Kerala, the original claimant to the catchphrase - God’s own country - is an interesting bundle of contradictions. It’s the most literate state in the country but has very high unemployment. Its finances are in a mess with salaries & pensions eating up almost 80% of its own revenues. And yet, as IndiaSpend’s Dhritiman Gupta discovers, almost all the balance goes into the social sector, mostly education.

With a literacy rate of 93.91%, Kerala is way ahead of the national figure of 74%. Despite the educated workforce, Kerala has however achieved little when it comes to industrialisation and creating employment opportunities. The state, as is well known, depends to a large extent on a remittance economy. According to reports, the total overseas remittance was approximately Rs 50,000 crore in 2011.

Unemployment rates in rural Kerala were as high as 15.8% in 2004-05 even though it eased to 9% in 2009-10. The corresponding figures for urban areas were 19.9% and 8.3% respectively. Even though unemployment seems to be on the decline, in absolute terms the numbers are still very high. Kerala thus has a huge pool of educated unemployed.

First let’s take a look at the general financial condition of the state.

Kerala's Financials

Revenue Receipts (in Rs cr)30,99139,42739,58748,141
Revenue Expenditure (in Rs cr)34,66444,96145,05951,605
A. Revenue Deficit(-)/Surplus(+) (in Rs cr)-3,673-5,533-5,471-3,463
Capital Receipts (in Rs cr)7,80710,43810,91711,099
Capital Expenditure (in Rs cr)3,3633,8344,9496,554
B. Capital Deficit(-)/Surplus(+) (in Rs cr)4,4446,6045,9684,545
C. Fiscal Deficit (in Rs cr)-7,73010,50611,30010,726
D. Revenue Deficit/GSDP (%)1.331.811.670.89
E. Fiscal Deficit/GSDP (%)2.793.433.462.74
F. Total Debt Stock (in Rs cr)78,67388,74689,2831,01,179
G. Debt/GSDP (%)28.42927.3325.86

Source: Kerala Budget 2012-13 (Budget in Brief)

Kerala spends more than it earns in the form of tax, non tax revenues and grants. The state has consistently posted revenue deficits. The revenue deficit went up by 49% in 2011-12. As ratio of GSDP, the deficit was a rather high 1.67% in 2011-12.

These deficits are financed by taking loans. This is evident from surpluses which the state runs on the capital account. Its inability to invest also reflects in the state of underdevelopment. However capital expenditures grew 47% in 2011-12, from Rs 3,363 crore in 2010-11 to Rs 4,949 in 2011-12. It is further expected to grow to Rs 6,554 crore in 2012-13; an increase of 32%.

Still most of the loans taken are used to finance the overruns on revenue account. This has lead to a steady increase in the states’ debt stock without much investment in productive assets. The debt grew by 13.5% in 2011-12.The debt is expected to grow by 13.3% in 2012-13. The Debt-GSDP ratio has continued to be quite high at 27.33% in 2011-12, even though there is a downward trend.

Fiscal deficit rose from 2.79% in 2010-11 to 3.46% in 2011-12. It is, however, expected to fall to 2.74% in 2012-13.

Salaries Get Lion’s Share

Besides all these fundamental financial pointers a look at where money is actually spent emphasizes the kind of fix the state is in. The lion’s share of the expenditure goes into paying salaries, pensions and interest payments.

Let’s take a closer look.

Expenditure On Salaries & Pensions

Expenditure on Salaries (in Rs cr)11,06816,32515,80516,765
Expenditure on Pensions (in Rs cr)5,7677,3117,7308,178
Expenditure on Interest Payments (in Rs cr)5,6896,2546,3587,234
Salaries, Pensions and Interest Payments as a % of Total Revenue Expenditure6566.566.462.35
Salaries and Pensions as % of States Own Revenue718180.670

Source: Kerala Budget 2012-13 (Budget in Brief)

Salary, pension and interest payments made up around 66.4% of revenue expenditure in 2011-12, a rise of 1.4 percentage points from 2010-11. Hence very little is left for investment after disbursement of salaries, pensions and interest payments. In fact around 80% of states own revenues receipts goes into these heads.

The good news is that most of what is left goes into creating assets in social sector, mostly education.

Expenditure On Education

Expenditure on Education (in Rs cr)5,9796,8479,32310,316
Expenditure on Education as % of Total Developmental Expenditure40.6641.5841.2838.82

Source: Kerala Budget 2012-13 (Budget in Brief)

Kerala has consistently spent more than 40% of its developmental expenditure on education. This is one of the reasons behind the high educational capital of the state.

Expenditure On Education Vs Bihar

Kerala ranks first in the country with a literacy rate of 93.91 %.In contrast; Bihar with a rate of 63% is way behind the national average of 74%. Comparing educational spends of the two state governments may throw some light on why things are the way they are.

Kerala's Expenditure On Education Vs Bihar

StateEducational Expenditure 2011-12 (Rs crore)Population (in crore)Educational Spend per person (Rs/person)

Source: Kerala Budget 2012-13, Bihar Budget 2012-13, Census 2011

As can be seen Kerala spent Rs 1,659 more per person in education than Bihar in 2011-12. The story has been the same all along. Kerala spends much more per person in education than most of the states in India. And it spends it much more efficiently.

The bad news is that despite having an educated workforce Kerala happens to have high unemployment rates. According to a NSS survey the rural unemployment rate in Kerala was 9% and the urban unemployment rate was 8.3% in 2009-10.

Tackling Unemployment

But steps are being taken to make this right. In state budget 2012-13, employment skill development has been made a priority.

The state government has declared the Additional Skill Acquisition Program (ASAP) to be undertaken along with School, Higher Secondary and Degree level classes and Additional Skill Enhancement Program (ASEP) for those who have finished their studies earlier.

Higher Secondary and degree students who opt for the ASAP Schemes can choose any employment oriented course based on their aptitude. The courses will be approved by associations and institutions in the industrial sector. Degree students can achieve ‘dual’ degrees when they finish their studies.

ASEP scheme will be implemented through State employment exchanges. Thus, the employment exchanges of the state will transform into employment skill development centres instead of being registration centres for the unemployed. Continuous training schemes will be conducted in at least one centre in each district utilizing available infrastructure facilities in existing Industrial Training Institutes (ITI). The schemes will be implemented with the co-operation of the National Skill Development Corporation of the Government of India. Rs 30 crore has been earmarked for these projects.

Besides ASAP and ASEP a State Entrepreneurship Development Mission has been formulated that would initiate 10,000 new employment ventures.

In view of all these new employment generation schemes, 2012-13 has been declared the Kerala Entrepreneurship Year.