When India became independent, the main livelihoods in this region, as in the rest of the country, were based on land. But unlike most other regions of India, a significant and relatively more prominent part of the economy (half or more of the domestic product) was urban and non-agricultural. Non-agricultural did not mean industrial. True, the processing of some commercial products involved non-mechanised factories. Alappuzha (Alleppey) had emerged as a hub of coir production and Quilon (Kollam) of cashew. Some isolated large, mechanised factories employed hundreds of people in one place in chemicals, rayon, paper and a few other lines. Thus, Aluva (Alwaye) had textiles, fertilisers, aluminium, glass and rayon industries, and Ernakulam oil and soap industries. There were also tea estates in the hills. A concentration of plantation businesses in rubber and spices occurred to the east of Kottayam. But collectively, these formed a smaller group than trade and the financing of marketing, which dominated the landscape of non-agricultural employment. All major towns lived mainly on trade and informal banking. Trichur and Kottayam were mostly service-based towns, with a concentration of banks, colleges and rich churches.

Over one-third of the workforce was in industry, trade, commerce and finance. In most large states of India, the percentage was 20–35. The exceptions were the industrialised states of West Bengal and Maharashtra, where factory-based large-scale industrial firms concentrated. Again, a contrast emerged with the rest of India. Most local businesses were small-scale, semi-rural and household enterprises, whereas non-agricultural enterprises in the rest of India were mainly urban.

Further, industrialisation almost everywhere else signified a sharp inequality between the countryside and the city. The former was trapped in low-yield farmland producing grains for subsistence or local markets, and the latter experienced growth of high-wage jobs. In the state, that distance was narrower. The presence of tree crops and their industrial processing made for a narrower gap between the rural and the urban. Many of the landholders were also owners of estates growing tree crops. Agriculture was not necessarily low yield nor subsistence oriented. In this way, agriculture and non-agriculture, rural and urban came much closer here compared with India.

In the early nineteenth century, the region was ruled by three main political entities: the British Indian district of Malabar belonging to the Madras Presidency, Cochin state, and Travancore state. This was what the southwestern coast's political map looked like for 150 years before the three units were merged to form Kerala (1956). Despite this difference in political form, the three units experienced rather similar forces of change since the nineteenth century, such as the commercialisation of farming and plantations that expanded into new land frontiers, the influx and mobility of capital, labour migration, social movements targeting harsh inequalities and the decline of landholder power.

This chapter will describe the change and its legacies in the mid-twentieth century. It is helpful to start with the eighteenth century, when the political balance faced new challenges before settling down.

Trade and Politics in the Eighteenth Century

A serious European engagement with the southwestern coast of India began with Portuguese explorations in the late fifteenth century. From much before, Malabar traded with West Asia and Africa. ‘Nowhere in India,’ wrote D. M. Dhanagare, ‘have foreign trading and commercial and religious interests interacted within the indigenous socio-economic and political institutions more intimately than they have in Malabar.’

The chief exports of Malabar in early modern trade were spices and timber. Teak was abundantly available. A large shipbuilding industry developed, dependent on the custom of local ship-owning merchants. Beypur was the principal port in Malabar, where much of the commercial and shipbuilding activity was concentrated. In 1498, the Portuguese mariner Vasco da Gama landed in Malabar. A subsequent Portuguese attempt to impose a licensing system on coastal trade produced intermittent conflicts with the ruler of Calicut (Kozhihode), his allies inland, and a resistance force created by the Muslim merchants operating in the seaboard. The Portuguese attempt failed in the end, and the centre of Portuguese settlement shifted further north.

The cosmopolitanism of Malabar strengthened further in the second half of the eighteenth century under two forces, one maritime and another inland. In the seventeenth century, Dutch and English traders arrived to take a share of the lucrative spice trade.

While advances in mass health and schooling made Kerala quite distinct from other states in India in the 1950s, this was not a pathway to economic and social mobility, let alone economic growth. The quality of education, especially higher education, was poor. The persistence of gender norms kept many women out of the labour force, and high unemployment forced most skilled people out of the state. Outside the state, Malayalis found work, but in jobs that did not provide a dramatic change in conditions compared with similar jobs back home.

The Persian Gulf migration broke the stagnation, not just by offering more gainful opportunities but in indirect, if powerful, ways. In the long run, the job market in the Gulf demanded progressively greater skills from the migrants. Two periodic reports – India Migration Reports and Kerala Migration Surveys – reveal a trend towards rising skill levels on average, consistent with the diversification of the Gulf economies from oil-based occupations towards financial and business services. Consequently, more jobs opened up in offices in clerical, accounting, sales and supervisory roles. The migration offered those who stayed back in Kerala the scope to invest in human capital. It stimulated growth by increasing construction activity and the consumption of services. It also possibly encouraged business investment, but this link remains under-researched (Chapter 4). A third factor that deserves mention is women's changing roles and economic conditions, both those who stayed back and those who moved out. In both cases, the nature of the migration and mobility link was different from men’s.

