Kerala – India’s 2nd best Investment destination

The fiscal position of most of the non-special category states improved in FY18 with their combined fiscal deficit to GDP ratio standing at 3.1 percent as against an elevated 3.5 percent in FY17. This is essentially because states such as Maharashtra, Haryana, Gujarat and Tamil Nadu succeeded in restricting their fiscal deficit to below the 3 percent mark which had a salutary impact on the overall number. However, the fiscal deficit ratio of states such as Bihar, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan and Telangana continued to stay elevated at above 3 per cent in FY18. This was mainly due to a shortfall in revenue receipts. Nevertheless, it is also instructive to note that while states such as Maharashtra, Haryana, Gujarat and Tamil Nadu contained their fiscal deficit to below the 3 percent mark, this was done on the back of lower capital and social sector spending as compared to the national average. In contrast, states such as Bihar, Odisha, Rajasthan etc., saw their fiscal deficit exceeding 3 percent in FY18 as they incurred a higher capital outlay as a ratio of its GSDP. Their social sector spending was also at respectable levels.

The state in focus here is Kerala. Kerala’s economic growth accelerated to 7.4 percent in FY17 as compared to 6.8 percent posted in the previous fiscal, underpinned by acceleration in growth in all its subsectors except services. Encouragingly, agriculture sector moved to positive territory in FY17 after posting three consecutive years of contraction, while industrial growth increased to 3.8 percent. The investment environment in Kerala has improved in the last few years with Kerala holding second rank in the Investment Climate Index (ICI) as per a policy research working paper by the World Bank. The second rank in ICI is also attributed to its world-class infrastructure and well-trained human resource pool. Owing to this, the gross capital formation in the state saw a massive jump of 82 percent in FY16 as compared to the previous year. On the various socio-economic indicators too, Kerala is doing well, with its sex ratio being the most favourable in the country. As per the World Bank, the state has also seen a steady decline in poverty levels since last two decades now.

Most states record an improvement in fiscal deficit ratio after the implementation of UDAY scheme

  • After suffering a deterioration in their fiscal position due to the implementation of the UDAY scheme in the years FY16 and FY17, most of the states recorded an improvement in the fiscal deficit numbers for FY18 with the fiscal deficit to GDP ratio restricted to below the mandated 3 percent mark.
  • There were a few exceptions though, for example, Bihar, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan and Telangana. Their fiscal deficit ratio stood above 3 percent mainly due to a shortfall in revenue receipts. From this list, only Rajasthan has budgeted the deficit number to fall below the 3 percent mark in FY19.

 

Good performers on the fiscal deficit front fare poorly on capex spending 

  • It is interesting to note that states such as Maharashtra, Gujarat, Haryana and Tamil Nadu, which had reined in their fiscal deficit below 3 percent in FY18, have done so at the back of a lower capital outlay as a percentage of GSDP as compared to the national average.
  • In contrast, states such as Bihar, Odisha, Rajasthan etc, the higher fiscal deficit exceeding 3 percent in FY18 was accompanied by a higher capital outlay as a ratio of its GSDP. Their social sector spending was also at respectable levels.

 

 

 

9 out of the 17 states under consideration saw central transfers as the primary source of revenue 

  • For states such as Bihar, Andhra Pradesh, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan, Uttar Pradesh and West Bengal, central transfers were the main source of revenue while for others own tax revenue is the primary source in FY17.
  • Among the major states, which depend on their own taxation system as the main source of revenue- Kerala, Punjab, Rajasthan, Telangana, Haryana, Gujarat and Tamil Nadu- are expected to see a rise in their own tax revenue. GSDP ratio in FY18 from their FY17 levels.

 

 

 

Economic growth in Kerala posts a jump in FY17 on broad-based sectoral improvement 

  • Kerala’s economy grew at a higher pace of 7.4 percent in FY17 as compared to 6.8 percent growth posted in the previous fiscal year. The acceleration in growth was underpinned by an improvement in growth in all the broad sub-sectors except services.
  • Agriculture sector moved to positive territory in FY17 after posting three consecutive years of contraction. While industrial growth also almost doubled in FY17 from the previous year.

 

 

 

Investment indicators show an impressive performance in Kerala owing to favourable state government policies 

  • It is interesting to note the revival in investment activity in the state is born from the 82 percent rise in gross capital formation growth in FY16. It is hoped that the wide range of policies and incentives for businesses provided by the state government would lead to further improvement in the gross capital formation rate.
  • FDI equity inflows in Kerala rose to USD 454 million in FY17, a massive jump from the previous year’s USD 90 million.

 

 

 

Kerala has the highest sex ratio among all the states 

  • As per the assessment of the socio-economic profile of the state by the World Bank, Kerala has experienced a steady decline in poverty since 1994. As a result, poverty levels in the state are among the lowest in the country.
  • However, on the socio-economic indicators, Kerala has shown a mixed performance. While the state has seen the highest sex ratio among all the states in India, the enrolment in primary schools has shown a downward trend over the years.
Source- Economic Matters- December 2018

 

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