The Cyprus shock gives us an opportunity to trim our ambitions and tailor our projects and programmes in such a way as to harmonise them with resource availability. Taking a lesson, Kerala should also review its half-baked investment ideas that are being pushed through by the neo-rich and non-resident Keralites and stop taking guidance from arm-hair economists

Cyprus is a small country with a population less than 10 lakh and geographical area less than one-fourth of Kerala. The country with almost 100% literacy, life expectancy at 79 years and a per capita income of over $28,000 in 2012 (today’s position will be assessed by analysts in due course!) must be having a comfortable position in various human development indicators. Despite all this, Cyprus has recently attracted media attention for failure of its financial sector needing a ‘bailout’ involving $13 billion jointly supported by the European Union, the European Central bank and the International Monetary Fund. The pre-bailout days saw the failure of Cypriot financial sector sending shock waves to global markets and even Indian stocks sliding in a sympathetic vibration mode.

The cause of the failure of the Cypriot economy is attributed to unbridled functioning of banks in the country, not following prudential norms, offering interest rates on deposits (mainly accepted from Russian depositors) which were unrelated to return on investments and heavy dependence on external assistance for survival in times of crisis. The conditions of present bailout package announced on 25 March 2013 include:

•  Splitting the Popular Bank of Cyprus (also known as Laiki) into a good bank and a bad bank. The bad bank will be closed in due course.

•  The good bank will be merged with Bank of Cyprus (BoC).

•  BoC will be recapitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. Simply put, major portion of large-size deposits which are not covered by insurance will become “non-refundable” in nature.

•  The conversion will aim at a capital ratio of 9% after implementation of the programme. The programme (bailout) money will not be used to recapitalize Laiki and BoC.

The Cyprus shock gives us an opportunity to trim our ambitions and tailor our projects and programmes in such a way as to harmonise them with resource availability. Cyprus suffered from an over-sized banking sector some eight times the size the country needed.

Taking a lesson from the failure of this country despite several positive factors in its favour, Kerala should review its ambitious projects involving massive investments dependent on borrowing and investments from outside.

 “God’s own country” (That is how the state’s tourism department is marketing Kerala in the international tourism market!) is going through a crisis, on almost all fronts. No. I am not referring to the sex scandals rocking the state assembly or the nasty outbursts by the leaders of various political parties or the weekly hartals and bandhs, which routinely affect the normal life in the state. People of Kerala take all these in their stride and have by now, learnt to live with them. After assumption of office nearly two years back, chief minister Oomen Chandy did not go to bed even on a single day with an undisturbed mind. This is on the assumption that his mind gets disturbed for things normally bothering ordinary human beings.

The last straw is the Comptroller and Auditor General of India’s (CAG) report on the state finances for the year ended 31 March 2012, presented to the state assembly on 18 February 2013. The increasing revenue and fiscal deficits and resultant growing fiscal imbalance were highlighted in the CAG report on the state finances for the year ended March 2012. Adverse features in the report included, among others:

• • Increase in the ratio of revenue deficit to fiscal deficit indicating the use of borrowed funds, largely for meeting current expenditure.
• • Disturbing maturity profile of debt. The state will have to repay 49.6% of debt during the next one to seven years.
• • Dwindling net availability of funds from borrowing, since a large chunk goes to debt servicing. During 2011-12, out of Rs8, 880 crore borrowed from the market, only Rs4, 426 crore was left after servicing debt. Even out of this a sizeable portion went for non-developmental purposes.
• • The average annual return on state’s investments aggregating Rs 4,206.43 crore in statutory corporations, own companies and cooperatives was 1.3% during the last five years.
• • Revenue expenditure which recorded a steep growth of 32.83% during 2011-12, accounted for 90.47% of the total estimated expenditure of Rs50, 896 crore. 70% of revenue expenditure was accounted by salaries, wages, pension, interest and subsidies.
• • Capital expenditure in absolute terms was a meagre Rs3,853 crore accounting for 8% of the total expenditure of the state. 

These observations, howsoever well-founded they might be, will be brushed aside by the combination of varying selfish-interests, which are these days coming together with the single agenda of staying in power and ‘sharing’ the benefits of power, as views of an auditor who should be checking the accuracy in figures rather than bothering about or suggesting how a government should manage the country’s/ state’s resources. The limited purpose of quoting CAG’s observations at the outset is to draw attention to the state of the state’s finances, which is relevant in the context of the discussion that follows.

Kerala, though the state came into being only in 1957, had the benefit of tasting the benefits of being governed by governments representing different permutations and combinations of different political and economic interests and periodic change in the ruling front, which has been a much later development at the Centre and in many other states. Thus, at least till the emergence of LPG (Liberalisation-Privatisation-Globalisation) politics. I differ with the economists who say that this LPG had more to do with economic development rather than politics—circa 1991—and usurping of power at the Centre by BPL (Businessmen-Politicians-Lawyers) combine—circa 2001. Kerala enjoyed the best of both the worlds namely a sprinkling of socialist ideology in policy formulation and capitalist practices in governance.

