long-term financial commitments.

Any solution in sight?

While solution lies in resolving the above issues, one approach could be to identify the areas in which the State can accommodate private investment without inviting political or social opposition. Since the scope for establishing large manufacturing units in the State is limited by the paucity of land and raw materials and also due to the concern among the people that industries damage the environment, Kerala could adopt a "green economy" approach for growth. There are industries that would neither damage the environment nor require large tracts of land. For instance, tourism, or IT, biotechnology and agro-based units. There exists a huge potential in these sectors waiting to be tapped. However, the problem with agro-industries and tourism is that their capacity to generate large incomes and employment is somewhat limited, whatever the effort. Also, they attract private investment mainly from within the State.

IT and biotechnology offer huge opportunities but so far Kerala has failed to capitilise on the boom in these sectors, despite all the right conditions including little or no resistance from the environmental lobby. The main barrier seems to be land/space.

The State government has categorically stated that it does not have large parcels of land to offer. It expects the private sector to set up industrial parks, buying land on its own. The existing IT parks in the State are fully occupied. Hence, both fresh investments and expansion plans are awaiting new space. The recent entry of some private players in the IT infrastructure area and the government support for it promise to improve the situation.

So, under these circumstances, how will Kerala attract large investments? Kerala's woes are compounded by the severe competition among the States to attract private investment; this has worked against States with poor investment climate such as Kerala. Probably, the State should woo non-resident Keralites, who have a better understanding of the constraints facing the State. However, a big question mark that still remains is the confidence in investing in the State.

(The author is a Faculty Member — Economics Area — at Indian Institute of Management-Kozhikode. The views are personal. He can be contacted at moorthy@iimk.ac.in)