VOICE & VIEWS
CBS LINE
Volume 4(8)
1. Despite leading India in human capital metrics, with a 41% higher education Gross Enrolment Ratio, Kerala continues to face a youth unemployment rate of nearly 30% alongside a subdued manufacturing base. In this context, what policy measures do you think are necessary to address constraints such as high land costs and operational friction, attract large-scale private investment, and create more formal local employment opportunities?
Respondent:Educated unemployment in Kerala is not a recent development. It was already the central concern of research at the Centre for Development Studies in the 1970s, when higher education enrolment was a fraction of today's. The state's unemployment rate has run two to three times the national rate throughout that period, currently around 7 per cent against roughly 3 for India, and close to 30 per cent among the young. A diagnosis resting on land prices and administrative friction explains a five-decade structural feature with a one-decade cause.
Kerala completed its social transformation well ahead of its economic transformation. It exited agriculture without entering industry. Manufacturing accounts for about a tenth of gross value added against roughly 17 per cent nationally, a share that has not risen in thirty years. The space vacated by commodity production was filled by activities financed externally. The Kerala Migration Survey places remittance inflows at approximately Rs 2.2 lakh crore in 2023, close to a fifth of state income, against about Rs 85,000 crore in 2018. That money went into construction, trade, real estate and private health and education, all non-tradable. High wages and high land values are consequences of this configuration rather than independent obstacles to it.
The unemployment rate also requires careful interpretation. Kerala is the largest labour-importing state in India relative to its size, because its wage rates are the highest in the country. The binding constraint is not an absence of work but the length of a queue: educated young people waiting for a Public Service Commission post, a nursing placement, a Gulf job, and now a student visa, sustained by households that can afford the wait. Poorer states record lower unemployment because their young cannot.
Kerala will not attract land-and-labour-intensive manufacturing at prevailing wages, and with debt near a third of GSDP it cannot purchase it. The two margins that remain are the quality and productivity of the informal work that already exists, and female employment, where the state educates better than any other and employs worse than that achievement warrants. Kerala’s options are limited. It should focus on developing high value services which can attract the educated labour force.
Kerala completed its social transformation well ahead of its economic transformation. It exited agriculture without entering industry. Manufacturing accounts for about a tenth of gross value added against roughly 17 per cent nationally, a share that has not risen in thirty years. The space vacated by commodity production was filled by activities financed externally. The Kerala Migration Survey places remittance inflows at approximately Rs 2.2 lakh crore in 2023, close to a fifth of state income, against about Rs 85,000 crore in 2018. That money went into construction, trade, real estate and private health and education, all non-tradable. High wages and high land values are consequences of this configuration rather than independent obstacles to it.
The unemployment rate also requires careful interpretation. Kerala is the largest labour-importing state in India relative to its size, because its wage rates are the highest in the country. The binding constraint is not an absence of work but the length of a queue: educated young people waiting for a Public Service Commission post, a nursing placement, a Gulf job, and now a student visa, sustained by households that can afford the wait. Poorer states record lower unemployment because their young cannot.
Kerala will not attract land-and-labour-intensive manufacturing at prevailing wages, and with debt near a third of GSDP it cannot purchase it. The two margins that remain are the quality and productivity of the informal work that already exists, and female employment, where the state educates better than any other and employs worse than that achievement warrants. Kerala’s options are limited. It should focus on developing high value services which can attract the educated labour force.
2. On November 1, 2025, Kerala officially declared itself India's first extreme poverty-free state. Kerala's success depended on decades of strong local governance, high literacy, and established community networks like Kudumbashree. To what extent do you think other Indian states with weaker local self-government architecture can replicate this model, and what institutional conditions would be necessary for its successful implementation?
Respondent:The declaration warrants precision, because press coverage has been considerably looser than the achievement itself. Kerala did not eliminate poverty on 1 November 2025. It concluded a four-year exercise identifying and addressing extreme destitution among an enumerated set of households. Roughly 64,000 families were identified through local self-governments, Kudumbashree neighbourhood groups and frontline health and child development workers, validated in gram sabhas, and assessed against four criteria: food, health, income and shelter. Each received a micro-plan prepared at the local body level. That is under one per cent of the state's approximately 87 lakh households, and NITI Aayog's multidimensional estimates already placed Kerala's headcount below one per cent before the programme concluded.