Kerala’s Sastra Sahitya Parishad, around 2002-04, did make some in-depth study on ‘How Kerala lives?’ and ‘How Kerala thinks?’ (Kerala padhanam—2006) and come out with some interesting revelations. By the time the Parishad team carried out the field study, the “Kerala Model” which had been by then received world acclaim had started showing signs of disintegration and was fading. At this stage, it would be worthwhile to recount the positives of “Kerala Model” briefly:
 

• • The underlying merit of the model was the fact that despite the relatively low income levels which did not show signs of rapid growth, there was perceivable improvement in human development indicators, especially when the comparison is with people in other geographical regions of India.
   
• • The focus and emphasis on equity and social justice acted as a catalyst for the state’s development experience.
   
• • The social leadership provided by leaders like Srinarayana Guru whose approach was humane, made the follow-up work easy for the Communist Party which gave economic and political dimensions to the thought process which was already embedded in the minds of the majority.
   
• • The revolutionary changes in land reforms and education initiated by the first Communist Ministry in Kerala was the continuation of a process, seeds of which had already been sown by an enlightened religious and social leadership. The leftist influence continued to dominate the state’s development process during the first four decades of the state’s existence.
   
• • Some of the longstanding results of these policies included lowering birth rate, reducing infant mortality, improving nutrition-availability for children, achieving almost 100% literacy level. An unwritten wage policy that ensured a much higher wage level for skilled and unskilled workers and  visible improvement in some of the crucial human development indicators in the state. Sometime last year, the RBI governor who visited Kochi, during his morning walk found daily wage workers from Andhra Pradesh on the street, who told him that they were paid about Rs600 per day and were able to save and send home ‘something’.

These commendable achievements are shadowed by near anarchy on the labour front, which has affected industrial progress and political instability. This resulted in assortments of political parties, with not much in common in terms of ideology except the greed to hang on to power, coming together to form alternating LDF (Left Democratic Front) and UDF (United Democratic Front) combinations governments after each election in the state.  This situation has resulted in governance being hijacked by vested interests within the state and outside, many a time, through inefficient and lazy leaderships of small political parties gaining more than their reasonable share of ‘responsibilities’(say, based on votes polled or number of legislators in the state assembly ) in the government of the day. When survival of the government is dependent on a couple of MLAs “not crossing the floor”, the ruling front compromises several democratic principles of governance. Much on the same way as Dr Manmohan Singh is carrying on at the Centre.

Historians will not pardon the political leadership of Kerala for messing up and destroying the gains and advances made during the closing years of the decade 1950s (Kerala came into being on 1 November 1957) by the governments which ruled the state from the formation of the state and successive couple of governments that followed. The choice of ministers by EMS Namboodiripad who was the first chief minister needs special mention. Ministers in the first cabinet like C Achutha Menon, VR Krishna Iyer and Joseph Mundassery brought glory to the first ministry by initiating far-reaching reforms in their respective areas of responsibility.

Last two years have seen policy prescriptions from several pressure groups influencing the approach of the Oomen Chandy government in several areas of the state’s economic development. Half-baked ideas for investment in industry, infrastructure and other development areas are pushed through by the neo-rich within the state, investing NRKs (Non-Resident Keralites) and arm-chair economists now guiding the state government. ‘Festivals’ like Emerging Kerala, conferences of NRKs and interactions with NRKs by state leaders when they visit countries like the UAE give an impression that the state is ripe to be transformed into another Dubai. When majority of the schools, hospitals, poverty alleviation programs, drought relief, unmanned level crossings on rail tracks, under-developed roads linking interiors of the state with towns, bridges, agriculture and so on wait for small allocations for years, the state government commits huge funds which involves long-term external borrowings for projects like Kochi Metro (Rs4,500 crore, with state and central participation), Trivandrum Metro (projected cost Rs5,100 crore), Calicut Metro (Rs4,500 crore) and several new airports. PPP (public-Private-Partnership) or attracting private investment from external sources have the inherent danger of leading the state into a debt trap which has been avoided because of the foresight shown by planners till the late 1990s.

Self-reliance is not a bad idea. Neither is borrowing for productive purposes. But, leaving everything to market forces or taking a short-term view of long-term liabilities may take the state into an irretrievably deep debt-trap. Sooner the state approaches planning with the seriousness the governments in the state perceived finances and economic development during the initial years of planning, the better for God’s Own Country!

Other stories by MG warrier

 (M G Warrier is a freelancer based in Thiruvananthapuram.)