The Issues

Kerala ranked first among the major Indian states for its human development index (HDI) in 1981, 1991, and 2001 despite its per capita income being much below the national average. Regional inequality in the state needs to be seen in the context of its develop ment challenges, which are different from those of the rest of India. To start with, a disturbing aspect of Kerala’s development pattern is that the expectation of accelerated economic growth was not realised along with human development, at least until recently. There was serious deceleration in the economy from the mid-1970s and through the 1980s, generating apprehensions about a possible trade-off between equity and growth. Such apprehensions have proved to be unfounded with growth peaking in the 1990s. Yet, the present phase of economic growth is not sufficient to provide quality employment to the rapidly growing educated workforce of the state or to generate sufficient revenues

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for the state government to maintain the social infrastructure already created. The state has the dubious distinction of having an open unemployment rate of 21%, nearly three times the national average, and also a very high fiscal imbalance. Recent years have also seen a decline in the share of social sector expenditure in total expenditure of the state government. The foremost development challenge before the state today is achieving a significant acceleration in economic growth and achieving fiscal balance while sustaining its high level of human development.

A vast network of public sector-supported educational and health institutions, an effective public distribution system, rural connectivity, and social security measures bring different types of challenges to Kerala from the rest of India. They impose a very heavy recurring expenditure on the exchequer. Meanwhile, additional investments in social and physical infrastructure are required if the quality of services is to be improved to keep up with the rising expectations of a new generation. For example, the quality of public school education has been deteriorating, and higher education facilities have to be diversified and expanded. How to tackle these problems without compromising equity and quality is the new challenge. The health transition in the state has generated new geriatric health and social problems. There has also been a shift in the morbidity pattern, raising the need for specialised healthcare system.

There is an urgent need for overhauling the social security system in the state to make it more comprehensive and efficient. We may call these the second generation problems of Kerala’s human development. Then there is the challenge of the outliers – marginal groups such as dalits, fisherfolk, and adivasis lag behind in the development process. There are many such social and regional groups with absolute poverty and deprivation, which the dimension of regional inequa lity per se cannot capture. However, there has been a significant fall in the proportion of population below the poverty line in the state. The challenge today is to eradicate or at least drastically reduce absolute poverty in the state.

The next development challenge is related to gender equality in the development process. While the condition of women in Kerala in terms of education and health is much superior to the rest of the country, the status of women in terms of economic and social participation is not all that different. Finally, there is the issue of ecological sustainability of the development process within the state. Economic processes have been highly resource depleting, causing serious crises in the marine and forest sectors and disruption of the water cycle. Modern industrial development has also been highly energy intensive. How to build environmental concern into the developmental process so that sustainable development is achieved is of critical importance. More importantly, in the context of the decentralisation programme in Kerala, most of the functions that are directly related to human development have been devolved to panchayats. Proportionate resources have also been devolved. Therefore, local-level strategies of development and interventions will play a vital role in furthering future human development.

Keeping in mind the development challenges discussed above, including fiscal constraints, we examine regional inequality in Kerala. In the first section we discuss the state’s regional

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i nequality in a historical perspective and some contemporary developments. In Section 2, we explore the reasons with a focus on the role of fiscal policy. Section 3 examines the critical role played by decentralisation as a public policy tool for the balanced spread of development. Section 4 analyses the outcome and its recent interface with growth and fiscal stance. Section 5 summarises and draws conclusions.

1 Development and Its Spatial Dimension

The state of Kerala was formed in 1956 by merging three states, Travancore, Cochin and the Malabar district of Madras Presidency.3 These three regions were at different levels of development at the time of the formation of the state, Travancore being the most developed, followed by Cochin. The most backward was the Malabar region.4 If we look at literacy, Travancore, Cochin and Malabar were more or less in a similar position at the beginning of 20th century (Table 1). However, the disparities widened in the next four decades, and the Malabar region now lags far behind Cochin and Travancore. Even during this period, literacy increased in all the regions with much higher progress of female literacy. The Kerala story of development after independence is not only that of faster progress in the social sector but also that of a reduction in regional inequality in various sectoral achievements.