The recent globalisation, or re-integration with the world economy, is, in these ways, a story of labour – and not primarily trade, foreign capital inflow, or investments abroad. It would still be a mistake to overstress international migration or even, more narrowly, emigration to the Persian Gulf. The recent history of labour is also a history of occupational diversification, professionalisation, skill accumulation, shifting gender roles, consumption and saving, and demographic transition.

The present chapter tells that story.

The Miracle

In 1981, the south Indian state of Kerala was among the poorest regions in India. The state's average income was about a third smaller than the national average. In the late 1970s, by average income, Kerala was in the bottom third of India's thirty-odd states. In 2022, per capita income in the state was 50–60 per cent higher than the national average. Among those states large in land size, populous and with a diversified economic base, the state was the fifth richest in terms of average income in 2022. Gujarat, Karnataka, Tamil Nadu and Telangana were the other four. None of the others saw such a sharp change in relative ranking.

Kerala's economy did not grow steadily throughout these forty years. The acceleration, catching up and overtaking were not more than fifteen years old, twenty at the most. Income growth rates were low for much of the 1980s and the 1990s. The numbers changed sharply only in recent decades. The roots of this extraordinary growth performance, however, were much older. This book is a search for these roots.

It is not a common practice among economists to treat a state in India as the subject of long-term economic history. But ‘Kerala is different’ from all other Indian states. A huge scholarship building from the 1970s and drawing in many social scientists insisted it was different. Although poor, the population of the state lived much longer than the average Indian and had a significantly higher literacy rate than in the rest of India. The scholarship trying to explain this anomaly was mindful of history. But the history had a narrow purpose. It was made to work for a specific question: how did an income-poor region make great strides in human development? The discourse that emerged to answer the question had two critical weaknesses. First, it was too state-focused and neglected to analyse enough market-led changes. Second, it took income poverty for granted. Neither the question nor the answers offered are useful to explain the recent acceleration in income. The explanations could not show how the basic premise of a low income might change someday because the research agenda did not consider that prospect very likely.

About a decade after India began liberalising its economy, arguments over the best pathway to plan for emerged. Kerala acquired a new significance in this discourse. Did the state have lessons for India at large? The most influential commentators on India's record of human development, Jean Drèze and Amartya Sen, cited the strides in human development, implying that India's policymakers needed to learn lessons from what could be done with limited state resources. A competing view, of which Jagdish Bhagwati was a forceful proponent, said that the accent on human development risked devaluing economic growth. Growth needed competitive markets, which would strengthen the state's finances and sustain the ability to fund welfare and public goods. In this second argument, Kerala was cited as a fiscally unsustainable model. ‘The much-advertised model of alternative development, in the Indian state of Kerala,’ Bhagwati said in a 2004 lecture, ‘with its major emphasis on education and health and only minor attention to growth, had … run into difficulties….’

How sound were these authors in reading the state's history? Not very, one would think. Bhagwati expressed his pessimistic views even as economic growth had begun to surge. His intuition that the model was unsustainable was probably correct but not testable. Drèze and Sen, writing in 2013, did casually acknowledge that economic growth revived and then attributed it to ‘Kerala's focus on elementary education and other basic capabilities’, not going into the details of how these two things were related. Their discussion of the state's recent history almost totally overlooked the most significant force of transformation, a market-driven one: the export of labour. In short, the market-versus-state choices in the 2000s debate were obsolete tools for a historical analysis of the state.

When discussing that history, what should we be looking at? Chronologically, the first major transformation that marked the state out in India was the positive achievements in education and healthcare, which began in the nineteenth century. The second major transition was the declining average fertility and population growth rates in the middle decades of the twentieth century. Since these topics are much discussed, we will be brief and build on a few major works on the subjects.

For years now, Kerala has had the distinction of being ruled by a communist-partyled coalition. The communist alliance won the first state assembly elections in 1957, lost in 1960, returned to power, and ruled the state in 1967–70 (first under E.M.S. Namboothiripad till 1969 and then under C. Achuthamenon), 1970–77, 1978–79 1980–81, 1987–91, 1996–2001, 2006– 11 and since 2016. In between, there were years when the state was under President's Rule, that is, the federal government governed it. The composition of the left coalition changed. It was never a body consisting of only the ideologically left parties: the Muslim League and some Christian factions allied with the communists. However, the main constituents of the coalition were the Communist Party of India (CPI) until 1964 and the CPI (Marxist), or CPI(M), after the CPI split into two parties.

