Multidimensional Index, a bane for Kerala's steady planning and Development

Kerala has fast changing Economic model, which is burdened with problems, but hopefully, the many successes it has successfully woven, inhibit it from getting benefits from Union Government for bettering its economic lot. It is a bane, rather than being a blessing in disguise. The Dr Raghuram Rajan’s Committee which was asked to evolve a composite Development Index suggesting methods for identifying backwardness of States using a variety of criteria which can be reflected in future planning and which will pave the way for proper devolution of funds from the Central Government to States, has classified Kerala among the ‘Relatively developed’ States’, which would deprive it of developmental support from the Planning Commission, which it badly needs.

Dr Raghuram Rajan, who is currently the  Governor of the Reserve Bank of India and under whose personal leadership the Report bearing his name was prepared when he was the Principal Advisor to the Finance Ministry of the Government of India, has proposed a general method for allocation of planned funding from Centre to States based on State’s development needs as well as its developmental performance. The Committee had recommended that each State may get a fixed allocation of 0.3% of overall funds, to which will be added its share stemming from need and performance to get its overall share.

The Committee has come up with a Multi Dimensional Index of Backwardness based on per capita consumption as measured by NSSO, the poverty ratio, and a number of measures which correspond to the multi dimensional approach as defining ‘poverty’ outlined in the 12^th Plan. The Committee, has recommended that State’s that score 0.6 and above of the Index may be classified as’ Least Developed’, States that score below 0.6 and above 0.4 may be classified as’ Less Developed’ and States that score below 0.4 may be classified as ‘Relatively Developed’.

On the basis of this methodology the Committee has formulated, it has identified the states as Least, Less and relatively developed and went on to classify them in the different groups.

In the Least Developed Group, it has placed, Arunachal Pradesh(0.729),Assam(0.707),Bihar(0.765), Chhattisgarh(0.752),Jharkhand(0.746), Madhya Pradesh (0.759), Meghalaya(0.693), Odisha (0.798),Rajasthan(0.6260), Uttara Pradesh (0.638), while Manipur (0.571),W Bengal(0.551), Nagaland (0.546), Andhra Pradesh (0.521), J&K (0.504), Mizoram (0.495), Gujarat (0.491), Tripura (0.474), Karnataka (0.453), Sikkim(0.430), Himachal Pradesh (0.404) are grouped under ‘Less Developed Group’ while Haryana (0.395), Uttarakhand (0.383), Maharashtra (0.352), Punjab (0.345), Tamilnadu (0.341), Kerala (0.095), and Goa (0.045) have been classified under ‘Relatively Developed’ States.

The Committee, in order to arrive at the categorization has used a) per capita consumption as measured by NSSO; (b) the poverty ratio; (c) poverty criteria table application as spelt out in the 12^th Five Year Plan document.

The methodology adopted by Dr Raghuram Rajan, contrary to Gadgil Mukherjee formula, banks heavily on ranking states on the basis of NSSO monthly per capita consumption expenditure which is not a realistic and accurate picture to determine the state of the economy of a State. The Committee bracketed Bihar and Odisha as part of one slate, as least developed states, while Gujarat was categorized as ‘less developed’ while Kerala came the second best as Relatively Developed state. This alone, shows the political bias of a Report which should be more slanting towards mathematical and economic precision when fixing norms for plan delivery exercises through Plan allocation. Kerala, who has no patrons in the Planning body, feels that the Report is not judicious.

I would like to confine myself to Kerala State, which has been classified as Relatively Developed State, and through arguments would show why the classification is incorrect based on the standard used by the Committee to arrive at the methodology. It astonishes me that the learned Economist who prepared the Report ranked  Kerala, as the Second top state  while Gujarat, Maharashtra, are ranked very much low in the order, while Bihar and Orissa seems to be placed at the bottom of the Table.