If we look at it historically, there has always been a pro-social sector public policy stance in Kerala, especially in the Travancore region since the beginning of the 19th century. A royal proclamation issued in 1817 in Travancore undertook to “defray the entire cost of education of its people in order that there might be no backwardness in the spread of enlightenment among them” (HDR 2005). Similar initiatives were introduced in Malabar and

INTER AND INTRA-STATE DISPARITIES

Figure 1: Real Per Capita Income Growth: 1997-98-2006-07

9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Trivandrum Pathnamthitta Idukki Kottayam Kochi Thrissur Calicut Alleppy Palghat Quilon Malappuram Kannur Wayanad Kasaragod (Per cent)

6000 7000 8000 9000 10000 11000 12000

Figure 2: District-Level HDI in Kerala

0.810

Ernakulam

Alappuzha 0.800

Kottayam Kollam Kannur Thrissur Pathnamthitta 0.790

HDI 0.780

Kozhikode

Trivandrum

0.770 Palakkad

0.760

Kasaragod

Wayanad

Idukki

0.750

Malappuram

0.740

Per capita income in Ascending Order

Cochin. In Malabar, since the 1860s, the colonial government emphasised the need to extend education and healthcare facilities and municipal boards were entrusted with such responsibilities, local funds being constituted under the Local Funds Act of 1871. After independence, this continued with the huge public funding of education and healthcare by the government and also by the private sector with and without government aid. All the regions have by and large developed in a balanced and equitable manner. The Kerala Human Development Report (2005) observed that one of the major highlights of the state’s development experience has been the rapid reduction in intra-state disparities and gender differentials in most indicators of human development across different social groups.

Kerala has 14 districts. As evident from Table 2 (p 275), the real per capita income in eight districts falls below the state average. But the real per capita income in the lowest per capita income district of Kerala is higher than that of many low and middle income states of the country. Average real per capita income growth has been quite impressive at more than 6% between 2005-06 and 2006-07.5 If we compare the district-level real per capita income of Kerala with that of the real per capita net national product (NNP) of Rs 22,553 for 2006-07, only the district of Malappuram falls below the average NNP per capita. Also, if we look at districtlevel poverty, the district with the highest incidence of poverty is Kasaragod with 26.4% of the population below the poverty line and the lowest is Kollam at 3.5%. In other words, the poverty ratio is eightfold higher when the districts with the highest and lowest incidence of poverty are compared. This brings out the regional disparity within Kerala in relation to the incidence of poverty, which is not so sharply evident when we look at district-level per capita income. Though Kerala’s overall outcome in social and economic achievements is far better than many other states and

276 the national average, there exist pockets of deprivation, be it poverty or other achievements in human development. Also, if we compare the real per capita income growth in Kerala, the districts with a low level of per capita income continued to grow at a low rate during the decade from 1997-98 to 2006-07, leading to an increase in intra-regional disparities in income (Figure 1). Consumption expenditure inequality has also increased in recent years (Tables 3 and 4) and it has remained consistently higher than the all-India level.

Against the backdrop of growing inequality, when we look at district-level health and educational outcomes, we find differences in achievements across districts (Table 5, p 277). Again, the worst performing districts are much above the national average in all these indicators. When the HDI is plotted against districtlevel per capita income, we find that except in two districts in central Travancore and two other districts in north Kerala, the district-level HDI is an increasing function of district-level per capita income. As evident from Figure 2, the low per capita income district of Malappuram has the lowest HDI, while that of Ernakulam is highest. However, the deviation in HDI is between

0.75 and 0.81, which is marginal.

2 How Has This Become Possible?

Kerala’s success story in the social sector, particularly in health and education, has been due to active state intervention.6 One way of looking at the public policy stance in the social sector in Kerala is to look at the government expenditure in the sector after the formation of the state. As we do not have such a long time series data on state government expenditure, we have compared Kerala’s social sector spending vis-à-vis other states from 1974-75 to 2007-08 BE, that is, government spending in the social sector over the last three decades. It shows an interesting pattern. As evident from Figure 3 (p 277), until the

Table 3: MPCE Decile-wise Distribution of Total Consumption Expenditure (%)

Deciles 1993-94 2004-05 Rural Urban Rural Urban

10 28.90 24.05 34.31 31.37

All deciles 100.00 100.00 100.00 100.00

Source: Subramanian and Shyam Prasad (2008).

