Kerala Or Gujarat: Which Model Gives The Better Results?

Over the past couple of years, we have heard many narratives, particularly from the Leftist media about the social wonder Kerala is because of its investment in human capital.

In the same vein, there is a tendency to downplay Gujarat's economic growth narrative because of the different model deployed there.

Even amid the Covid-19 crisis, articles emerged about the failure of the Gujarat model to take care of the population's health needs. Such glorification of Kerala was immature where the pandemic is still spreading today.

None of these articles have considered data to understand the success of the socio-economic models at play.

Economic Development

Gujarat is a Top 5 economy in India, with a gross state domestic product (GSDP) of Rs 16.7 lakh crore in financial year (FY) 2020 as against Kerala's GSDP of Rs 8.7 lakh crore.

Table 1 compares the same from FY2015 to demonstrate that Gujarat has grown at 12.6 per cent year on year (YoY) since FY2015 compared to 11.1 per cent for Kerala.

Per-capita GSDP or income is estimated at Rs 246,495 for Gujarat — slightly higher than Kerala's at Rs 242,698. Gujarat has a larger population – 6 crore in 2011. Data from the Civil Registration System (CRS) of births and deaths indicates the current population is an estimated 6.8 crore.

Kerala's population was 3.34 crore in 2011; CRS data suggests it is an estimated 3.58 crore in 2020.

Gujarat's population is growing much faster than Kerala's — an estimated 12 per cent versus 7.4 per cent in the past decade.

The GSVA composition (Table 2) of Gujarat and Kerala are starkly different.

Data from the Reserve Bank of India (RBI) from 2017-18 shows Kerala’s GSVA comprises of 5.1 per cent from agriculture, 26.2 per cent from industry and 68.7 per cent from services.

There is a large skew towards services, which is mainly based on the government, tourism and ancillary services sectors.

The IT industry, which is a major source of the services sector growth in Karnataka, where it contributes 25 per cent to GSDP as per the state’s Economic Survey, has not been developed to its potential in Kerala and does not contribute as much.

Besides services, the state has not seen investment in agriculture or industry to the extent of other major states, which leaves Kerala overly dependent on the services sector.

With the Covid-pandemic, tourism and other services sectors like hospitality, restaurants, and travel have been badly impeded, and their recovery looks to be a slow, long road ahead.

Gujarat, meanwhile, has concentrated on developing a strong industrial sector which contributed 51.6 per cent to GSVA in 2017-18.

It is the only large state with more than 50 per cent dependence on industry (India is at 27.4 per cent), accompanied by a strong infrastructure push.

This is a remarkable achievement that has triggered a strong wave of employment and development. According to the Periodic Labour Force Survey 2017-18, Gujarat’s unemployment rate was 4.8 per cent — below the national average of 6.1 per cent, and far below Kerala’s unemployment rate of 11.4 per cent.

However, Gujarat has not focused equally on the services sectors, which contributed 37 per cent to GSVA. With knowledge economy-led growth ahead, the state needs a strong services sector and technology-backed development to complement its industrial sector and ensure that growth doesn’t recede when automation and mechanisation take over industrial production.

Comparing sectoral growth rates from 2014-15 to 2017-18 shows Kerala’s industrial sector grew by 5.6 per cent YoY whereas Gujarat’s grew at more than double the rate at 13.3 per cent YoY. Despite having a lower services contribution to GSVA, Gujarat’s services sector grew (10.7 per cent YoY) more than Kerala’s (10.3 per cent YoY).

Kerala’s economy depends a great deal on remittances from abroad. The state received 19 per cent of the total remittances of $78.6 billion to India in 2018. This translates to Rs 1.01 lakh crore — 1/7th of its GSDP in 2018 (Table 1).

Meanwhile, Gujarat received 2.1 per cent of total remittances, amounting to Rs 11,225 crore — merely 0.8 per cent of GSDP.

Kerala’s dependence on remittances is unsustainable for long-term growth, as has already been proven during the pandemic. Various estimates say remittances may decrease by 25-30 per cent due to the global economic fallout of Covid-19, which will asymmetrically harm Kerala’s economy.

Human Capital Development

Kerala’s push towards universal literacy has resulted in the highest literacy rates in the country, at 97.9 per cent for women and 98.7 per cent for men. This is a remarkable achievement, but unfortunately has not translated adequately into higher education (HE) or the workforce.

Kerala’s gross enrolment ratio (GER) in HE stands at 37 in 2018-19, certainly higher than the India-average of 26.3 but much lower than Tamil Nadu's at 49.

Tamil Nadu has managed to propagate high literacy into college which Kerala has not.

Moreover, in Kerala, the difference between women’s GER at 43.2 and men at 30.8 is stark. This would be a great asset if women’s workforce participation was proportionately higher but PLFS data shows women’s unemployment rate is 23.2 per cent against 6.2 per cent for men.