Per capita consumption is measured by NSSO making use of the factor cost. It would be appropriate to use the ‘market price methodology’ as well, to arrive at the consumption level. Kerala is facing some economic structural challenges. Kerala’s growth in State domestic product (SDP) and consumer expenditure is due to high growth in service sector which in turn is facilitated by large scale remittance income from abroad. But many of the services are not tradable. NSSO data on consumer expenditure is often quoted to project Kerala topping the list. But a disaggregated analysis of the data will show that it is expenditure on education, health and other services contributing to the human development. It cannot be treated as ‘consumer expenditure’ in the State. These services do not help the state to levy ‘service tax’ as well.

Kindly refer to the definition of wealth, as, “Total of all assets of an economic unit that generate current income or have the potential to generate future income. It includes natural resources and human capital but generally excludes money and securities because they represent only claims to wealth. Two common types of economic wealth are (1) Monetary wealth: anything that can be bought and sold, for which there is market and hence a price. The market price, however, reflects only the commodity price and not necessarily its value. For example, water is essential for human existence but is usually very cheap. (2) Non-monetary wealth: things which depend on scarce resources, and for which there is demand, but are not bought and sold in a market and hence have no price. Examples are education, health, and defense.

Read 

more: http://www.businessdictionary.com/definition/wealth.html#ixzz2hbpodgTP”

Secondly, those who take education and becomes educated cannot get any job in the State because manufacturing activity that recycles the income into different brackets is not possible in Kerala, as it does not have manufacturing activity to produce cyclic economic activity, resulting in wealth changing hands. Neither the organized industry, nor the multinational companies or medium sized production units, either in the public or private sector, want to set up any facility in Kerala, due to many reasons. Kerala is the only state where there is no accretion of capital as investment. Even units in the defence establishment sector or the Railways have set up any unit, even though there is tremendous local talent available through mushrooming higher educational institutions set up in the Private Sector which has deployed Crores of Rupees worth of investment. Consumption expenditure, which forms the bulk work of economic recycling, is not apparent here. The money that comes from abroad, which spills over to individuals,  who hold it as a residuary cannot be termed as their per capita income which according to VKRV Rao method is annual income divided by Population. Income is earned by the Recipient, rather, it is kept with him as a residuary owner hence cannot become Income. This difference has to be borne in mind when the State Domestic Product is arrived at. The foreign money that flows into the Construction sector cannot be deemed to be capital invested and hence cannot come under the ambit of construction activity for which consumption activity tag may otherwise apply. The second mode of investment is in Gold, which is a dead investment. Kerala accounts for more than 25% of the 31,000 tonnes of Gold that is in the hands of private individuals. Its temples also possess gold. If buying and selling, becomes a part of consumption spending, then, the economic activity which is dead investment can be consumption expenditure in theory and not in practice!

Kerala has agro based industry like rubber which has production of 9, 25,000 tonnes equivalent to 93% of India’s total production of natural rubber in the Country. It is sold up-country for making value added products out of rubber. According to Rubber Board statistics, Production of natural rubber was 9, 03,700 MT while consumption of Rubber in the country was around 9, 66,415 MT while the import of Rubber was to the extent of 2, 14,433 MT. Rubber export from Kerala was at 27,145 MT. Instead of realization of around Rs 14,650 Cr as 100 Kg rubber was priced Rs 16,600 INR while it was $ 271.43 in the international market, the value added segment could have raked in 6 times the amount if there was a manufacturing activity here. The producers of Rubber products are all in the up-country. Low value for one of the priceless production of Rubber, which has its lion’s share of production in the state with a few units set up to produce rubber based products cannot be called ‘Relatively developed’ state needing lesser funds compared to the other ‘least developed and less developed funds’ where more funds will be deployed courtesy Planning Commission to upgrade industrialization to produce larger wealth.

