Before we make unnecessary comments we must understand the overall
perspective of Kerala’s economy in the larger framework of the whole country.
It is only looking into the past and present patterns of economy of Kerala that
we may be able to establish beyond doubt the whole problem besetting the state.
It is understood that without diagnosing the disease it is impossible to
suggest proper treatments and the same is true for the economy of any state. Kerala
has made tremendous stride in enhancing the standard of living within the state
as well as has improved the social welfare system that is far above the
national average. This has been made possible by the significant contribution
of the people who had migrated to the Middle East and were able to bring in
huge foreign exchange as well as increase the social spending. Due to the
tremendous flow of foreign remittances from abroad the society became
transformed and lush with moneyed people. This was in sharp contrast to other
states within the country.
Perhaps to counter the growing free money flow and general rice in
prices of all essential commodities and properties as well lack of proper labor
protection by erstwhile state governments and also with the due acknowledgement
that all the money that flows into the state is never going to reach the poorer
population, the left parties became a formidable force in the state. Not
necessarily the left point of view were in tandem with left parties in West
Bengal and Tripura and in other states where they had a good hold during the
emergency period and after, the left of Kerala were more focused on the state’s
soil and had their own labor policies that were more rigid than in other
states. So over a period of time the state always swung its political pendulum
to the left or the center left at one time or another during elections
continuing with the easy policy of foreign money and hiking wage rates within. Yet
basically no one knew what was the growing problem with Kerala’s economy and
the way its huge inflows of fund from abroad ought to have been utilized and
that too in line with the state’s policy and social welfare system that is
touted as the best in the country. Of course, so far the going was good for all
these decades since the early sixties when workers from Kerala saw an
opportunity of significant wage differentials between working in their own
state and that in the Middle East, and as a result enabled a large flow of
people to migrate to the Gulf countries to become rich. Even the education
system got a tremendous boost due to the certification process for Gulf jobs
and perhaps made the state literate enough although lacking on higher level
value based education for professional job markets. However, things are
changing on the ground, but not on the level required of a highly literate
state.
Kerala’s Extended Economy Status
Unlike any other states in India, Kerala’s economy is an ‘extended
economy’ with part under political control and the other part under no control
and this means politically free. One must look at things from this dimension as
it would be quite impossible to note the difference and understand the
financial problems in its true perspective other than by this method. A state,
as we all know, is called a state if there is an almost equal control of the
economy and also political control.
However, this is not possible as these are two separate regions (economically)
where one belongs to the Indian union while the other is a foreign country. However,
from the economic point of view Kerala has always held a unique position of
openly embracing the remittance money that ought to have spurted out economic
activities within the state for sustainable social development. But
unfortunately this never did happen as the state would always find itself in
dire straits financially trying to fund many projects of social importance and
inevitably falling short of goals and targets due to shortage of money.
While most other states have their own natural resources Kerala
never has any except for its human resources. This is the reason why the worst
revenue deficit states in India namely Bihar, Orissa and others have something
to bank upon in the future, Kerala has nothing save its human resource.
However, the type of human resources that have been prominently seen in the
state may soon be out competed by other states in the future. However, assuming
that Kerala has an edge over others in the near future it should be the state
policy to raise the standard of education beyond the school and graduate levels
for sustaining the competitive edge of its human resources.
However, the above point is only a suggestion and though important
do not have a bearing on the financial problem that is being discussed here.
It would be imperative to point out at this juncture that unlike
other natural resources that are static and remain within the boundary of a
state, human resources are mobile and therefore there is need for a separate
strategy altogether so as to attract money to a fund starved state government.
It is one thing to have individuals holding a lot of money and spending
according to their sweet will and a different thing altogether when it is held
in the exchequer by the government. While static resources may be tapped or
exploited by the government and raise revenues by profits and taxes, the human
resource have a mind of their own and are almost always nomadic.
Hence, the distinction between the two is of utmost importance for
states that rely heavily on its human resources for bringing in revenue.
What is an ‘extended economy’?
An extended economy would be an economy where there is equal or greater
dependence upon source of income from other region (Middle East in this case)
and lesser budgetary provision for money derived within the state in the form
of taxes and duties and revenue from government undertakings and investments. In
the case of Kerala it must be seen that the extended economy operates very much
in the line with pure laissez-faire kind of activities on one side where there
is no political control and on the other side in sharp contrast a socialistic
setup where there is political control. Although both ought to have balanced out and
brought about the much needed equilibrium for the state’s finance and balance
sheet unfortunately never happened in reality as there was the technical flaw
of channeling remittances coming from abroad for the developmental activities
of the state.
