Decoding the Paradox of Kerala’s Economic Inequality

Kerala is known for several paradoxes — but the most perplexing of them would be the level of economic inequality in the state.

Economic Inequality has been increasing in Kerala in the past two decades. Today, this southern state of India has the highest economic inequality in the country and one of the highest in the world. Given the left leaning welfare oriented policies of the state, and given its history in inclusive policies, this is surprising.

For instance, Kerala has the highest HDI, highest trade union density, highest financial inclusion and the highest minimum wage in India. Kerala was even ranked as the most equal state in India by CRISIL which measured inequality between capital city of a state with rest of the state.

The state also has a rural-urban continuum. The difference in consumption expenditure in rural areas and urban areas is one of the lowest in India. The comparable educational and health achievements between men and women indicate lower levels of inequality between gender in the state. All of these seem to suggest that Kerala is intrinsic in each region and within gender, or that the state is equally unequal.

Gini Coefficient and NSSO Survey

Before exploring the reasons for the high economic inequality in the state, a basic understanding of economic inequality is important. Economic Inequality is a measure of income distribution in the society. As of now, Gini coefficient is considered to be best method to capture economic inequality. Economic Inequality can be measured in terms of wealth inequality, income inequality or consumption inequality.

In India, in order to infer economic inequality, we estimate consumption inequality based on data from the Household Consumption Surveys conducted by the NSSO. Population is then sorted by their consumption expenditure and divided into deciles (ten blocks each consisting of 10% of total population). The income distribution curve for each decile is then plotted and Gini Coefficient is calculated.

Two important aspects regarding the methodology of the survey is worth mentioning.

First is regarding population coverage of the survey. Emigrants are not listed as members of households in the survey. However, immigrants from other parts of India are listed if they stay more or less regularly at the same place.

Second is regarding the scope of Consumption Expenditure. Expenditure on certain items are excluded by the survey. For example, money given as remittance is not consumer expenditure. Any expenditure incurred towards the productive enterprises of the households is excluded from the household consumer expenditure. Thus, consumption by livestock belonging to the household will not be included in the household consumption.

At this juncture, I must also express my skepticism of the survey methodology and results. The methodology of survey is highly complicated and highly technical that I find it impractical to expect surveyors to fully capture data as per the survey. Unless those entrusted with administering the survey are highly educated and highly skilled, it is unlikely that survey would yield accurate results.

However, since this problem would have been present in all the NSSO surveys, it can still be argued that economic inequality in Kerala is rising.

The effect that changes in survey methodology over the years have had on the survey results is also debatable. Nevertheless, given the sudden spike in economic inequality in the state in the last two decades, it is reasonable to presume that the economic inequality is indeed rising in the state.

Possible Reasons for High Economic Inequality

The first reason relates to population dynamics. Kerala has high number of emigrants and immigrants — almost in equal number. Emigrants from Kerala can be found in other states, in other countries (especially in the Gulf). Immigrants to Kerala are mostly manual labourers who come from Northern parts of India (West Bengal, Bihar, Orissa etc).

Emigrants living outside India contribute remittances which account for approximately 30% of GDP of Kerala. If we add remittances from those living in other states in India, this figure might be even higher. The expenditures that households make using these remittances are captured in the NSSO survey. But they do not consider the remitter as a member of the household.

Thus, while the consumption expenditure is higher due to remittances, the number of members in the household are lesser as the remitter is not considered a part of the household. This results in a very high per-capita consumption expenditure.

While this factor is nothing new to Kerala, remittances post late 1980s (following liberalization) have seen tremendous increase. This would have boosted income share at the top deciles spurring economic inequality.

The effect immigrants have on economic inequality is the opposite. Immigrants to Kerala are mostly low income earners. They remit a large proportion of the already meager income they receive to their own respective households. This drives percentage of people in the lower deciles, thereby driving economic inequality again.

The inward and outward remittances can, therefore, explain the high economic inequality to a great extent.

The second major reason relates to ‘quality gap’ between public and private institutions. Liberalisation movement happened in all states of India following the monumental policy shift initiated under the leadership of Dr.Manmohan Singh. In Kerala, the impact was more profound in the education and healthcare sector.

Until late 1980s, almost everyone in the state received education and healthcare from public institutions. There were very few private hospitals or private schools and colleges in the state until then. The period since late 1980s saw a huge spurt in the number of these private institutions. This also coincided with the steady withdrawal of government from these important areas.

While publicly run educational and healthcare establishments in the state are better than such institutions in other states of India, there exists a huge ‘quality gap’ between the private institutions and public institutions in Kerala. This would exacerbate economic inequality as private institutions are affordable mostly to those who are rich. It is the poor who end up going to the public institutions.

The gap between rich and the poor would widen if the quality of education and healthcare they receive vary greatly. Late 1990s would have been the time when the first batch of students who studied in these private institutions joined the labor force. This coincides with the increase in economic inequality that the results indicate.

There are several other reasons that might also have contributed to the high economic inequality in Kerala. In my view, these two are likely to be the major reasons driving economic inequality in the state.

Among these, the effect due to emigration and immigration is perhaps inevitable. It is also primarily on account of survey methodology. If people remitting income are also considered as a member of the household, we might get a more accurate picture of economic inequality. Similarly, if the amount remitted by immigrants can be captured, it would also improve the results.

In practice, it may not be possible to make these changes because it may not be considered ‘consumption expenditure’ survey then. Doing so could, however, shed light on the impact of emigrants and immigrants on the consumption inequality.

To address the effect due to ‘quality gap’, it is mandatory that the government makes quality education and healthcare affordable. It can be done by investing in social infrastructure. Investment in public educational and healthcare institutions needs to increase. The state could also look at indirect means of making quality education and healthcare affordable. Scholarships and health insurance schemes are worth exploring.

While the tolerable level of economic inequality is debatable, it is mandatory that the extremely high inequality level in Kerala has to be brought down.

Economic Inequality is an undesirable outcome as it affects fairness of political institutions, economic institutions and even the fabric of the society. High levels of economic inequality indicate that the benefits of economic growth are not reaching everyone in the society. High economic inequality can also adversely affect equality in opportunity. Therefore, the high economic inequality in the state is indeed a serious concern.

As Rawls put it, inequality is acceptable only if it is to the advantage of those who are worst-off.

By Sibin Sabu

   2014 Passout

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