Table 4: Trends in Consumption Inequality (Gini coefficient) in Kerala and India

38th Round 43rdRound 50th Round 55th Round 61st Round 1983 1987-88 1993-94 1999-2000 2004-05

Kerala urban area 0.390 0.381 0.343 0.374 0.410

Kerala rural area 0.320 0.312 0.301 0.329 0.382

Kerala (U+R) combined 0.352 0.343 0.319 0.348 0.392

India urban area 0.341 0.332 0.343 0.374 0.375

India rural area 0.308 0.300 0.286 0.311 0.305

India (U+R) combined 0.321 0.313 0.311 0.339 0.336

Source: Subramanian and Shyam Prasad (2008).

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m id-1990s, Kerala’s social sector spending as a percentage of gross domestic product (GDP) remained much higher than all state spending, but it began declining and has reached the allstate level ratio in recent years. It is also to be noted that the gap in spending between Kerala and all other states has narrowed sharply over the years. Though a large expenditure on education and health remained the main focus of fiscal policy during the early 1970s and during the 1990s, Kerala has been able to reduce it in recent years.

Figure 3: Social Sector Expenditure to GSDP Ratio: 1974-75 to 2007-08 BE

12

10

(Per cent to GSDP)

8

6 4 All States

Kerala

2 0

1974-751976-771978-791980-811982-831984-851986-871988-891990-911992-931994-951996-971998-992000-012002-032004-05

2006-07(RE)

Even though Kerala’s spending in relation to GSDP has declined, its per capita social sector spending has increased and is the third highest among the 14 major states in the country (Table 6, p 278). If we look at the 2005-06 data, the states that spent marginally higher than Kerala in the social sector were Maharashtra and Tamil Nadu. High spending in the social sector is one of the major reasons for the high revenue deficit and fiscal imbalance in the state. As evident from Figure 4 (p 278), even during the 1970s and the first half of the 1980s, the state had a revenue deficit when the revenue account of all states showed a surplus. Kerala continues to have a high deficit in the revenue account compared to other states and in turn high fiscal deficits in recent years.

3 Effective Decentralisation as a Policy Tool

It needs to be highlighted that the decline in budgetary spending in the social sector in recent years can be attributed to the transfer of various social sector functions to the sub-state level through the process of decentralisation. Decentralisation has also played a major role in accommodating spatial needs within Kerala in budgetary policymaking and in the process of plan formulation through local-level planning. If we look at recent initiatives, 35-40% of the total plan funds have been devolved to local bodies from 1996-97 onwards. It is important to understand the context of decentralisation. Among others, one of the major concerns was the sustainability of the Kerala model of development. The objectives of the decentralisation in Kerala were to ensure (1) Local participation in allocating resources according to the l ocal needs and preferences for balanced and equitable d evelopment. (2) Local solutions to developmental problems through local-level planning, implementation and choice of technology. (3) An improvement in public service delivery through local m onitoring and participation.

Kerala’s experience in fiscal decentralisation is worth noting. Two main features have to be highlighted. (a) Tax power to local bodies such as property tax, profession tax, entertainment tax and advertisement tax, in terms of fixing tariffs and user charges and also sharing of state taxes such as land tax, motor vehicle tax and tax on registration of property. (b) Large-scale transfers of untied plan grants to local governments to implement plans prepared by the local bodies themselves.

The process of decentralisation has succeeded in providing a platform for participatory planning in local-level development. The People’s Planning Campaign (1996-2000) was indeed a unique experiment in decentralisation. The 73rd and 74th a mendments to the Constitution created uniformly structured elected local bodies throughout the country and also guaranteed

periodic regular elections. But, by and large, the newly elected local bodies remained a far cry from the “institutions of self g overnment” that the constitutional amendments formally proclaimed. The constitutional amendments created only an e nabling framework for state-level legislatures to enact actual devolution to local bodies. The experience has been that the state governments have not been generous in the devolution of powers and resources to the newly formed local bodies. In this not very exciting national context, the People’s Planning Campaign was

launched for extending and deepening grass roots-level democracy and empowering local governments to address developmental needs.

