The Hindu Business Line : Kerala and the global financial crisis

As a State that has long nourished trade and cultural links with the rest of the world, Kerala has already begun to feel the pinch of the current persistent global financial and economic crisis. As world commodity prices continue their downslide and aggregate demand remains depressed in the background of stagnation, rising unemployment and inflation, an economy like that of Kerala, which has a great degree of integration with the global economy, just cannot wish away the financial contagion now circling the world.

That was stressed last week in a report by a team of economists and social scientists from the Centre for Development Studies (CDS), Thiruvananthapuram.Titled “Global Financial Crisis and Kerala Economy: Impact and Mitigation Measures”, the report was prepared in response to a request from the Government of Kerala to analyse the ramifications of the global financial and economic crisis.

The team that prepared the report was led by the CDS Director, K. N. Nair, and comprised S. Irudaya Rajan, A. V. Jose, K. J. Joseph, Sunil Mani, M. Parameswaran, P. Mohanan Pillai and V. Santhakumar. The team received inputs from the commodity boards (specifically, the Spices Board, the Coir Board and the Coffee Board), export promotion councils (especially the Cashew Export Promotion Council and the Marine Products Export Development Authority), industry associations like the Kerala Chapter of the Confederation of Indian Industry (CII), the small and medium industry association, Group of Technopark Companies (GTECH), as well as the State Level Bankers’ Committee (SLBC), and captains of the travel and tourism industry.

As the report states upfront, “Kerala, being historically more integrated with the rest of the world, is more susceptible to any external shocks compared to rest of the States in India.” The study team identified six possible ways in which the global financial crisis can affect the Kerala economy: (I) remittance inflows; (ii) availability of credit from the banking system; (iii) exports; (iv) tourist arrivals; (v) prices of intermediate inputs ; and (vi) prices of imported goods, both raw materials and finished.

The report pinpoints the following factors as determining the inflow of remittances into Kerala: (a) the economic conditions in the host countries such as those in the Middle East, the US, and the UK; (b) the exchange rate of the Indian rupee vis-À-vis the US dollar; (c) the rate of interest on non-resident Indian (NRI) deposits; and (c) the perception of the relative strength of Indian banks compared to overseas banks. Considering all these factors, the CDS team expect remittances to be positive but with a reduced rate of growth during the short and medium terms. (However, the present downslide in oil prices, which have tumbled to nearly $35 a barrel, and its impact on the Middle East economies has not been factored in by the team.)

The continuing credit crunch will affect cashew export, automobile sales, the construction and real estate sector, and micro, small and medium enterprises (MSMEs). The CDS team expects a minimum 20 per cent drop in export of coir and coir products in the immediate future. This may cause a loss of direct employment to about 32,000 persons. “The actual reduction could be higher if we consider the plausible decline in domestic demand and other indirect effects,” the report warns.

In the cashew sector, the credit squeeze is likely to cause a minimum 15 per cent reduction in export demand. The import of raw cashew can become costlier due to the rupee depreciation. The net result could be a contraction of employment opportunities for at least 18,000 workers in the sector.

The decline in Kerala’s marine exports is about 25-30 per cent across all the major destinations, except South East Asia. The CDS team anticipates seafood exports to decline by about one-third in the short run, which could lead to job cuts for at least 20,000 people.

In the handloom sector, a short-term reduction of export by 15-20 per cent is expected, along with rising input prices. The rupee depreciation will not really help manufacturers since most of the export contracts were settled prior to the onset of the present crisis. The decline in demand for spices, especially pepper, can affect the districts of Idukki and Wayanad, which were recently in grip of a major agrarian crisis fuelled by the fall in price of commercial crops.

In the information technology (IT) sector, the CDS team found that larger companies are yet to feel any severe adverse effects of the financial crisis. The limited exposure to the crisis thus far could perhaps be seen in the context of relatively lower engagement of Kerala-based companies with financial services and their greater orientation towards the Japanese market, in contrast to the national situation, where the share of Japan in software exports from India is only about 3 per cent. Many of the smaller IT firms in Kerala have reported a definite decline in orders, postponement of projects and delay in realisation of payments.

In a context where the prices of most of the products in traditional industries and plantation crops are facing a downward pressure, the ultimate outcome may be the worsening of the terms of trade for the State, the CDS report warns. The team’s simulation exercise predicts a 95 per cent probability that Kerala’s net State domestic product (NSDP) growth rate at current prices will be between 5.15 and 7.58 per cent during the next couple of years. “Thus, there can be a decrease in the growth rate of Kerala’s economy by around 2 to 3 percentage points, and there can also be a consequent increase in the revenue deficit of the State government”, notes the report.

The list of mitigation measures proposed in the report is not really remarkable or originally insightful.

Monitoring credit availability through the SLBC; and using the co-operative banking network to extend credit to MSMEs and exporters, especially those dealing with traditional products; alternative employment measures; and implementation of the National Rural Employment Guarantee Act (NREGA), especially in areas where such traditional industries and fishing/fish-processing units are located, have been suggested.

Other mitigation measures include crop diversification, rationalisation of taxes on tourist services, infrastructure-oriented public spending, enhanced social security measures for traditional industries like coir, cashew and fisheries, and for unorganised labourers, marginal farmers and workers depending on cash crops like pepper, strengthening the basic public distribution system and encouraging public-private partnership (PPP) for infrastructure development.

The crisis is likely to increase Kerala’s revenue deficit, the report warns. The mitigation measures suggested demand more expenditure, which could lead to additional deficits. Thus the State government needs to be prepared for a budget with a higher deficit.

The CDS report also adds this rather platitudinous homily: “In the long run, there is a need to generate more employment and income within the State to minimise the impact of potential crises in future. Public investments are inadequate to give a momentum to economic development, and hence a strategy to attract private investments on a sustainable basis is unavoidable.”

The report also raps the government on the knuckles: “The most important bottleneck in achieving faster and equitable economic development seems to be the weak governance of the State.” Not to mention laxity in quick decision-making and coordination at the State level.

The writer can be contacted at kgkumar@gmail.com

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