Unease Of Doing Business In Kerala: Kitex Saga Reveals An Ideologically Nurtured Hostility To Private Enterprise

Sabu Jacob, the managing director of Kitex Garments Limited recently declared that the company would not be investing further in Kerala. The company was planning to spend Rs 3500 crore on expansions; however, it will be building new manufacturing plants elsewhere. These events might undo the image Kerala has been trying to build over the past few years.

The Kerala government has been trying to create an investor-friendly image for some time now. It has been hosting ASCEND Kerala, a global investor meet to attract investments into the state. If one looks at the larger picture, these are desperate measures the government has taken with remittances falling and unemployment rates rising.

Kerala has a youth unemployment rate that is almost double the national average. The unemployment rate among youth between 15 and 29 years of age in the state was at 40.5 per cent between January and March of 2020, according to the Indian government’s Periodic Labour Force Survey. India's average was at 21%, according to the survey, which was released on December 31, 2020.

There are multiple reasons attributable to the high unemployment rate of Kerala’s youth.

The government has set a high minimum wage rate, partly due to its socialist bent and partly due to the strong labour unions in the state.

The labour unions tacitly encourage and support malpractices like Nokkukooli, wherein goods are unloaded from vehicles only if the customer pays an exorbitant fee to the labourers. Though banned in 2018, several reports indicate that the practice continues till date.

While larger manufacturers might manage to quell such issues using political connections, such charges inhibit smaller manufacturers from doing business. Other Indian states, which have lower minimum wages for labourers and weak labour unions, attract private investment easily.

Keralites began moving to the Gulf during the oil boom in order to find well-paying jobs. Even though some of these jobs were blue-collar jobs, the extremely high pay attracted educated Keralites. These non-resident Keralites would then pay remittances to their families in India. The Gulf countries did extremely well when the oil rates were high, and remittances kept going higher.

Kerala’s economy, without many other sources of revenues, soon developed an unhealthy dependence on remittances. These remittances financed consumption and savings in the state and provided an impetus to economic growth. However, with the drop in crude oil prices since 2014, the economies of Gulf countries have been struggling, resulting lower remittances since 2015. Further, with the onset of the pandemic, many Keralites from the Gulf and other countries have returned back home. With unemployed returnees and lower remittances, the Kerala government is under greater pressure to create jobs.

Kerala has been trying hard to boost its business-friendly image; however it does not look like its efforts are bearing fruit. For instance, since the time Kitex announced that it will not be making any new investments in Kerala, the stock price has jumped up by 57 per cent. Such a huge jump in the stock price within a span of less than a month indicates that the investor community still has a negative perception of Kerala.

One theory suggests that the lack of businesses forces labour unions and political parties to harass a few companies that dare to operate in Kerala. Due to these organised extortion mechanisms, most companies perform poorly and are forced to move out, resulting in negative investor perception. The vicious loop keeps away investors from Kerala.

Kerala’s government seems to have an infantile dream of building a socialist state while entertaining capitalists, but it can’t have its cake and eat it too. It must realise that for the long-term welfare of its public, it needs to adapt with changing times.

Education is a means to an end; the “Kerala model” does not add any real value unless the youth have jobs that match their education levels. Kitex isn’t the first company to face problems in Kerala – Muthoot Finance, MRF Tyres, V-Guard, Thapar Group and other large Indian business houses have faced problems in Kerala.

The state government has been complicit in these anti-industry actions so far, however with the cloud over remittances and growing unemployment, the government must focus on attracting the private sector.