In no other state of India, except West Bengal (and later Tripura), did the CPI or CPI(M) command a popular support base large enough to win elections. In common with West Bengal, tenants and agricultural labourers in these acutely land-scarce regions formed the main support base for the party. The communists won elections on the promise of land reforms. There was another historic factor behind their popularity. Caste equality movements coalesced around the leftist movement. Because of their commitment to the rural and land-dependent poor, the left delivered land reforms in Kerala and West Bengal in the 1970s. And in both states, ruling left parties indirectly drove private capital out of trade and industry. Ideological differences within the Communist Party of India led to a split in 1964. A faction led by S.A. Dange tended to have cooperation with the Indian National Congress, which then had a good relationship with the Soviet Union. That and the debates on National Bourgeoisie led to the split.

This is not a paradox. The paradox was that from the 1990s, if not earlier, the left quietly turned friendly towards private capital. By then, agriculture was in retreat, the old base of the left was not significant anymore, and the state was rapidly falling behind India in economic growth (and investment rates).

The state's climate is unique among Indian states. Following the Koppen– Geiger classification of climatic regions of the world, over two-thirds of the land in India is tropical savanna, desert or semi-arid. Most of Kerala is monsoonal or highland tropics. The difference is this. The average summer temperature in the former regions can reach levels high enough to dry up surface water. The monsoon rains relieve that aridity, but only for a few months in a year. That dual condition makes water storage and recycling a fundamental precondition for economic growth. It elevates the risk of droughts and diseases from seasonal or periodic acute water shortages. Kerala, by contrast, does not get as fierce a summer as the other areas of India and receives a lot more rainfall. That dual condition implies a natural immunity from seasonal food and water scarcity and a low disease risk.

With its extraordinary biodiversity, this is a vast storehouse for natural resources. The state has a surface area of 38,855 square kilometres and is bounded by the Arabian Sea to the west and the Western Ghats to the east. The eastern highlands, the central midlands and the western lowlands, with 580 kilometres of coastline, can access a wealth of ocean resources and means of subsistence for their fisherfolk and the general populace. Compared with semi-arid India, the benign environment largely explains the head start in life expectancy (Chapters 1 and 6). Further, nature provides industrial resources that cannot be found elsewhere. The highlands have the ideal climate for growing coffee, tea and spices. Low hills are often planted with rubber. The seaboard traded with West Asia for centuries. The state's Gulf connection, thus, had a prehistory. A large tourism business has developed by selling nature.

On the other hand, recent experience shows that climate change and overdevelopment can jointly raise the risk of disasters. In the first three weeks of August 2018, Kerala received 164 per cent of the average rainfall for that time of the year. The following floods were devastating, comparable only to a similar event in 1924. In 2019, extreme weather repeated, now causing landslides. Mining and quarrying, frequent blasting and unscientific changes in land use patterns affected the highland ecology.

In 1956 (and even now), two distinct types of agriculture existed in the state: cultivation of seasonal field crops and cultivation of tree crops. The latter held steady in the long run. But traditional agriculture, especially paddy cultivation, for which the lowlands and the river basins were especially suitable, has seen a relentless decline since 1970. Twenty years into the new millennium, traditional agriculture was an insignificant employer and earner, and for most people still engaged in it, the land provided no more than a subsidiary income. A relative retreat from traditional agriculture is not news. It happened everywhere. In the state the fall was spectacular.

What was this a change from? Although agriculture employed a smaller proportion of the workforce than in India at the start of this journey, it was not a marginal livelihood. Land control secured the political power of the elites in the princely states. A variety of crops were cultivated throughout the state, from monsoon rice to tapioca, ginger, groundnut, sugarcane and pulses. Most were rarely traded outside the region but were vital to sustaining local consumption. Good croplands occurred in clusters. Because of the topography, land available for the cultivation of traditional field crops was less than half the total land area of the state. Alluvial soil occurs in a narrow strip along the coast or in river valleys. Land elsewhere is not as fertile, though frequently suitable for tree crops. Unlike in most regions of India, access to water was not a serious problem. Soil quality and drainage of excess water were bigger problems.

Good land, however, was extremely scarce relative to the population. The exceptionally high population density in the areas of cultivation ensured a level of available land per head that was a fraction of the Indian figure (0.6 acres against an Indian average of 3.1 acres around 1970) and low by any benchmark. Partly, the density reflected high labour demand in lowlands to deal with drainage and seasonal flooding. Paddy yield was very high in these areas, but paddy cultivation needed a lot of people. From the 1940s, this zone in the middle was emerging as a political battleground.

The series to which this book belongs began with the intuition that the pathway of economic change since independence from colonial rule (1947) differed fundamentally between the states of India because their prehistory, geography, political make-up and initial conditions were very different. So large is the difference that each case deserves a book. Contributions to the series will inevitably structure their work to adapt to the specific experience of the states and cannot follow a single template. In that decision, one thing matters: whether to write a chronological narrative or a thematic one.