It was decided to earmark 35-40% of the Ninth Plan outlay of the state for projects drawn up by local bodies. During 1997-98, this worked out to Rs 1,025 crore. It may be noted that plan devolution to local bodies till a year ago had not exceeded Rs 20-30 crore per annum. About 75-85% of the devolution was in terms of grant-in-aid and the rest in the form of schemes sponsored by the state government so as to give maximum autonomy to the local bodies in drawing up the development programmes.

A unique feature of the financial devolution adopted in Kerala was the insistence that a comprehensive area plan be prepared by each local body before it laid claim to the grant-in-aid. The plan outlay was not to be merely for the grant-in-aid amount but was to be integrated with different state and central-sponsored

Table 5: Achievement in Health and Education: A District-Level Comparison

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The Planning Process: Community Participation

The first step in drawing up a local development plan is identifying the felt needs of the local area. The people of every grama sabha and ward sabha have to identify their local development problems. A grama sabha, it may be noted, is an assembly of all the voters in an electoral ward. Given the relatively larger size of

the local bodies was separately indicated in the state budget, with broad guidelines regarding sectoral allocations. While 40% of the plan allocation to rural local bodies was to be invested in productive sectors, a maximum of 30% could be spent on roads and other public works, including energy. A higher outlay was permitted for the social sectors in the special component plan (SCP) and tribal sub-plan (TSP), and 10% of the plan outlay was earmarked for programmes for women known as the women component plan. By the time the grant-in-aid

Figure 4: Fiscal Imbalance Profile: Comparing Kerala with All States (% to GSDP)

7 6 4 2 0 -2 -3 1974-751976-771978-791980-811982-831984-851986-871988-891990-911992-931994-951996-971998-992000-012002-032004-052006-072008-09(RE) RD: Kerala RD: All States FD: Kerala FD: All States

for the local bodies was announced, most of them had prepared a shelf of projects corresponding to the development problems identified by the people. This set the stage for the next phase, where the projects prepared by the task forces were prioritised and incorporated into the plan documents of the panchayats and municipalities. The delays and problems in project preparation had an adverse impact on plan finalisation, so the drawing up of plan documents proved to be more difficult than expected. H owever, over successive years it has been possible to bring down the plan formulation period and in 2000-01, the plans were f ormulated by July.

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Annual Plan of Block Panchayat

Block and district panchayats were supposed to start preparing their annual plans only after the grama panchayats had drafted their plans. A sequential ordering of the processes was made to ensure that the plans of the various tiers were integrated and that the plans of the higher tiers did not duplicate, but complement, those of the lower tiers. A simple method of integrating the analyses and programmes of the grama panchayats at the block and district levels was also proposed.

Every block panchayat was to prepare a printed development report in which the problems identified in the development reports of the grama panchayats in the block area and the projects included in their plan were integrated for each sector. In each sector, all the major development problems identified were listed in rows, and in each column under the relevant grama panchayat the rank of the problem was marked according to its relative gravity. Similarly, a matrix of relative importance of different types of projects for each grama panchayat was prepared. These matrices made it possible to understand the problems and solutions identified by the grama panchayats at one glance. The block panchayats were to take up projects to fill up the gaps or for complementing the activities of the lower tier.

Emphasis was laid on the importance of integrating the different central-sponsored poverty alleviation programmes being implemented through community development blocks with the block panchayat plans. There was strong resistance to this from both the bureaucracy and elected representatives. This was partly due to genuine problems arising from separate guidelines for the central-sponsored programmes, but mainly due to the fear that their decision-making powers would be curtailed and encroached upon.

The block panchayats convened a meeting of all the elected representatives of grama panchayats and special invitees to discuss the plan formulation process and constitute task forces. They also prepared a development report integrating the development reports and plans of the grama panchayats. They were discussed in block development seminars before the plans were finalised. Because of the delay in the preparation of the grama panchayat plans, the integration of the plans of the different tiers could not be effectively undertaken. As a result, there were many instances of duplication of planned activities and also critical gaps between the various tiers.

Plan Appraisal

The District Plan Committee (DPC) was to appraise and approve the plan document before the first instalment of grant-in-aid was to be released. Since, the DPC did not have the official machinery or expertise to make an appraisal of such a large number of local plans and since it was apparent that modification to the technical and financial details of many of the projects would be necessary, expert committees were formed at the block and d istrict levels.

