Industrial investments: The Kerala story

The perception that Kerala is investment-unfriendly has faded over the years

Updated - May 25, 2023 01:22 am IST

Published - May 25, 2023 01:20 am IST

The Kerala Infrastructure Investment Fund Board office in Thiruvananthapuram. File

The Kerala Infrastructure Investment Fund Board office in Thiruvananthapuram. File | Photo Credit: The Hindu

The incongruence between Kerala’s social and economic development has been a part of discourses on development trajectories. Until recently, the dominant narrative has been the inability of the State to provide a suitable investment climate, especially in the industrial sector. Kerala was often touted as a hostile investment destination with active trade unionism regularly supported by pro-labour policies. This perception seems to be fading away, as Kerala has been attracting investments in the industrial sector. A combination of right policies, institutional support and the ramping up of necessary infrastructure could mark the beginning of a new Kerala story — that of a State pursuing late industrialisation.

Analysis of data published by the Annual Survey of Industries for the period 2009-2019 reveals that Kerala has made strides in the growth of industrial factories and fixed investments. It registered a compound annual growth rate of 2.55% in the number of factories during this period, which is modest when compared with the all-India figure of 4.07% and Gujarat’s growth rate of 5.64%. However, in comparison with other leading States in industrial performance, such as Maharashtra and Tamil Nadu, which witnessed growth rates of 2.53% and 3.43% respectively, Kerala’s growth is conspicuous. The State’s performance in terms of fixed capital invested in these factories was spectacular during this period; Kerala registered a growth rate of 12.82%. This stands out in relation to the all-India growth rate of 7.33% and Tamil Nadu’s and Karnataka’s growth rates of 6.24% and 6.33% respectively. Even if we account for the base effect, with Kerala having low levels and other States having higher levels to start with, this growth in fixed capital is a clear indication that the State is slowly shedding its image of a hostile investment destination. It is important to note that investment flows were observed despite changes in political regimes. This is a sign of policy continuity and stability.

Also read | CM urges banks to support ‘investment-friendly Kerala’ drive

Kerala faces three major challenges in order to push industrialisation further. First, there is an imperative need to sustain investment flows. The State recently unveiled a new industrial policy highlighting major focus areas. These areas could become advantageous if the State swims along the current. However, if other States also follow the same route, the pool to woo investors will become larger, which could be disadvantageous for Kerala. There is little differentiation among the States in their approaches to attract investments. The most common one seems to follow the Centre’s templates, such as Global Investor’s Meet and Make in India. Kerala too announced a Make in Kerala project.

The second challenge is to have a right blend of traditional and modern industries, given the constraints of land and environmental conditions in the State. Traditional industries need to be preserved as they absorb labour. Modern industries generate higher value addition and open possibilities for entry into global value chains. But these might not be high employment-generating industries. Hence, a right balance is required as employment generation has to be accorded priority.

The third is the issue of physical infrastructure expansion. Kerala needs to find a balance between highly capital-intensive infrastructure and fragile environmental conditions. Given the State’s fiscal situation, high borrowings for infrastructure investments would impose a debt burden, constraining funds for productive investments. Limitations imposed by urbanisation, forest cover and wildlife, and the possibility of natural calamities need close consideration while designing infrastructure for industrialisation.

Also read | Make Kerala attractive for investors, says Tharoor

A combination of policies is required to maintain and increase investments over time. In this endeavour, Kerala needs to guard against two possible deceptions. First, there could be a hangover from the image of being an unfriendly State for investors, which needs to be handled deftly. Second, there could shallow advice emanating from poor research conducted by public and private institutions. Such research needs to be empirically scrutinised before being considered. The fact that Kerala has been able to attract investments incrementally over time without much fanfare points to the relevance of a human development-based growth strategy.

M. Suresh Babu is Professor of Economics at IIT Madras. Views are personal

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