Kerala's rebranding push for private investment: Businesses wait and watch

The Communist bastion is looking to reinvent itself as a friendly destination for private investment. But its economic and business indicators aren't flattering

For years, the debate has raged over the so-called “Kerala model” versus the “Gujarat model.”

While Kerala’s approach is hailed for its strong social indicators, the Gujarat model boasts economic prowess. This debate isn’t just political posturing: It reflects a deeper ideological clash — epitomised by scholars like Amartya Sen and Jagdish Bhagwati — over goals that economic policies should prioritise.
 

Today, however, Kerala is evolving. Once considered a not-so-friendly destination for private investment, the state is making strides to shed that image. In the latest Business Reforms Action Plan (BRAP) rankings from the Union Commerce and Industry Ministry, Kerala jumped into the “top achievers” category, a marked ascent from its 2020 status as an “aspirer,” according to P Rajeev, industries minister. The BRAP ranking categorises states into top achievers, achievers, aspirers, and emerging business ecosystems, based on their performance in reform implementation.

 

The state has abandoned practices that once seemed anti-business, a legacy of its strong Communist ethos. For example, the much-criticised “nokku kooli”— a practice where some labour unions demanded payment simply for permitting others to load or unload goods — has been abolished. Chief Minister Pinarayi Vijayan earlier claimed to have full support of trade unions for this step.
 

Yet, despite a series of investor summits and pro-business reforms, Kerala still struggles to improve its economic and business indicators. In 2014-15, the state’s per capita income was 13.5 per cent above the average of other southern states. Fast forward to 2023-24, and that lead has flipped, with Kerala now trailing by 10.9 per cent. The state’s advantage over the national per capita income has also dwindled -- from 56.4 per cent in 2014-15 to 52.5 per cent in 2023-24, according to the latest available data. Seven states and Union Territories had higher per capita income than Kerala's in 2014-15 against nine in 2022-23.
 

Kerala’s gross capital formation (GCF) — a measure of investment — has consistently lagged the national level since at least 2014-15, falling from 1.2 per cent of its gross state domestic product (GSDP) to a mere 0.3 per cent. At national level, this figure has remained steady at 2.8 per of GDP.

 

As GCF is also determined by inventories and acquisition of valuables, the gross fixed capital formation (GFCF) figure can be considered for a relatively precise picture. And the parameter also reveals a declining trend: Kerala’s GFCF fell from 1.2 per cent of GSDP in 2014-15 to 0.5 per cent in 2022-23, while the national rate dropped from 2.6 per cent to GDP to 2.2 per cent over the same period.
 

Goods exports from Kerala have risen and fallen in recent years, mirroring national trends but on a smaller scale. While Kerala’s merchandise exports jumped by 86.4 per cent in 2023-24 over the previous year, all-India exports fell by 2.3 per cent. 

Over the past decade, Kerala’s exports grew by 12.3 per cent, but that figure pales compared to the 44 per cent national increase. The state’s share in India’s total goods exports has shrunk — to just 1.9 per cent in 2023-24 against 2.4 per cent a decade ago.
 

Foreign direct investment (FDI) in Kerala, too, remains modest, fluctuating between $0.2 billion and $0.3 billion since 2020. Nonetheless, Kerala’s share of total FDI inflows into India has inched up, from 0.3 per cent in 2020 to 0.5 per cent in 2023, despite a 36 per cent drop in national FDI over the same period. For the first half of this year, the state’s share stood at 

0.2 per cent.
 

On social parameters, Kerala outperforms the national average in multidimensional poverty, literacy, and infant mortality. But it’s a mixed picture. The state’s unemployment rate is high — double the national average in 2023-24. While the national unemployment rate held steady at 3.2 per cent, Kerala’s rose from 7 per cent in 2022-23 to 7.2 per cent in 2023-24, according to the latest Periodic Labour Force Survey.