Beyond Literacy: Can God's Own Country Become India's Next Economic Powerhouse?

Known as God's own country with a vibrant culture and high literacy rate, Kerala, India's southernmost state, has long been hailed as a development success story. However, its economic trajectory has long been a subject of both admiration and analysis.

The economic model, often referred to as the 'Kerala Model,' has garnered international attention for social welfare, human development and economic growth. However, beneath the surface of this apparent success lies a complex web of challenges. Despite impressive social indicators, its economy faces significant hurdles, including a substantial fiscal deficit, limited job opportunities, and reliance on remittances from the Gulf.

Surprisingly, once a significant contributor to India's gross domestic product (GDP), the state has seen its share decrease over the years. In contrast, neighbouring states like Karnataka and Telangana have flourished. According to a working paper by the Economic Advisory Council to the Prime Minister, Kerala's GDP share peaked at 4.1 per cent in 2000-01 but has since declined to 3.8 per cent in 2023-24, after initially rising from 3.4 per cent in 1960-61.

The 2024-25 economic review estimated Kerala’s fiscal deficit at 3.45 per cent of its gross state domestic product (GSDP), compared to a national average of 3.7 per cent. Revenue deficits (estimated at another 2.09 per cent of the total deficits) have also been consistently higher, driven by the state's heavy commitments to salary and pension expenditures, which account for over 60 per cent of its revenue receipts.

With an aim to become India's next economic powerhouse, can Kerala sustain its developmental gains while addressing its economic vulnerabilities? Well, experts told BW Businessworld that the fiscal constraints have hindered its economic dynamism, impacting its ability to invest in critical infrastructure.

"While some of these expenses are inevitable, such as those arising from Kerala’s ageing population and pension commitments, better expenditure rationalisation can alleviate some of these pressures," said Pallavi Gupta, Assistant Professor, Sarla Anil Modi School of Economics, NMIMS.

In 2023, Kerala’s total revenue expenditure reached Rs 159,361 crore, up 7 per cent from the previous year, while capital outlay decreased. This misalignment has persisted despite warnings from the Fiscal Responsibility and Budget Management Act, with the state continuously borrowing to meet expenditure needs. 

Meanwhile, its capital outlay— expenditure on asset creation— has decreased by 2 per cent in 2023, while revenue expenditure has risen, indicating a structural imbalance in the budget, Gupta stated. “By comparison, Maharashtra and Gujarat have managed to keep their fiscal deficits within more manageable limits, this was largely possible by attracting private investment and reducing dependence on government borrowing.”

Notably, the current situation shows the complexity of Kerala’s development, where social indicators like education and health are strong, but economic growth is not as fast. This raises important questions about finding a balance between improving social well-being and boosting the economy.

“Mixed trends are visible in the state of Kerala at present with difficult situation on the fiscal deficit and growth front. The sharp decline in growth rate to 6.6 per cent in 22-23 was partly due to base effect as the previous year's growth rate was exceptionally high at over 12 per cent. Nonetheless, there are issues with regard to the manufacturing sector and commercial crops and inadequate and inefficient utilisation of resources and potential,” stated Jyoti Prakash Gadia, Managing Director (MD), Resurgent India.

Back In Time
Often described as the “Kerala Model,” the state’s economic development has a unique narrative that is emblematic of a strategy that prioritises social welfare and human development over conventional economic growth indicators. This helped the state achieve remarkable results in health, literacy, and equity since the 1960s.

During this period, low-income states such as Uttar Pradesh and Bihar lagged far behind in terms of literacy, healthcare and social outcomes. While Kerala was reducing poverty and enhancing life expectancy, many others still grappled with basic infrastructure and governance issues. However, the story of growth is complex, evolving from welfare-led development in the 1960s to today’s remittance-dependent economy facing structural and fiscal challenges.

In the 1960s and 70s, Kerala established a distinctive social welfare growth model, prioritizing land reforms, literacy campaigns, and healthcare expansions. These issues remain central to transforming societal structures. The Kerala Budget 2024-25 showed this focus, with increases in social welfare and nutrition (25 per cent), rural development policies (136 per cent), and welfare for SC, ST, OBC, and minorities (50 per cent).

Kerala's emphasis on redistribution policies, particularly land reforms, improved equity but limited industrial output and economic diversification. Unlike high-growth states like Maharashtra and Tamil Nadu, which focused on industrialization, its approach led to reliance on agriculture and small-scale industries. However, these investments built a strong social fabric, attracting remittances, experts noted.

Post-1980, Kerala's growth model evolved, diversifying beyond agriculture into services and benefiting from remittances, which now make up a significant portion of the state's GDP. The IT sector's growth in hubs like Thiruvananthapuram and Kochi illustrates this shift, with services accounting for over 60 per cent of Kerala's GSDP. This transition brings challenges, but Kerala's focus on social outcomes demonstrates human development can proceed without rapid economic growth.

Kerala's Employment Scenario
Kerala faces a pressing issue with youth unemployment, particularly among educated individuals aged 15-29, with an alarming rate of 29 per cent. According to experts, its industrial policies, however, have been cautious, prioritising worker protection over attracting significant investments, resulting in a stark difference in economic outcomes.