The matter assumes serious proportion as the remittances were
freely flowing in and there were no apparatus to check or channel the fund for
proper usage within the state. Here, the government was left with no options,
but to allow money to flow in and do the needful without proper leash on what
the money does. In other words, the extended economy had no political control
while within the state other forms of revenue flows were well under control.
This matter became compounded as Kerala was hugely dependent upon the flow of
remittances from abroad that were in the tune of 50,000 to 60,000 cores of
rupees annually.
It is no secret that most of the remittance that flowed into the
state went to real estates investments and other unproductive sectors of the
economy as those who brought in the money were generally never questioned by
rules and regulation or by law. This would be the case with other states too
where dependence upon foreign remittances by their overseas citizens became far
greater than the revenue yielding capacity within the state.
It wouldn’t be surprising when other states with rich natural
resources became revenue surplus, sooner or later, Kerala government in spite
of its wealthy population would be going to Delhi forever with a bowl to
balance its perennial revenue deficits.
Spending at will by Repatriates
Kerala’s economy is a free for all of those who are repatriates and
they spend according to their whims and fancies spiking up prices of real
estates, gold and other forms that have no bearing in the actual economical
development of the state. It must be understood that free flow of money need
not necessarily bring about social justice to the populace that live in poverty
within the state nor do they generate employment in a sustainable way. For this
to materialize the government ought to step in and channelize the flowing fund
for infrastructure projects, commercial investments and building other institutions
for the overall improvement of the economic system. Besides, the existing
practice of hiking prices of all things several folds due to the easy spending
by repatriates have negated much of the social development process. What one
sees in Kerala is unbridled capitalism on one side through foreign remittances
and on the other side straining to bring about economic and social justice for those
living within the state. The two do not match due to un-channeled flow of
funds. This would inevitably create revenue deficit for the state in the short
as well as long run.
Why is this flow of remittance akin to unbridled capitalism?
Usually, money that flows in unchecked, attracting no taxes, spending without
being subject to scrutiny and allowed to be invested in scarce factors of
production and commodities is nothing but unbridled capitalism on the loose.
Since, many politicians have no idea about economics it is seen that even those
who are leftists are themselves involved in this game hiking prices of land and
other commodities as if it were the right way to carry on with these kinds of businesses.
Unfortunately, this unbridled capitalism paves way for all the
vices that may ensue in a growing consumerist economy.
Economy of the bottle
This has been a raging political debate within the state for
sometime and the present government has greatly reduced the intake of alcohol
within the state and has plans to wrap up hot drinks and make Kerala a liquor
free region within 10 years period. This is a commendable action as otherwise
the supply chain activities of the bottle economy would mean that all the other
associated sectors including social life would be straining towards making
liquor a part of everyday life of the state’s citizens. The enormous negative
effect of the whole thing may have to be borne by the women and children and
thereby has a negative impact on family life as a whole. Hence, having a policy
like this in force would go a great way in reducing alcohol consumption by all
and sundry within the state.
It is to be noted in this context that citizens may be able to save
better by improving the quality of life that gets enhanced with the
prohibition. It is no secret that around 60 to 70% and perhaps more of monthly wages
of a regular laborer go for expenses in alcohol consumption and other
associated entertainments. In other words, there could be better consumption
pattern with expenses being mooted in other supply chain activities that are
positive to the society.
In economics there are no countries in the world that do not have
an economy worth noting. Even in Somalia there is a thronging economy albeit
with piracy and other nefarious activities. Even in some South Asian and South
American countries the total narcotic sale forms a significant part of these
countries GDP including prostitution and arms trade as supply chain activities.
In short, in order to establish a justifiable society there is need to lay
stress on socially acceptable practice and this means choosing the right kind
of supply chain activities.
Economy means any activities commercial or otherwise and the supply
chain may be anything that could be added to the overall GDP and it is for the
social scientists, political leaders, social philosophers, environmentalists
and thinkers to choose as to which option is the best. In economics all data
are collected and connected with the GDP and there is no such discrimination
between what is socially right and wrong. It is by studying the segregated data
that social thinkers and politicians try to get the fuller knowledge about the
economy and how much transitions are taking place from one sector (bad or good)
to the other ( bad or good) and whether rectification or remedy has to be
planned and implemented.
