A Kerala Conundrum

What are the conditions that will enable the entrepreneur inside many of us to find expression?
C Balagopal’s book, ‘Below the Radar – The untold story of how modern manufacturing grew by stealth in Kerala’, explores this question and provokes thought in the reader, writes G. Sabarinathan, PhD¹ 

Well before Vasco da Gama set out for Kerala in 1498, this littoral strip of land in Southwestern India had been in touch with the Greeks and then the Romans and the Arabs, writes Manu Pillai, the young sensation among historians, in his doorstopper volume, Ivory Throne.

It does quite well on human development indicators (HDI).  It has been blessed by nature bounteously.  It has mesmerizing hills, breath taking valleys and beaches with waves, both wild or calm, as you like.  It produces highly gifted men and women of literature, art and cinema.

For a state that was the entry point for sailors from the west for many centuries and has so many other things going for it, the post-independence economic and industrial trajectory of Kerala has been less than impressive.  A conundrum.  Or so one would think.  But that is not entirely true, argues C Balagopal in his slim volume Below the Radar – The untold story of how modern manufacturing grew by stealth in Kerala.

Balagopal’s career itself is interesting.  He started as an officer of the Indian Administrative Service (IAS) of the Manipur cadre.  He quit midway to start Peninsula Polymers (PenPol), now known as Terumo Penpol (TP) after its acquisition by global pharmaceutical and parenterals giant Terumo.  His struggle with PenPol for close to a decade was rewarded with a profitable exit.  He has also been on the boards of a few listed enterprises.

Balagopal’s book, written in nine chapters, essentially deals with three different strands of ideas.  Two chapters offer two separate case studies of two companies, including Terumo PenPol.  And the last chapter concludes with a look into the future.

Three principal strands in the book

The first strand is that independent India, arguably at the instance of the Bretton Wood twins, namely the World Bank (WB) and the International Monetary Fund (IMF), followed the model of development recommended by western nations who arguably had a vested interest in locking up developing nations as a source of cheap inputs for their factories and as a market for their finished goods.  A perpetration of the colonial economic legacy, if you like.

Second, East Asian economies drew on this model but with their own adaptation.  That led to the growth of their economy and a simultaneous development of their society.  At the centre of this were global majors who set up operations in countries of some kind or the other in countries like Taiwan and Korea and poured capital in the form of foreign direct investment.  Apart from access to technology and capital it also helped those economies leapfrog into high growth.

This model did not work well for India.  India tried to make land and labour available at affordable rates.  But then India was also a democracy.  It had trade unions.  This contrasted with the business friendly autocratic regimes of E Asia.   More importantly, India did not invest in development of infrastructure.

Third, Kerala’s trajectory of economic development differs from what Balagopal refers to as the factor endowments driven approach to growth and development that was followed in the rest of the country under the Nehruvian model that tried to correct two hundreds of colonial economic exploitation.

He compares the development of Gujarat and Kerala to illustrate this difference.  The state of Kerala did not have the large tracts of land that Gujarat had to set up large manufacturing industries.  The cost of labour had increased over the years thanks to militant trade unionism.  The “Dutch disease curse” of remittances had also contributed to the rising cost of labour.  Kerala thus had to depend on high value added manufacturing activity.  Balagopal attributes this to a conscious set of deliberate policy choices that a Chief Minister of Kerala, C Achutha Menon (CAM) had made in the seventies.

Rephrasing the dominant narrative about industrialization in Kerala

The primary thrust of the book though is on countering a commonly held belief that the low industrial development in Kerala has been the result of militant trade unionism.  Balagopal describes it as follows: “The ubiquitous red flag that flew over the gates of the industrial establishments…came to symbolize the malaise of the state; militant trade unionism hampering and dampening industrial development and growth.” He goes on to note, “The picture that emerges is of a state where employee groups are privileged over business owners when it comes to the resolution of disputes, due to the political predilection of the government in the state.”

Balagopal presents a counterfactual to this narrative by showing that the share of manufacturing increased from less than seven percent in 1990 to fourteen percent of the Gross State Domestic Product (GSDP) in 2014 on a higher GSDP level, surpassing the level of remittances as a fraction of GSDP.  He comes up with a list of fifty micro, small, and medium enterprises (MSMEs) that are engaged in high value added technology intensive manufacturing for the export markets that are illustrative of this industrial growth.  He uses these two data points to drive home his point that Kerala’s militant trade unionism and the Dutch disease curse² of external remittances of Malayali’s working in the Gulf nations did not lead to the demise of the manufacturing sector in Kerala as may have been predicted by economic theory.

Not only that.  He goes on to argue that “(t)he period of purely investment led growth will soon come to an end, unless factor productivity starts to pick up and that depends on other factors like HDI.”  This observation probably assumes relevance in the current context where some observers argue that all the capital expenditure that is being undertaken by the private sector, especially, is not leading to the creation of employment.  Balagopal anticipates this challenge in his analysis of some of the sectors in India.  And that in a way sets the stage for what he believes Kerala should follow.