Kerala is a literate state, having higher women: men ratio; It has higher infant mortality rate. Every year, it produces more people who have higher education. But its growth of industries compared to all India is so low, that these educated employed turn to other States and even plan to go abroad in search of greener pastures. In spite of the fact that we have 44 rivers, 41 flowing west and 3 in the eastward direction, our per capita consumption is lower than that of Rajasthan and the state is placed in the 19^th position amongst the 28 states. The per capita growth of Roads in the State is pitiably poor though there is connectivity.  Most of 1, 51,652 Km long roads in the State are in despair. Kerala’s waterways which can play a very important role in taking over the goods traffic is still to become a full force due to lack of investment. State’s power woes need desperate solution, as most of the power comes from hydro electric power sources which are dependent on monsoons.  Despite heavy monsoon and dams becoming almost full, power scenario is not so bright.  Kerala perhaps, is the only states which either get scanty monsoon or devastating rains which rather causes more loss than benefit.

Revenue from Tourism has risen to great heights at Rs 21,125 Cr, and every year, this income tends to grow, yet the State is not able to utilize in full strength the benefits nor revenue that flow from this industry. Kerala has the highest per capita consumption of alcohol in the country, but Government gets revenue from it, hence feel reluctant to let go the revenue as sources of revenue has dried up.

Even vegetables come from neighbouring states making Kerala a high consumer state. The robust textile industry has very nil manufacturing presence here. It is for this reason that it is called a Consumer state. Consumption can become a base, if there are manufacturing units which pushes up production, thereby accelerates consumption. Just because there is consumption, without corresponding economy creating wealth through its distribution, consumption expenses cannot rally as a point in creating wealth which is responsible for welfare. Therefore, to say higher consumption expenses has resulted in higher wealth, which is repatriated to the original centres of manufacturing, cannot create economic growth as Dr Raghuram Rajan's report tend us to believe.

Against the income that the Below the Poverty line people get can by no means be explained away as Poverty ratio is coming down in Kerala. Against high costs, the low income group consistently earns but sustains itself by going for multiple jobs to get fair wages to enable him or her to sustain the family. In Kerala, you can see, more than 1 member of the family seeking livelihood options to feed the family. Assuming that the estimate of poverty families by the definition suggested by the Planning Commission show that there is a large number of households who are in the peripheral income group of the definition, yet, have no sufficient ways and means of increasing their wealth so as to enjoy the ‘welfare’ benefits that Plan programme subscribes to.

Comparing the un-employed list of 40 lakhs in the employment exchanges is no guarantee of confirming that the unemployment has come down in Kerala. Since employment opportunities are almost nonexistent, new qualified young men do not register in the employment exchange. They go to other pastures, where job seeking result in getting employment.

The present criteria fixed for extending benefits to develop the state on various criteria drawn up by Dr Raghuram Rajan Committee is flawed. The sources of developing multidimensional Index are not accurate. The conclusion based on artificial reading of the growth parameters against distinct objective conclusions was not followed by the eminent Economist.  For development to have meaning, human development is only an engine that will cause better economic development, but necessary co-relation must be  made to develop the infrastructural and developmental engines which will add wealth and create welfare. Kerala’s micro growth criteria may fulfill text book theories, but the inertia of a large gap in the developmental model, will not help nor assist Kerala to grow to its potential if Plan assistance is not provided using criteria of developed human index with Gross domestic product from economic growth indices.   29^th annual meeting of the World Economic Forum (Indian Chapter) slated for Nov 8-9, 2013 has been called off. Even if held, it is not going to throw open opportunities to bring in huge investments. These meets are imageries which would glow state’s appetite for a pie in the investment module which will never come.

 An eminent Economist of world order like Dr Raghuram Rajan looking at peripherals and forming an opinion, has ranked Kerala as a ‘Relatively Developed’ State. His fundamentals on which he has based the opinion are flawed. This needs to be researched to come to starch reality. Kerala cannot be grouped under ‘Relatively developed’ states. Its eligibility to grow depends upon wider support Planning apparatus in crucial and critical areas offer. Kerala has developed a model called ‘Kerala Model”. This has created excellence in certain human development activities only. It has not looked beyond that. Hence a course correction in the model by bringing in economic development is the need of the hour.