Contrasting stories of economic transition from a trio of states

Tamil Nadu at present has the highest per capita real income, calculated as real net state domestic product (NSDP) divided by population, although it was lagging behind Kerala at the start of the last decade. An average person in West Bengal is roughly at the halfway mark in terms of economic prosperity compared to the two southern neighbours, although it was almost at par with them in the early 1990s.

While both Kerala and Tamil Nadu have become relatively affluent, they are like chalk and cheese in terms of their paths to prosperity. Kerala transited straight from agriculture to services, largely skipping a manufacturing expansion. In contrast, Tamil Nadu followed a time-tested economic transition path by consolidating its manufacturing sector and entering high-skilled services.

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Manufacturing accounted for one-fourth of the gross value added in Tamil Nadu in 2018-19, but only about 13% in Kerala. Manufacturing in the former is led by both high-tech sectors such as automobiles and low-tech sectors such as textiles. Unlike Kerala, West Bengal once had a formidable manufacturing base, similar to Tamil Nadu’s, but at present manufacturing accounts for only about 15% of the state’s economy. All three have seen the share of manufacturing in their economies rise since 2004-05, but the least increase has been in West Bengal.

The service sector dominates Kerala, making up over 60% of its economy, with an emphasis on tourism, education and healthcare. Further, the share of government-led services in Kerala’s economy is the highest among the three states. With a higher share of non-farm sectors in their economy, over 67% and 52% of the population in Kerala and Tamil Nadu respectively was residing in urban areas in 2019, as per estimates from the ministry of health and family welfare. With just 35% urbanization, West Bengal is the least urbanized.

In ongoing research with Sowmya Dhanaraj and Sanklap Sharma of Madras School of Economics, we calculate a Consumer Durable Index (CDI) for major Indian states using unit-level data from the National Family Health Survey 2015-16, taking into account the ownership of 20 consumer durables and vehicles. We compare the share of the population in each state that is poor (below the 25th percentile value of the all-India CDI value), low to medium (between the 25th and 50th percentile of that value), above medium (between the 50th and 75th percentile) and prosperous (higher than the 75th percentile).

Measured this way, more than half the people in Kerala and around 26% in Tamil Nadu are ‘prosperous’, while the same is true of only 13% in West Bengal. Higher prosperity in Kerala despite a similar level of real NSDP per person as its neighbour is a result of inward remittances that have poured into the local economy from those who have left the state in search of better economic opportunities elsewhere. At the other extreme, a mere 1.7% of Kerala’s population, and 8.3% of Tamil Nadu’s, but over 26% of West Bengal’s is poor in terms of durables and vehicles ownership.

The Kerala model of development, with its ‘education and health first’ policy, ensured a high level of human development and it continues to top the United Nations Development Programme’s human development index for Indian states. While Tamil Nadu has risen the fastest over the years to join the country’s top HDI states, West Bengal has neither done well on economic nor on social parameters.

Despite its successes, Tamil Nadu too has many unresolved issues in terms of basic infrastructure: poor water availability and low levels of piped sewerage, among others. Also, as per to the estimates based on the periodic labour force survey of 2018-19, both Kerala (20%) and Tamil Nadu (12%) had a high unemployment rate among young adults (20-29-year-olds) in urban areas, reflecting insufficient jobs commensurate with the aspirations of their educated youth.

What does the future hold for the trio?

Despite the apparent success of Kerala in terms of prosperity and equality of well-being, Tamil Nadu seems better placed to face the post-covid world. The twin engines of Kerala’s prosperity—tourism and remittances—may see a lasting adverse impact of the pandemic. The state is especially vulnerable to the threat of relative stagnation, like Punjab has been in recent years. Punjab, which led India on average real incomes in the 1980s, has fallen behind due to its inability to create non-farm jobs and continued high reliance on remittances. Kerala must improve its local capacity for manufacturing and skill and labour-intensive services such as healthcare.

Tamil Nadu has expanded production capacity in its export industries, whether it is information technology (and IT-enabled services), automobiles or textiles, to generate local work. Kerala, however, requires either its people to migrate and send in remittances or tourists to enter to generate economic activity. Also, with its strong manufacturing base, Tamil Nadu can cater to India’s growing domestic market. West Bengal, though, has the most to gain in learning from the experience of Tamil Nadu if it’s to make its people prosperous.

This trio of the Indian states each has its unique challenges and opportunities ahead. How their policymakers deal with those will determine the fate of their people to a large extent.

Vidya Mahambare is professor of economics, Great Lakes Institute of Management, Chennai