What Kerala did, then, was locate the residual and address it case by case. This is a genuine administrative accomplishment; no other state has attempted identification at that granularity. But it is a last-mile exercise rather than a poverty reduction strategy. Mass poverty was eliminated earlier through land reform, a functioning universal public distribution system, early near-universal schooling and public health, social security pensions now reaching around 60 lakh people, and four decades of remittances. A state that has not done those things cannot begin at the last mile.
The components differ in portability. The community network is the most replicable, and the premise of the question overstates Kerala's distinctiveness here: JEEViKA in Bihar is comparable in membership, SERP in Andhra Pradesh predates Kudumbashree, and most states now possess similar architecture under the National Rural Livelihoods Mission. What Kerala possesses uniquely is the linkage between that network and an elected local government holding funds and authority. Since the People's Plan Campaign of 1996, roughly a third of plan outlay has gone to panchayats and municipalities as untied funds, with functionaries transferred alongside. Elsewhere the Eleventh Schedule was devolved on paper. The necessary conditions follow: untied rather than scheme funds, staff reporting to the local body, a convergence mandate with real authority, gram sabha validation, and recurring fiscal capacity, since much of what lifted these households is a monthly transfer payable indefinitely. Two qualifications. The survey frame excluded interstate migrant workers, among the most deprived in the state. And destitution is a flow rather than a stock; in a state where a sixth of the population is over sixty, illness, widowhood and disability will continue generating cases. The durable achievement is the machinery of continuous identification, not the declaration.
What Kerala did, then, was locate the residual and address it case by case. This is a genuine administrative accomplishment; no other state has attempted identification at that granularity. But it is a last-mile exercise rather than a poverty reduction strategy. Mass poverty was eliminated earlier through land reform, a functioning universal public distribution system, early near-universal schooling and public health, social security pensions now reaching around 60 lakh people, and four decades of remittances. A state that has not done those things cannot begin at the last mile.
The components differ in portability. The community network is the most replicable, and the premise of the question overstates Kerala's distinctiveness here: JEEViKA in Bihar is comparable in membership, SERP in Andhra Pradesh predates Kudumbashree, and most states now possess similar architecture under the National Rural Livelihoods Mission. What Kerala possesses uniquely is the linkage between that network and an elected local government holding funds and authority. Since the People's Plan Campaign of 1996, roughly a third of plan outlay has gone to panchayats and municipalities as untied funds, with functionaries transferred alongside. Elsewhere the Eleventh Schedule was devolved on paper. The necessary conditions follow: untied rather than scheme funds, staff reporting to the local body, a convergence mandate with real authority, gram sabha validation, and recurring fiscal capacity, since much of what lifted these households is a monthly transfer payable indefinitely. Two qualifications. The survey frame excluded interstate migrant workers, among the most deprived in the state. And destitution is a flow rather than a stock; in a state where a sixth of the population is over sixty, illness, widowhood and disability will continue generating cases. The durable achievement is the machinery of continuous identification, not the declaration.
3.State governments frequently debate whether to prioritize capital expenditure or social spending. In lagging states, how effective do you think state-led public capital expenditure can be in crowding in private corporate investment?
Respondent:The framing requires qualification. Approximately two-thirds of state revenue expenditure is committed to salaries, pensions and interest, leaving little discretionary social spending of the kind the debate assumes. The operative trade-off is therefore not capital outlay against welfare but capital outlay against the quality of service delivery. What is typically compressed to protect capital expenditure is maintenance, teacher recruitment and drug procurement. That is a reallocation between forms of capital formation, frequently toward the less productive one.
On the substantive question, the theoretical case is sound: public capital complementary to private capital raises its marginal product. The Indian evidence is considerably thinner than the confidence with which the claim is advanced. The multiplier commonly cited, approximately 2.4 for capital expenditure against 1.0 for revenue expenditure, derives from Bose and Bhanumurthy's NIPFP work. It is a national structural macro econometric estimate concerning output, not a state-level causal estimate concerning private corporate investment.
My expectation is that crowding-in is real but conditional and smaller than the policy discourse assumes. Capital expenditure is a heterogeneous category in which equity infusions into loss-making distribution utilities sit alongside infrastructure. Absorptive capacity binds before finance does, as persistent underspending of budgeted capital outlay indicates. Private corporate gross fixed capital formation has remained around 11 to 12 per cent of GDP and is concentrated where agglomerations already exist; improved connectivity in a lagging state lowers the cost of trade with leading states, which may accelerate outward movement as readily as inward. And debt-financed capital expenditure that displaces maintenance can reduce the usable capital stock. The higher-return interventions are administratively demanding rather than capital-intensive: reliable supply at the point of use, functioning commercial courts, secure land records, and maintenance budgets.
