Kerala is known for its achievements in basic education and healthcare for all. Its people participate in economic activities not only within the state but also nationally and globally. This participation generates income and it is used for consumption of goods and services. Some of these are non-tradable and hence these are produced within Kerala and contribute to state’s economic growth. Moreover certain attributes of the state (certain natural features) sustain activities like tourism which attract buyers from outside the state and this is another driver of its economy. However tax resources that are available to the state government is inadequate to meet its current public expenditure. Hence it is borrowing to meet even revenue expenditure and does not have enough money for infrastructure development.
Basic educational and healthcare outcomes may sustain or improve even if the government is not able to spend significantly more money, since people may increase their private expenditure for these purposes. The status of healthcare in the state is not only due to public expenditure but also due to a higher competition between public and private players. (I am not saying that an increase in private expenditure is desirable). Regarding education, inadequate investments may not be the main constraint for further improvement in quality. If we take higher education, the not so good quality is more of an institutional or cultural or even a political issue.
My sense is that the participation in economic activities may also continue more or less around the same pace even if the government is not able to increase its public expenditure. This participation and consequent income may generate demand for non-tradable services and it may continue to be a driver of the state’s economy. A similar pattern may prevail due to the consumption by outsiders (say through tourism). Hence I don’t see an immediate danger to Kerala economy. However there are other social, political and environmental challenges in addition to economic ones.
The first lesson from Kerala’s economic growth is that we should not overestimate the role of the state in its economy (though it has played an important role in providing education and healthcare, and a not-so enabling role in terms of material production historically.) Politicians should not think that they can bring in huge investments and accelerate Kerala’s economic growth further. There are structural constraints for certain activities like mass manufacturing; and a deviation from its current path of economic development may not happen that easily. For example, even if there is a development of local manufacturing, outsiders may have to come as workers. However this overestimation of politicians is leading to not so desirable outcomes.
Real Life Microeconomics 