The evaluation was not for selection or rejection of the projects, but to rectify the technical and financial weaknesses of the project proposals. Technical specifications and even d esigns might have to be prepared. Further, the entire work had

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to be undertaken within a span of three to four months. It was evident that the o fficial machinery would not be able to cope with the task.

The expert committees were organised with a non-official expert as chairman and the block development officer (BDO) as secretary. There were around 50 members in each of the committees, 39% of them being Volunteer Technical Corps (VTCs) or experts with development experience and minimum qualifications who volunteered to work in the committees. Two-thirds of them were above the retirement age. Only 4% were women. VTC members were given training at the state and district levels. Besides VTC members, key officials of the development departments were nominated to the expert committees. Such officials constituted 55% of the membership. Finally, selected Key Resource Persons (KRP) of the people’s planning campaign were also given membership.

Plan Implementation

The transparent and participatory approach adopted in the planning process was also extended to the plan implementation stage. The key innovations that were introduced in the plan implementation process were the following: (a) social monitoring, (b) the selection of beneficiaries in grama sabhas, and (c) execution of public works through beneficiary committees rather than contractors. The plan documents were approved in a bipartisan spirit unanimously by all the panchayat samithi. In none of the years were any new proposals included in the plan document disregarding the recommendations of the development seminar. A summary of the approved plan document was printed and distributed in the grama sabhas. The selection of beneficiaries in the grama sabhas was the most successful of the reforms. The applicants were listed on the basis of predetermined criteria and the

Table 7: Three Distinct Phases (sub-periods) in the Long-term Trend in Per Capita NSDP

Character of the Phase Length of the Phase Annual Growth Rate (in%)

Source: Subramanian and Prasad (2008).

priority list distributed in the grama sabhas. The draft list of the beneficiaries was printed and published. From the third year, the list was also exhibited on notice boards. The publication of the beneficiary list is an important guarantee against arbitrary changes at a later period.

All the construction activities in the panchayats were implemented through beneficiary committees, avoiding middle men. The details of the public works were also exhibited on notice boards. A careful examination of the projects revealed that in certain instances small-time contractors acted as the convenors of beneficiary committees. The difficulties of mobilising start-up capital, difficulties of measurement and delays in payment were factors responsible for the “binami” committees. Some of the genuine beneficiary committees facing the above difficulties degenerated. But in a majority of the cases, construction activities that were carried out by the beneficiary committees were done much below the official estimates. What has been the outcome of

4 Is There a Macro-outcome of Kerala’s Equity-Driven Social Sector Policy?

The Human Development Report 2006 mentioned that “no country can follow a course of lopsided development for such a long time where economic growth is not matched by advances in human development and vice versa”. If we put this in the Kerala context, the high spending on the social sector seems to have started paying dividends in terms of higher economic growth. Several studies have noted that there has been a faster growth of income in Kerala since the end of 1980s (Subramanian and Azeez 2000, Ahluwalia 2002, Pushpangadan 2003, Jeromi 2003). As evident from Figure 5, real rates of growth in Kerala have been moving in tandem with the GDP growth rate in recent years. In per capita terms, this has brought Kerala into sixth position among the 15 major states in India. As evident

which is unsustainable in the long run, it needs to highlighted that Kerala’s fiscal profile is historically driven by high social sector expenditure, which is largely revenue expenditure. The increasing strain of committed expenditure is visible in the declining share of primary expenditure in total expenditure. The share of primary expenditure which was 79.2% in 1987-88, declined to 63.5% in 2001-02. However there has been a gradual increase in the share thereafter primarily due to a moderate decline in the interest burden and also due to an increase in capital expenditure.