Kerala’s women seem to suffer more because they are better educated but lack adequate employment prospects. Kerala must find a way to translate literacy into human capital development and workforce participation.

Meanwhile, Gujarat has not focused adequately on human capital development. Men’s literacy is 89.6 per cent and women’s is 72.9 per cent.

Higher education GER is only 20.4 — lower than the all-India average of 26.3. Human capital development is going to be all the more important in the coming decades, and it’s crucial for the state to focus on it the way it has on employment.

But Gujarat’s women’s unemployment rate is 4.1 per cent compared to 5 per cent for men.

This is antithetical to its GER of 18.7 for women and 22 for men and is a strong employment model for other states to implement.

Data from the Employee Provident Fund (EPFO) also demonstrates the emphasis on formal job creation by the two states.

Total number of EPFO jobs created in FY2020 by Kerala was 81,140, just over 10 per cent of Gujarat at 7.2 lakh. In the 18-28 age group alone, Gujarat created 5 lakh new jobs compared to 66,575 for Kerala.

Calculating the coverage ratio of graduates in FY2019 to EPFO jobs created in the 18-28 age bracket in FY2020, Gujarat created more jobs than graduates at 137 per cent whereas Kerala barely covered 29 per cent of its graduating class.

Kerala’s Leftist politics has clearly prevented large-scale job creation.

In higher education infrastructure, Kerala maintains an excellent pupil-teacher ratio of 18, compared to 26 for Gujarat. Kerala has 1,809 institutions and 23 universities whereas Gujarat has 2,634 institutions and 72 universities. Being a larger state, Gujarat must focus on both brownfield and greenfield expansion to improve its GER and human capital development.

Kerala too has to focus on improving enrolment and providing follow-on jobs for graduates like its neighbour, Tamil Nadu, has.

The other issue Kerala has is that its minorities seem to be faring worse in higher education compared to other large states. Against the state GER of 37, the GER of Scheduled Castes (SCs) is only 25.9, of Scheduled Tribes (STs) is 23.1 and the estimated GER of Muslims is a mere 20.2. With one of the highest Muslim populations in the country — at 26.6 per cent per the 2011 Census — this difference is quite stark.

In Gujarat, against a state GER of 20.4, SCs are at 26.9 and STs at 14.9. Estimated Muslim GER is only 5.2 — a result of a lower Muslim population at 9.7 per cent and extremely low enrolment. In 2018-19, only 36,052 Muslim students were enrolled in Gujarat’s entire higher education system.

Human capital development is essential for Gujarat to maintain its economic growth and development beyond its industrial sector. It will continue to have a young population, as indicated by its higher population growth rate, crude birth rate (CBR) at 19.7 and fertility rate at 2.1 in 2018, per the Sample Registration Survey (SRS) 2018.

The state’s 18-23 year-old population stood at 72 lakh in 2018-19 — 10.7 per cent of the population — which is pretty substantial and must be mobilised with higher education and skilling. Life expectancy in Gujarat for the SRS survey period 2013-17 was 72 years compared to 77.8 for Kerala, the highest in the country.

Kerala has an ageing population, with its fertility rate at 1.7 and CBR at 13.9. 18-23 year-old population stood at 29.6 lakh in 2018-19, 8.3 per cent of the population. Add to that the fact that a large segment of the state’s population has emigrated — either elsewhere in the country or abroad.

One major factor in this emigration is the lack of quality employment and development prospects in the state. With inadequate focus on the economy, industry and services, Kerala has invariably created a large outflow of citizens who would have otherwise contributed to building a healthy economy.

State Finance Minister Thomas Isaac himself declared in April that the state is ‘financially broke’, and this situation will only exacerbate in the wake of Covid-19 unless radical measures are taken to revive Kerala’s economy with a focus on economic development and human capital development beyond basic literacy.

The analysis clearly shows it is odious to compare two states in India without concrete data, as many Leftists in India are wont to do. Each state is very different, has its legacy, focus and ideology.

Nevertheless, economic development must be the foremost goal of any state government to provide adequately for the citizens. Kerala does not seem to have a successful strategy for this.

Even though it has touted its horn on the human development front, data shows it has not captured that value share either. Tamil Nadu has done a far better job.

Gujarat, on the other hand, has focused admirably on infrastructure and industry. The state has to now focus equally on developing human capital and services sectors to provide adequate high-skilled high-paying jobs to its larger and younger population.

In the wake of the Covid-19 economic fallout and the prospect of kickstarting state economies, each state government must make an honest appraisal of the economic entity their citizens have entrusted to them and not indulge in politics at the expense of citizens’ lives and livelihoods.

This article first appeared in The Sunday Guardian.

T V Mohandas Pai is Chairman, Aarin Capital Partners and Nisha Holla is Technology Fellow, C-CAMP.