Kerala’s economic trajectory has long been a subject of both admiration and analysis. Often described as the “Kerala Model,” the state’s economic development has a unique narrative that is emblematic of a strategy that prioritises social welfare and human development over conventional economic growth indicators. This helped the state achieve remarkable results in health, literacy, and equity since the 1960s. During this period, low-income states such as Uttar Pradesh and Bihar lagged far behind in terms of literacy, healthcare and social outcomes. While Kerala was reducing poverty and enhancing life expectancy, many others still grappled with basic infrastructure and governance issues. This is where Kerala's model distinguished itself - a focus on equitable distribution of resources rather than the accumulation of capital. However, the story of Kerala’s growth is complex, evolving from welfare-led development in the 1960s to today’s remittance-dependent economy facing structural and fiscal challenges.
During the 1960s and 70s, Kerala was establishing a distinctive growth model of social welfare. It is interesting to note that critical issues of land reforms, literacy campaigns, and healthcare expansions are still central to the state's efforts to transform societal structures. Sector-wise expenditure of Kerala Budget 2024-25 shows a 25 per cent increase in revised estimates for Social Welfare and Nutrition; a 136 per cent increase for Rural development policies mainly The National Rural Employment Guarantee Scheme and the LIFE-Parppida Mission; and a 50 per cent increment for the welfare of SC, ST, OBC and minorities. Signalling Kerala’s continued focus on social outcomes, indicating that human development can proceed even without rapid economic growth.
Unlike other Indian states that focused on industrialization, Kerala's emphasis on redistribution policies, especially land reforms, improved equity but has left the state with minimal industrial output, and restricted its economic diversification during its initial developmental phase. If one compares this to the growth trajectories of high-growth states of Maharashtra or Tamil Nadu, this welfare-focused approach led to relatively low levels of industrial development and a heavy reliance on agricultural and small-scale industries. Still, these investments have paid long-term dividends in terms of building a strong social fabric that attracted remittances.
Post-1980, Kerala’s growth model has evolved but remains distinct, characterised by diversification beyond agriculture, leaning into services and benefiting from remittances (that make up a larger proportion of the state’s GDP). The evolution can be studied by observing the growth of the IT sector, recently centred in hubs like Thiruvananthapuram and Kochi, with services now accounting for over 60 per cent of Kerala’s Gross State Domestic Product (GSDP). Yet, this transition to a remittance-driven, service-oriented economy has brought challenges.
First, Kerala has one of the highest educated youth unemployment rates in India, reaching up to 29 per cent in the age group of 15 to 29 unemployed. By comparison, Gujarat and Tamil Nadu adopted pro-business policies that boosted their manufacturing, leading to higher growth in industrial output. This stands in stark contrast to Kerala’s industrial policies which have largely remained conservative, focusing on protecting workers rather than incentivizing large-scale investment.
The result is a significant gap in employment creation, which leads to a paradox: despite high literacy rates, Kerala struggles with high unemployment compared to its peers. The social welfare-driven model of development has led to a slow (but steady) growth rate of around 5 to 6 per cent, significantly lower than industrial powerhouses such as Gujarat, which has clocked growth rates exceeding 8 per cent in certain decades.
Second, Kerala's high literacy and skill levels have not translated into proportional employment opportunities. According to the Periodic Labour Force Survey (PLFS 2022-23), Kerala’s unemployment rate stands at 5.8%, higher than the national average. In contrast, Tamil Nadu, which has adopted robust industrial policies, have created more jobs and maintained lower unemployment rates despite lower literacy levels. The paradox can be partly explained by Kerala's reliance on the service sector and the public sector for employment. Remittances have cushioned the blow of unemployment for decades, these inflows have been volatile in recent years due to global economic changes and stricter Gulf migration policies.
Third, fiscal constraints have hindered Kerala’s economic dynamism. Its fiscal deficit stood at 3.3 per cent of GSDP in 2022-23, above the ideal threshold, impacting its ability to invest in critical infrastructure. According to the 2024-25 Economic Review estimates, Kerala’s fiscal deficit is estimated at 3.45 per cent of its GSDP, compared to a national average of 3.7 per cent. Revenue deficits (estimated at another 2.09 per cent of the total deficits) have also been consistently higher, driven by the state's heavy commitments to salary and pension expenditures, which account for over 60 per cent of its revenue receipts.
While some of these expenses are inevitable, such as those arising from Kerala’s ageing population and pension commitments, better expenditure rationalization can alleviate some of these pressures. In 2023, Kerala’s total revenue expenditure reached Rs. 159,361 crore, up 7 per cent from the previous year, while capital outlay decreased. This misalignment has persisted despite warnings from the Fiscal Responsibility and Budget Management Act, with Kerala continuously borrowing to meet expenditure needs. Meanwhile, Kerala's capital outlay—expenditure on asset creation—has decreased by 2 per cent in 2023, while revenue expenditure has risen, indicating a structural imbalance in the budget. By comparison, Maharashtra and Gujarat have managed to keep their fiscal deficits within more manageable limits, this was largely possible by attracting private investment and reducing dependence on government borrowing.
Fourth, to sustain its growth momentum, Kerala must attract more investments and improve infrastructure. The state’s strengths in IT, healthcare, and tourism offer substantial potential for economic growth if supported by improvements in connectivity and industrial infrastructure. Initiatives like the TransGrid 2.0 project (aimed at reducing transmission losses and modernizing the power grid) are promising steps toward creating a more conducive environment for industry and innovation.
As an example, the Kerala State Electricity Board (KSEB) still faces inefficiencies, with inconsistent power supply and high transmission losses compared to other states like Gujarat, which have modernized their electricity grids. Kerala reported a transmission loss of 11.5 per cent, which is significantly higher than the national average of around 9 per cent. Despite the state making strides in water resource projects like the Jalanidhi scheme, the issue of inadequate irrigation infrastructure and water supply reliability persists, limiting agricultural productivity and industrial development. This problem has become more pressing in the context of climate change, which has exacerbated water scarcity during dry seasons. This has critical future implications.
Kerala’s impressive human development indicators are closely linked to the active role women have played in its social and economic fabric. High female literacy, one of the cornerstones of Kerala’s development, has translated into better health outcomes, lower fertility rates, and increased participation in both education and the labour force. Kerala’s female literacy rate, at 92 per cent (as per the 2011 Census), stands significantly higher than the national average of 65.5 per cent, reflecting the emphasis placed on female education from the 1960s. Kerala surpasses most other Indian states, a crystalline testament to its progressive social policies. For example, the Kudumbashree initiative, launched in the late 1990s, empowered economically weaker sections by encouraging mainly women to participate in small-scale entrepreneurial ventures that enrolled over 4.5 million women. This model has not only contributed to household incomes but also improved the socio-economic status of women across the state.
There lies some scope for improvement. By contrast, Tamil Nadu has been more successful in integrating women into its labour force, particularly in industries like textiles and electronics, and this can be duplicated by Kerala to develop women-friendly work environments in emerging sectors such as IT and healthcare, this can further promote female workforce participation and entrepreneurship to leverage Kerala’s high literacy rates.
Kerala's economic growth trajectory is both unique and fascinating and its growth model is a testament to the power of social development and inclusive policies, but structural reforms are necessary to address persisting challenges. The development of smart cities and tourism infrastructure can further drive growth, leveraging Kerala’s strengths as a highly educated, service-driven state. Policies that foster innovation and entrepreneurship, especially in high-value sectors like biotechnology and green energy, could position Kerala as a leader in sustainable, knowledge-driven industries.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication.
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