Although, generally speaking, a fiscal deficit driven by current consumption expenditure is considered unsustainable in the long run, Kerala’s level of revenue deficit needs to be judged

Figure 5: Real Growth Rates of Kerala and India: 2000-01 to 2005-06 (% per annum)

10

Kerala 8 6 4

All India

2 0 2000-2001 2001-02 2002-03 2003-04 2004-05 2005-06

T able 8. As evident from Table 8, the state’s own tax revenue to GSDP ratio remained at around 8.5% of GSDP, while own non-tax to GSDP ratio steadily declined between 1987-88 and 2008-09 (BE). The revenue expenditure to GSDP ratio increased sharply during this period due to a sharp increase in committed liabilities, namely, interest payments and pension obligations. The capital expenditure to GSDP ratio declined sharply up to 2001-02, fluctuated afterwards and is expected to be 1.37% of GSDP by the end of 2008-09 (BE). This increase in capital expenditure is almost double that of 0.73% of GSDP for 2004-05. Thus the estimated increase in fiscal deficit is also contributed to by an increase in capital expenditure in the last two years.

The movement of the key revenue and expenditure profile has contributed to large fiscal imbalances. It is true that Kerala’s fiscal deficit is driven by revenue deficit, which in turn is driven by large social sector expenditure. By the end of 2004-05, the share of revenue deficit was as high as 82.5% of the fiscal deficit. However, the share of revenue deficit in total fiscal deficit has started showing a tendency to decline in the last two years. Although fiscal deficit is driven by current consumption expenditure, in terms of its expenditure priorities and the commitment of the government, which has long aimed at growth through higher human development. This is a very complex public policy issue and the fiscal parameters, particularly revenue deficit, will behave according to the fiscal policy stance towards the social sector. The same is the case with decentralised planning. The fiscal policy stance, which emphasises decentralised planning with adequate fiscal autonomy to the third-tier of government and largescale devolution of untied plan funds, needs to find resources for it. Given the constraint of growing fiscal imbalance and rising inequality with rise in growth, an equity-driven fiscal policy will be the only option that can sustain the benefits of high human development and growth.

5 Conclusions

To conclude, although we find accentuation of consumption i nequality in recent years in Kerala, development in the social sector seems to have been more or less equitable across districts. However, there are pockets of deprivation. The study noted that Kerala’s achievements in human development are

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Notes

1 Kerala’s high growth performance in recent years and rising inequality are examined meticulously by Subramanian and Shyam Prasad (2008).

2 This development path of Kerala first discussed in CDS-UN Report (1975) described this as the “Kerala Model of Development”. This development is attributed to effective public policy intervention in the social sector, especially in health and education. Also political activism, social reform movements and the civil society have played a major role historically in the development of the state. Also see Chakraborty (2005) for an interesting analysis of debates around the Kerala m odel of development.

3 During colonial times, Travancore and Cochin were princely states and Malabar was directly u nder British rule.

4 See Tharakan (1998), Jeffrey (1992), Kabir and Krishnan (1996), Ramachandran (1997), HDR (2005).

5 The recent high growth performance of the Kerala economy is called the “virtuous cycle” of growth by many scholars due to the high human development in the earlier years of development (Kannan 2005).

6 See for details Thomas Isaac T M and Michael Tharakan P K (1995).

References

Ahluwalia, Montek S (2002): “State-Level Performance

Pushpangadan, K (2003): “Remittances, Consumption and Economic Growth in Kerala: 1980-2000”, Working Paper 343 (Thiruvananthapuram, K erala: Centre for Development Studies).

Ramachandran, V K (1997): “On Kerala’s Development Achievements” in J Drèze and A Sen (ed.), Indian Development: Selected Regional Perspectives (205-356) (Delhi: Oxford University Press).

Subramanian, K K and Shyam Prasad (2008): “Rising Inequality with High Growth: Is This Trend Worrisome? Analysis of Kerala Experience” (Working Paper No 401), (Thiruvananthapuram: Centre for Development Studies).

Subramanian, K K and A E Azeez (2000): “Industrial Growth in Kerala: Trends and Explanations”, (Working Paper no 310), (Thiruvananthapuram: Centre for Development Studies).

Thomas, Isaac T M and P K Michael Tharakan (1995): “Kerala: The Emerging Perspectives: Overview of the International Congress on Kerala Studies”, Social Scientist, Vol 23, No 1/3, 3-36.

Tharakan, P K M (1998): “Socio-Religious Reform Movements, The Process of Democratisation and Human Development: The Case of Kerala, South-West India” in Lars Rudebeck (et al) (ed.), Democratisation in the Third World, Concrete Cases in Comparative and Theoretical Perspective (London: Macmillan), 144-172.

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