The nexus between policy and industrial development 

His explanation for the revival of the manufacturing sector rests on the policy initiatives of CAM government.  The policy resulted in the establishment of a number of state owned undertakings during the seventies.  Balagopal’s detailed discussion on the number of new industrial undertakings and institutions that were set up as part of the initiative, across a range of sectors, are educative for anyone who wishes to acquire a quick introduction to the genesis of whatever institutional excellence one might observe in the state today.

More importantly, these initiatives resulted in “highly educated human resources, public funded healthcare, education and social welfare, public transport and housing”.  While that is something many of us might anticipate, Balagopal notes a few other aspects about the economic geography of Kerala.

He says that the policy resulted in dispersed manufacturing, disintegrated manufacturing processes which resulted in many MSMEs instead of one large manufacturing entity, support systems such as efficient supply chains, vendor networks, shared services facilities and so on.  “Such conditions were present in Kerala through a combination of deliberate government policy, serendipitous social factors and historical factors.”  The connections that he builds between those conditions and the growth of the MSMEs, which are the main subject of the book, are interesting from a corporate strategy perspective for students of business management.

Beyond the immediate

In building his thesis Balagopal traverses quickly through the history of industrialization of independent India and the industrialization of East Asia.  His discussion on the numerous turns in the history of industrialization in Kerala – the migration of labour intensive industries out of Kerala, the shutting down of many of the initial industrial units of Kerala, the flaws in the industrial policy at that time that now look so evident with the benefit of hindsight, the laying of the foundations of a knowledge economy are all interesting and insightful.

Those who worked in the field of economic policy in the seventies and eighties are bound to be left with a sense of déjà vu while reading the book.  For example, much of the thinking that influenced the initial policy document that I wrote for ICICI’s technology financing initiatives, which eventually took the form of India’s first technology focused venture capital institution, TDICI (Technology Development and Information Company  of India, originally) was drawn from the project appraisal documents relating to Korea Technology Development Corporation and Korea Advanced Institute of Science and Technology that had just been funded by the World Bank around that time.

Balagopal’s claims that the fifty MSMEs at the end of the book conform to what he says are the contemporary idea of MSME and not the traditional Indian definition.  The two cases about PenPol and Peekay Steel are quite engaging.  They give an idea of the kind of industrialization that Balagopal believes that the state of Kerala should pursue when he writes, “Instead of imitating other regions and models, Kerala should evolve her own models and try new experiments better suited to her local endowments.”

His belief in decentralized policy, tuned to local conditions, shows up also in the case he makes for labour laws that are germane to the local context rather than have one national labour statute that prescribes minimum wages for the country as a whole and so on.  That is in step with the ethos of decentralization of planning that has dominated the Kerala approach to planning and local self governance.  It would appear to be an interesting contrast to the current thinking on governance that seems to prefer a greater degree of standardization at the national level, if not centralization in decision making.

The way forward for Kerala

Balagopal makes a passionate case for creating an alternative narrative about industrial development in Kerala, around those innovative and technology intensive MSMEs in Kerala that he identifies in the book.  He writes: “By adopting policies that have helped Kerala become the Cuba of India in terms of social parameters and HDI an unintended consequence has been that Kerala has emerged as the state best equipped to become the Taiwan of India.” The connection he outlines between social conditions and economic growth is compelling and persuasive.

Balagopal may be right in his assertion.  But the image of Kerala as a state that is not business friendly is not easy to shake off overnight.  It is a hard sell to those who have been brought on the staple narrative about Kerala that Balagopal acknowledges but does not endorse.  People may find it a lot easier to buy into his other quote: Red kept Kerala green – although quite a bit of that greenery is giving way to monstrous mansions that not only soak up a lot of those remittances from the Middle East that he talks about at length and locks them in unproductive assets, but also shave off a lot of the laterite hillsides, upset the ecology of the state and make for an unstable landscape.

Balagopal’s book, like the other edited volume that he refers to, Crouching Tiger, Sacred Cows – Kerala’s Economic Development are important starting points in this endeavour to change the narrative.  To understand why these industries are successful a deeper inquiry will help.  An inquiry that will help answer the question that Balagopal says is important for the development of entrepreneurship:  “What are the conditions that will enable the entrepreneur inside many of us to find expression?”

Engaging Style

Balagopal’s style of writing is engaging.  The training that civil service aspirants get in writing good prose shines through in the book.  Academics may not be happy by the lack of references in the book though.  But I do not know if Balagopal was writing for them.  Also he seems to assume that the reader is aware of the underlying economic ideas and terms like tradeables and non-tradeables and so on.  The book also does get a little repetitive in Part B.  One wishes he had spelt out better a few other details like the idea of an MSME in his scheme of things.

All of that said, for those who wish to have a quick introduction to industrialization in India in the seventies and eighties, or for those who wish to update their understanding of industrial growth in the state that I call home, Balagopal’s book is a highly recommended start.  That it is a slim volume makes it accessible even for someone who is attention-challenged like me.  If it had not been for my social media distractions it is the sort of book that I would have completed reading in one brisk night, over a couple of cups of filter coffee.

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²The Dutch disease is an economic condition in which a sudden increase in inflow of currency, triggered by an unexpected positive development like the discovery of deposits of some valuable natural resource, like oil or gas for example, adversely affects the growth and development of the other sectors of the economy by making them uncompetitive.