"The result is a significant gap in employment creation, which leads to a paradox: despite high literacy rates, Kerala struggles with high unemployment compared to its peers. The social welfare-driven model of development has led to a slow (but steady) growth rate of around 5 to 6 per cent, significantly lower than industrial powerhouses such as Gujarat, which has clocked growth rates exceeding 8% in certain decades," Gupta asserted.

Kerala's high literacy and skill levels have not translated into proportional employment opportunities. According to the Periodic Labour Force Survey (PLFS 2022-23), Kerala’s unemployment rate stands at 5.8 per cent, higher than the national average. In contrast, Tamil Nadu, which has adopted robust industrial policies, have created more jobs and maintained lower unemployment rates despite lower literacy levels.

Gupta mentioned, “The paradox can be partly explained by Kerala's reliance on the service sector and the public sector for employment. Remittances have cushioned the blow of unemployment for decades, these inflows have been volatile in recent years due to global economic changes and stricter Gulf migration policies.”

More Issues
Observers told BW Businessworld that to sustain its growth momentum, Kerala must attract more investments and improve its infrastructure. The state’s strengths in IT, healthcare, and tourism offer substantial potential for economic growth if supported by improvements in connectivity and industrial infrastructure. 

The Kerala State Electricity Board (KSEB) still faces inefficiencies, with inconsistent power supply and high transmission losses compared to other states like Gujarat, which have modernised their electricity grids. The state reported a transmission loss of 11.5 per cent, which is significantly higher than the national average of around 9 per cent. Despite the state making strides in water resource projects like the Jalanidhi scheme, the issue of inadequate irrigation infrastructure and water supply reliability persists, limiting agricultural productivity and industrial development, experts noted.

"A prudent balance shall be required with additional emphasis on economic growth at this stage which can get converted to social welfare once the state is able to tide over crisis created due to heavy expenditure not commensurate with the revenue generation through productive activities," Gadia told BW.

Labour-intensive Rubber Industry
The rubber industry is very labour-intensive, which means it plays a significant role in generating employment opportunities in the region. In recent years, there has been a notable increase in the establishment of rubber product manufacturing units in Kerala, including several tyre manufacturing facilities.

This growth can be attributed to various factors, including the abundant availability of rubber, which reduces reliance on imports and ensures a steady supply for production. Additionally, the reduction in transportation costs, due to proximity to rubber plantations, further enhances the viability of setting up manufacturing operations in the state.

The availability of a relatively inexpensive labour force also makes Kerala an attractive location for these industries, as it allows manufacturers to maintain lower production costs. Consequently, the expansion of rubber product manufacturing not only provides employment opportunities but also boosts the local economy. This connection between rubber farming and manufacturing helps create a strong system that benefits both farmers and industries in Kerala, strengthening the state's role in the national rubber industry.

"The rubber industry, particularly the production of natural rubber (NR), is gradually expanding in Kerala, yet there remains a pressing need for further efforts to enhance this sector. Despite the steady growth, NR production often falls short of meeting the increasing demand, highlighting the necessity for modernisation in rubber farming and plantation practices," said Shashi Singh, President, All India Rubber Industries Association.

About 70 per cent of the rubber goes to the tyre industry, which relies heavily on it for making tyres, while the rest is used in other non-tyre sectors like footwear and industrial products. Overall, despite facing challenges like volatile prices and adverse climatic conditions in the previous fiscal year, the industry is expected to grow at a rate of 2 to 3 per cent as plantations have now reached a peak level of production, indicating a positive outlook for the future of rubber farming in the state.

Additionally, variations in climatic conditions can adversely affect the production of natural rubber (NR), making it difficult to maintain consistent yields. Pest and disease outbreaks pose further threats to rubber plantations, leading to reduced production levels.

"The sector also struggles with a shortage of skilled labour, which can result in lower tapping efficiency and, consequently, diminished production. High labour costs further complicate the situation, putting pressure on profitability. Additionally, the prices of rubber are highly volatile, fluctuating based on market conditions and the balance of supply and demand. This uncertainty can deter investment in the sector. Despite high import duties, the import of NR continues, adding competition for local producers," Singh added.

Experts Recommendations
Experts also noted that there is a need for structural reforms to address persisting challenges. The development of smart cities and tourism infrastructure can further drive growth, leveraging Kerala’s strengths as a highly educated, service-driven state.

They pitched for policies that foster innovation and entrepreneurship, especially in high-value sectors like biotechnology and green energy, that could position Kerala as a leader in sustainable, knowledge-driven industries.

"Prudent policies of revenue generation and cost efficiency will be required to tackle the comparatively high fiscal deficit. As a long-term strategy, the state will need to improve investments in all sectors where it has the potential to reap the benefits over some time and improve employment. Education alone can not generate jobs and productive ventures which are job-oriented need to be initiated which need fresh capital allocation," Gadia added.

Resurgent India's Gadia also mentioned that the potential in agriculture will require the usage of improved technology in commercial crops for better productivity and development of the food processing industry. While tourism is being promoted, there is a scope for still better tapping of potential by value addition activities and mass attraction in certain geographic domains. Suitable fiscal incentives will be required to promote the IT sector which can be based on the local educated population.

Kerala's paradoxical tale of high literacy and crippling unemployment serves as a stark reminder that education alone cannot drive economic growth. The time has come for Chief Minister Pinarayi Vijayan's Kerala to redefine its growth model, balancing social welfare with economic pragmatism. Only then can the state unlock its true potential and become India's next economic powerhouse.