KERALA COMMUNISTS WORRY ABOUT COST OF SOCIAL PROGRAMS

UNCLAS CHENNAI 000593

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PINR SOCI IN
SUBJECT: KERALA COMMUNISTS WORRY ABOUT COST OF SOCIAL PROGRAMS



1. (SBU) SUMMARY: The southern Indian state of Kerala has long
been known for achieving a high level of social development despite
poor economic growth and low incomes. Kerala's approach, known as
the "Kerala model" of development, focuses on government spending on
education and health care. Remittances from overseas Keralites have
helped keep the system afloat. But Kerala officials are extremely
pessimistic about the sustainability of the model, admitting that
the "money is not there" to continue the government's costly health,
education, and pension programs. END SUMMARY.

KERALA MODEL: HIGH ACHIEVEMENTS IN SOCIAL INDICES . . .
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2. (U) Kerala regularly ranks highest among Indian states on
various indices of human development, including literacy, average
lifespan, and infant mortality. Life expectancy is 76 years (11
years higher than India's national average); literacy is 91 percent
(26 percentage points higher than the rest of India). The state's
achievements are credited to robust spending on social programs.
According to media reports, it spends 36 percent more on education
than the average Indian state and 46 percent more on health. This
spending is sustained by the high level of remittances the state
receives. Overseas Keralites send home 5 billion USD per year in
remittances, augmenting the state's GDP by 25 percent. These
remittances, though not taxed, lead to increased revenue through
sales taxes paid on remittance-driven consumption.

. . . BUT GOVERNMENT SPENDING LEVELS UNSUSTAINABLE
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3. (SBU) The amount of spending required to maintain the state's
social programs is causing widespread anxiety. Politicians from the
ruling Communist Party of India (Marxist) (CPI-M) and the opposition
Congress Party, as well as bureaucrats and journalists we spoke with
during a recent visit were unanimous in the view that the level of
spending on health care, education, and pensions is unsustainable.
According to government of Kerala figures, salary, pension, and
interest payments consume more than 80% of the government's total
revenue. Kerala, with an anticipated revenue deficit of 4.4 percent
of the state's GDP in 2006-2007, has one of the highest budget
deficits among all Indian states.


4. (SBU) In a recent meeting with visiting Consulate officers,
Finance Minister Thomas Isaac described the state's dire financial
situation. When we met, he glumly admitted the state was on the
thirteenth day of a fourteen-day revolving line of credit. He kept
a brave face saying it was largely "a liquidity question" and the
Finance Ministry would need to shuffle some accounts to avoid
overdrafting the line of credit. Isaac also said Kerala had reached
out to the central government for support, requesting reimbursement
for a 750 million USD shortfall in its budget due to decreased
revenues from its postal deposit scheme. The shortfall, he
explained, had resulted from the central Finance Ministry's decision
to reduce interest rates paid on these accounts. Isaac obliquely
acknowledged that spending on social programs prevents the state
from adequately addressing other critical needs when he advised
against traveling to nearby Kottayam by road, saying that the state
had not been able to adequately tackle road repairs. (NOTE: We
observed that the roads in Kerala are in substantially worse shape
than in the other south Indian states. Although the poor conditions
could partially be explained by the fact that Kerala has already
experienced the monsoon and the other states have not, the extremely
poor conditions left no doubt that limited resources have also had
an impact. END NOTE.)


5. (SBU) The state's bureaucrats were particularly gloomy. Chief
Secretary Lizzie Jacob (the state's highest bureaucrat) told post

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"the money is not there" to continue the current levels of spending
on health, education, and pension programs. Jacob explained that
retirement at 55 years of age combines with the state's lengthy
average lifespan (almost 74 years) to make pensions especially
burdensome. According to Kerala's own figures, pensions account for
15.5 percent of the state's total expenditures; pension expenses
increased 41.7 percent from 2005 to 2007. Health Secretary Dr.
Viswas Mehta, whose Ministry employs the majority of the doctors in
the state, agreed that the retirement age is a major burden. "All
of our doctors take retirement at 55, when they are in their prime,
and then go on to private practice," he said. Jacob also expressed
frustration with the lack of continuity in government programs. She
said each new government puts an immediate stop to projects
initiated by its predecessor, resulting in enormous waste.


6. (SBU) In addition to fiscal constraints, there is growing
competition from private sector education and health care providers.
Many people describe a two-tier system in place with anyone in
Kerala who can afford to pay for private health care or education
doing so, with only the lower classes utilizing public services.
Executives from U.S. Technologies (a major U.S. information
technology services company) mentioned that the wide array of
private educational institutions in Cochin is a big draw for
recruits with families. We observed numerous newly built high-end
private hospitals as we traveled through south and central Kerala.
In fact, Industries Secretary T. Balakrishnan told post that the
proliferation of private medical facilities in Kerala is leading the
state to emphasize medical tourism as an up-and-coming sector.


COMMUNISTS LOOK TO REVENUE FROM
PRIVATE INVESTMENT TO SAVE SOCIAL PROGRAMS
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7. (SBU) Our contacts told us the political environment in Kerala
means cutting social programs is a non-starter, despite the state's
poor fiscal situation. Industries Secretary T. Balakrishnan said
"the political will is not there" to cut spending. Chief Secretary
Jacob agreed with this assessment. With spending considered
untouchable, the politicians are focused on improving revenues.
Education Minister M.A. Baby, who is also a member of the CPI-M's
policy-making Central Committee, brushed aside the possibility of
reducing spending. He told us higher revenues derived from
increased investment, including foreign investment, are the answer
to the state's problems. Baby said "we want investment." As if to
insulate himself from questions about a Communist party seeking FDI,
he added "Even Castro wants investment but your government's
restrictions are holding it back." Another indicator of the degree
to which the government is feeling the fiscal squeeze is that Baby
suggested that the state might implement new user charges. In the
past, user charges such as road tolls have been met with serious
popular resistance in Kerala.


8. (SBU) Industries Secretary Balakrishnan and P.H. Kurian,
Managing Director of the Kerala State Industrial Development
Corporation said Kerala was eager for foreign investment, especially
in the IT sector. The investment promotion efforts they described
-- tax breaks, establishment of special economic zones, and
bureaucratic facilitation -- are similar to those offered by the
other south Indian states. But they admitted it was difficult to
compete with their neighbors. Balakrishnan mentioned that the state
was planning a trade promotion trip to the United States but, unlike
the other south Indian states, the Chief Minister would not lead the
delegation. This, he said, sent the wrong message to prospective
investors. The biggest problem Kerala has with prospective
investors, according to Balakrishnan and Kurian, is land
acquisition. Extreme sensitivity over land ownership by corporations
means that typically companies lease space in government-established
technology parks. Balakrishnan said companies prefer to locate in
the other south Indian states because they are able to buy property
there, which in India's hot real estate markets usually appreciates
in value, rather than rent.


9. (SBU) COMMENT: Kerala's achievements on social indices are
impressive. But the system is clearly under strain. Kerala's
ruling Communists are looking to revenue from private investment to
save the day. We did meet a number of business people who are happy
to have set up operations in Kerala. But government officials and
representatives of chambers of commerce were pessimistic about
Kerala's chances of drawing substantial private investment when
compared to neighboring economic powerhouses Karnataka, Tamil Nadu,
and Andhra Pradesh. We agree that competition with the neighboring
states, all of which have a more business-friendly reputation, will
make it tough for Kerala to save its social programs on the back of
revenues from increased investment. END COMMENT.

HOPPER