On the substantive question, the theoretical case is sound: public capital complementary to private capital raises its marginal product. The Indian evidence is considerably thinner than the confidence with which the claim is advanced. The multiplier commonly cited, approximately 2.4 for capital expenditure against 1.0 for revenue expenditure, derives from Bose and Bhanumurthy's NIPFP work. It is a national structural macro econometric estimate concerning output, not a state-level causal estimate concerning private corporate investment.
My expectation is that crowding-in is real but conditional and smaller than the policy discourse assumes. Capital expenditure is a heterogeneous category in which equity infusions into loss-making distribution utilities sit alongside infrastructure. Absorptive capacity binds before finance does, as persistent underspending of budgeted capital outlay indicates. Private corporate gross fixed capital formation has remained around 11 to 12 per cent of GDP and is concentrated where agglomerations already exist; improved connectivity in a lagging state lowers the cost of trade with leading states, which may accelerate outward movement as readily as inward. And debt-financed capital expenditure that displaces maintenance can reduce the usable capital stock. The higher-return interventions are administratively demanding rather than capital-intensive: reliable supply at the point of use, functioning commercial courts, secure land records, and maintenance budgets.
4. In an article you wrote for the Financial Express in September 2025, titled “Making GST 2.0 work for states, citizens,” you point out that past GST rate cuts did not lead to lower consumer prices because sellers absorbed the tax savings as profit margins. Given that enforcing anti-profiteering has historically been a legal and administrative challenge, can the government realistically ensure that consumers benefit from GST 2.0 without slipping into price controls or regulatory overreach?
Respondent: Three questions require separation: whether a rate reduction should be expected to reach consumers, whether it did, and whether the state should compel it.
On the first, full pass-through should not be expected, and statutory incidence is uninformative about economic incidence. Transmission depends on relative elasticities of demand and supply and on market conduct. Competitive markets with elastic supply transmit nearly fully; concentrated markets with linear demand transmit roughly half; constant-elasticity demand with market power can produce over-shifting. Partial transmission in categories dominated by three or four firms is the predicted outcome, not evidence of misconduct. The European literature, including Benzarti and co-authors on French VAT and Benedek and co-authors at the Fund, documents both a marked asymmetry between increases and reductions and substantially weaker pass-through for reduced rates and reclassifications, which is the category most Indian changes occupy. Informality compounds this. Where price is negotiated and the seller operates under composition or below threshold, no credit chain exists to transmit the reduction. Where the change denies input tax credit, as with the exemption of individual insurance premia, the supplier's embedded tax cost rises and price cannot fall by the headline amount.
On the second, this round differs analytically from 2017 to 2019. The earlier reductions were piecemeal, dispersed across Council meetings, and largely invisible to consumers, conditions under which absorption is the firm's optimal response. The September 2025 restructuring was large, simultaneous across entire categories, and advertised aggressively. Salience alters the elasticity of demand facing the individual seller: where consumers hold a category-level reference price, the firm that does not reduce loses share. Publicity functions here as a demand-side incidence instrument, reinforced by the requirement to declare revised maximum retail prices on existing stock. Pass-through in this round is therefore likely to be materially higher in the publicised categories, with the earlier pattern persisting in the unpublicised remainder.
On the first, full pass-through should not be expected, and statutory incidence is uninformative about economic incidence. Transmission depends on relative elasticities of demand and supply and on market conduct. Competitive markets with elastic supply transmit nearly fully; concentrated markets with linear demand transmit roughly half; constant-elasticity demand with market power can produce over-shifting. Partial transmission in categories dominated by three or four firms is the predicted outcome, not evidence of misconduct. The European literature, including Benzarti and co-authors on French VAT and Benedek and co-authors at the Fund, documents both a marked asymmetry between increases and reductions and substantially weaker pass-through for reduced rates and reclassifications, which is the category most Indian changes occupy. Informality compounds this. Where price is negotiated and the seller operates under composition or below threshold, no credit chain exists to transmit the reduction. Where the change denies input tax credit, as with the exemption of individual insurance premia, the supplier's embedded tax cost rises and price cannot fall by the headline amount.