There is no ideal choice. We decided to follow the thematic format because we wished to concentrate on the main drivers of economic change, like migration, trends in private investment or environmental change, which did not unfold in a coordinated way. We felt a chronological story suggesting that the 1970s saw one kind of change and the 1980s another would miss the point. Still, to keep chronology in the foreground, we discuss the changing character of the state's economy in the introduction and the conclusion (Chapters 1 and 9).

We wish to acknowledge the anonymous readers of the book proposal, and the reader of the manuscript, for their comments and suggestions that significantly improved the quality of this text. We thank Upasana Guha, who provided valuable research assistance, for her careful and diligent work. The help rendered by Rachel Mathew, Dulhaqe S. and Benna Fathima is also gratefully acknowledged.

A note on placenames: Many placenames have changed since 1956. In every chapter, in the first usage we write both old and new names and use the changed name in the rest of the chapter. Chapter 2 on history uses the old names in subsequent usages.

Kerala Is Different … Not the Way You Think

The book began with a one-liner – ‘Kerala is different’. The series to which this book belongs emerged from the intuition that every state in India ‘is different’. Kerala was not more different than Tamil Nadu, Gujarat or West Bengal. Geography and resource endowments, social conditions such as patterns of inequality, politics and markets were significantly dissimilar between the larger Indian states, and sometimes between regions within these states. Scholars doing development or history have not explored the differences enough.

And yet that shallow slogan has had an unparalleled impact on development discourse in the late twentieth century. Why has this one state drawn so much attention in the development scholarship? Because of a misreading of its economic history, the book argues.

As we mentioned in the introduction, the state's economic trajectory can be summed up, if crudely, with a chart with three lines, one measuring economic growth and the other two education and life expectancy. The state's position relative to India fell with the social indices but dramatically improved with economic growth. A preoccupation with social development lacks a strong justification, at least for economic historians of the state. The more challenging task for us was explaining the economic growth divergence with reference to prehistory and the state's geography.

The misreading emerged in the 1980s through an overstatement of human development performance. Many scholars inferred that the state's political ideology was more enlightened and developmental than that of other Indian provinces and that the state government's heart was in the right place. Whether due to the communist movement or Travancore and Cochin's princely heritage, the governments prioritised poor people's access to primary education and healthcare. Others further claimed that the state showed the world that economic growth was not needed for development.

This reading is not wrong. But, historically speaking, it is a naive reading. It is naive for three reasons. First, suppose Kerala was ahead of India in the 1950s and 1960s. In that case, a story of enlightened government does not make much sense because governments were relatively small then, and many factors besides the government were at work behind the initial advances in education and health.

Introduction

The preamble to the Reserve Bank of India (RBI) Act enjoins the Bank to operate the credit system to the advantage of the country, a country where most of the population lives in rural areas. Further, the Bank is required to ‘study various aspects of rural credit and development’ as it may consider necessary to do so for promoting integrated rural development. From the 1970s, this aim was achieved by means of directed credit, mainly ‘priority sector lending’. The policy directed banks to lend to agriculture, small enterprises, retail trade, microcredit, education and housing, subject to certain conditions. It started with nationalised banks in 1974 and was extended to private banks in 1978. In 1985, 40 per cent of bank credit was directed to flow to priority sectors, within which 25 per cent (10 per cent of the total advances) was to go to the ‘weaker sections’ of society. Weaker sections included small and marginal farmers with landholdings of less than 5 acres, landless labourers, artisans and ‘tiny’ enterprises with loan limits up to 50,000, beneficiaries of the government’s poverty alleviation programmes, Scheduled Caste/Scheduled Tribe (SC/ST) borrowers and members of self-help groups (SHGs). A separate sub-target of 16 per cent was fixed for agriculture in 1985 and raised to 18 per cent in 1990.

The financial sector reforms from 1992 underscored that banks and other financial institutions (FIs) had to become strong and efficient (see Chapter 10.1). The report of the Committee on the Financial System (Narasimham Committee I, 1991) recommended that the directed credit programme, being an anomaly in a ‘free market competitive system’, should be phased out. The Committee on Banking Sector Reforms (Narasimham Committee II, 1998) observed that ‘a high incidence of NPAs [non-performing assets or advances] could be traced to policies of directed credit’. Other reviews also recommended reforms and scaling down. But neither the government nor the Reserve Bank was ready to deprioritise the priority sector.

Still, as more emphasis was laid on operational freedom and profitability of banks, the Reserve Bank was under pressure to pause or go soft on directed lending and its rural focus. While it avoided a reversal of its policies, occasional wavering in its resolve could be observed.