Why had alcohol become so rampant in Kerala? The prime reason for
this is the unbridled spending by repatriates who indirectly hiked wages and so
also other factors of production and created rampant consumerism without
productive investment strategies. Here, it is the government that ought to
channelize these funds for employment generation and sustainable growth of the
state’s economy to create revenue surplus. In the short run therefore the
government with implementation of prohibition would face severe cash crunch and
it would be imperative to think of other supply chain activities including
family tourism and medical tourism of which Kerala has an edge due to its excellent
social security network and better policing than other states in India.
Although GST may solve the problem to some extent in the context of
Kerala this by itself isn’t sufficient and there is need to look for other
options as well. Without deviating from our initial argument it would be
imperative to point out here that the bottle economy is a side effect of the
free fund flow that the state has seen over the years. Hence, there is need to
understand the link between proper social spending and improper expenses.
What is the solution?
Fist Option
There are only two possible solutions to this problem. The state
may impose taxation @ 5 to 10% or more on all foreign remittances. The same has
been articulated by many of Kerala’s economist a year or two back. However,
this solution has its positive and negative aspects which must be taken due
note of.
Pros
·
The state would
easily get money to fund some of the projects that are essential for the people
living within the state.
·
The state wouldn’t
need to be bothered if the sales tax gets replaced with the introduction of the
GST in the short or long run.
·
The state can look
after the rehabilitation program for the repatriates who were forced to return
from war torn countries.
·
It can introduce
quality health care system and education system and improve other social
network with the money.
Cons
·
The state may
suffer some loss of repatriate money if the same is routed through other states
·
The state possibly
drive investment into other states than within its own territory
Second Option
The other option is to introduce a unique method by creating a
compulsory pooling of foreign remittances so that the fund could be utilized by
the government. This is a totally different method and may be named as
Refundable Tax Pooling Method or RTPM. In this method, unheard of perhaps
anywhere else, is to tax all revenue flows at a percentage or slab rate. This
means the taxes would be collected compulsorily through the bank accounts of
the repatriates and the same would then be refunded back only after a period of
five or ten years or even more with or without interest as the government may
wish to. Here, a large amount of money would find its way into the exchequer
for starting of completing important socially and commercially viable project
by the government so that the same entity could yield revenue in the form of
profits and taxes to the state government.
The above method is unlike bond purchases as the latter need lump
sum money and that too at fixed rates. This method has to be evolved because
the government would in an excellent position to compulsorily extract a
percentage of money going otherwise into the mainstream consumer driven Kerala
economy. Again, the sums of remittances may vary and it is only over a year or
more that a lump sum could be allocated into each individual accounts for refund
at a distant future date. This is only possible with a tax program rather than
bond buying. Further, the sums may vary and may be very small to sizeable and
having an incremental RTPM structure could go a long way in addressing the
problem. The repatriates under this program ought to be taxed on the revenue
they bring in and not on their salary certificates which would unnecessarily
complicate the process.
It is also a fact that other states too may in the future have the
same kind of problem with repatriate money as their own human resources becomes
mobile and go abroad for employment and therefore the Central government needs
to be a participant in the whole system and do not allow other states to take
undue advantage of diverting the flow of remittances.
Pros
·
The repatriates do
not loose their money unlike other taxes, but the same is withheld for
government use and refunded back after a period of time.
·
The repatriate do
not come under pressure to spend the whole amount in their home town and would be
able to avoid wasteful expenses
·
The repatriates
may utilize the money thus refunded after a period of five or ten or more years
for other long term positive plans for their own purpose or setting up
businesses.
·
The government
would be spending only on socially and commercially viable projects so that it
would generate revenue and not spend the same on charity.
Cons
·
The same needs to
be passed through a legislation with the approval of the Central government
·
There may be
initial protest against such an action by the repatriates as it would mean they
wouldn’t be allowed to spend the entire money they bring in as they please
·
There is need for
proper monitoring and proper technology or otherwise individuals may try to
route their money through other channels that are not screened
·
There is need for
a comprehensive program so as to account smaller bulk amounts to large bulk
amounts as and when the are remitted into the bank accounts of the country
Once such a method is in place then it would take care of the
current revenue deficits as well as deficits of the future quite well. The only
catch is that the money shouldn’t be diverted to charity and unproductive
sector as after all at the end of the day in the Balance Sheet it is still a
liability. On the other hand if the fund is well invested then it can yield
profits as well as taxes to the government so as to pay the refund. The latter
option is by far better as foreign remittances are after all earned out of hard
labor.
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