On the second, this round differs analytically from 2017 to 2019. The earlier reductions were piecemeal, dispersed across Council meetings, and largely invisible to consumers, conditions under which absorption is the firm's optimal response. The September 2025 restructuring was large, simultaneous across entire categories, and advertised aggressively. Salience alters the elasticity of demand facing the individual seller: where consumers hold a category-level reference price, the firm that does not reduce loses share. Publicity functions here as a demand-side incidence instrument, reinforced by the requirement to declare revised maximum retail prices on existing stock. Pass-through in this round is therefore likely to be materially higher in the publicised categories, with the earlier pattern persisting in the unpublicised remainder.
5.While middle-class tax relief measures, such as the income tax exemption up to Rs 7 lakh announced in the 2024 Budget, provide immediate disposable income to households, they also create fiscal trade-offs for government revenues. From a public finance perspective, what tax reform measures or structural adjustments can the government implement to benefit individual taxpayers without compromising overall tax revenues?
Respondent:The premise requires correction. The Rs 7 lakh rebate threshold under Section 87A was announced in the 2023-24 Budget and has since been superseded. The 2025-26 Budget raised it to Rs 12 lakh, and with the standard deduction of Rs 75,000 the effective zero-tax point for a salaried taxpayer is approximately Rs 12.75 lakh, at a stated revenue cost near Rs 1 lakh crore. The relevant fact is not a marginal concession but that three successive budgets have removed most of the salaried population from the income tax net.
India has roughly nine crore filers, of whom approximately half report zero liability, in a population of 1.4 billion. Personal income tax now yields more than corporation tax, inverting the position of a decade ago. The resulting structure has a narrow base, an exemption threshold very high relative to per capita income, dependence on a thin band of high earners, and reliance on indirect taxation for the remainder, with a general government tax-to-GDP ratio around 17 to 18 per cent. The objective as stated is not coherent, since the same rupee cannot be forgone twice. The tractable question is how to raise taxpayer welfare at a given yield, which concerns composition and administration.
First, the exemption threshold is the wrong instrument. Threshold increases deliver the same absolute benefit to a taxpayer earning Rs 1 crore as to one earning Rs 13 lakh, making them the most expensive form of relief per rupee of welfare delivered. Rate reduction in the lower brackets is more efficient; thresholds are preferred only for their visibility.
Second, the larger gain lies on the deduction side, and the shift to the new regime has largely secured it. The Section 80C and house rent allowance structure subsidised those with liquidity and advisory capacity and channelled savings into lock-in instruments. Completing the migration is close to revenue neutral by construction. Third, revenue must come from base-widening outside the income tax. Agricultural income remains untaxed and serves as a laundering channel. Capital income is still taxed more lightly than labour at the top. Property tax, at 0.1 to 0.2 per cent of GDP against one to two per cent in comparable economies, is the largest and least distortionary gap available.
Finally, personal income tax is shareable and cesses are not. States forgo roughly 41 per cent of the revenue cost without participating in the decision. Reducing visible taxes while expanding non-shareable ones is not tax reform.
India has roughly nine crore filers, of whom approximately half report zero liability, in a population of 1.4 billion. Personal income tax now yields more than corporation tax, inverting the position of a decade ago. The resulting structure has a narrow base, an exemption threshold very high relative to per capita income, dependence on a thin band of high earners, and reliance on indirect taxation for the remainder, with a general government tax-to-GDP ratio around 17 to 18 per cent. The objective as stated is not coherent, since the same rupee cannot be forgone twice. The tractable question is how to raise taxpayer welfare at a given yield, which concerns composition and administration.
First, the exemption threshold is the wrong instrument. Threshold increases deliver the same absolute benefit to a taxpayer earning Rs 1 crore as to one earning Rs 13 lakh, making them the most expensive form of relief per rupee of welfare delivered. Rate reduction in the lower brackets is more efficient; thresholds are preferred only for their visibility.
Second, the larger gain lies on the deduction side, and the shift to the new regime has largely secured it. The Section 80C and house rent allowance structure subsidised those with liquidity and advisory capacity and channelled savings into lock-in instruments. Completing the migration is close to revenue neutral by construction. Third, revenue must come from base-widening outside the income tax. Agricultural income remains untaxed and serves as a laundering channel. Capital income is still taxed more lightly than labour at the top. Property tax, at 0.1 to 0.2 per cent of GDP against one to two per cent in comparable economies, is the largest and least distortionary gap available.
Finally, personal income tax is shareable and cesses are not. States forgo roughly 41 per cent of the revenue cost without participating in the decision. Reducing visible taxes while expanding non-shareable ones is not tax reform.
Rafa Mariyam
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