Economic Consequences of the Great Deluge

Great Deluge

The Great Deluge of 2018, which resulted in loss of 370 precious lives and colossal destruction of private property and public infrastructure is bound to have a huge impact on the economy of Kerala. Economic growth will certainly take a hit. Initial estimates put the losses at Rs. 20,000 crore. SGDP growth rate is estimated to decline by around 1 per cent. These are early estimates.

Unlike other states, Kerala is a ‘money-order economy’ driven by remittances. Even before the floods the State has been reeling under the impact of declining remittances. Economic woes of West Asia and the increasing indigenisation of the workforce there have led to decline in remittances to the State. More importantly, the remittances are no longer spent on consumption like in the past since NRKs now know that the prospects in West Asia are declining. The declining propensity to consume had already impacted businesses in Kerala. Revenue collections also have taken a hit. Initial estimates indicate that the GST receipts in 2017-18 are likely to be lower than the VAT collections earlier.

This declining trend in consumption is likely to be aggravated by the flood. There has been massive loss of livelihood of the people and this will certainly impact consumption. The loss from decline in production of rubber, paddy, pepper and cardamom is likely to be huge. This, too, will impact consumption. Since a lot of money will have to be spent on reconstruction of damaged property, consumption of many other goods will have to be postponed. Small farmers engaged in cattle rearing and duck farming also have been impacted by the loss of livestock. The cumulative impact of all these on consumption, business and tax revenue of the government will be significant.

Silver Lining among the Dark Clouds

However, there is another side to this. Reconstruction of roads, bridges, houses, waterways, commercial centres etc. will have a huge stimulus impact on the economy. This will create jobs and generate income on a massive scale. Aid is flowing in from outside the State. These external funds will act like a ‘Keynesian fiscal stimulus’ positively impacting the domestic economy. The massive destruction of consumer durables also has a positive side. Vast majority of households in Kerala has consumer durables like televisions and refrigerators. Since tens of thousands on these and other consumer durables have been damaged, these need to be replaced. This will create huge demand and the resultant boost to sales will positively impact business and government’s revenue.

NGOs have done exemplary work during relief operations. Keralites the world over would be keen to donate to NGOs for rebuilding the State. Already money has started flowing into NGOs. Since NGOs work far more efficiently and faster than the government, they are likely to receive huge amounts of money that will be very well spent.

Services Sector will Quickly Bounce Back

Agriculture accounts for only 10 per cent of India’s GDP while services sector accounts for 63 per cent. Within services, trade, transportation, communication, financial services, hotels and restaurants are the large segments. This segment will bounce back quickly and grow fast aided by the stimulus.

Reckless Borrowing will be Disastrous

The State Government has proposed that it should be allowed to borrow 4.5 per cent of the SGDP (presently the upper limit is 3 per cent). This request is unlikely to be considered favourably. Kerala’s reckless spending, unsustainable revenue deficit and ballooning debt have landed the State in a financial mess. We are in this pathetic situation of having to run to the Centre for borrowing because we have reached the limits of borrowing. Further reckless borrowing will push Kerala into an inevitable debt trap. Therefore, this temptation has to be resisted.

In the post-flood scenario, the focus of the State should be on building a more environment-friendly sustainable society. Fiscal prudence should be an integral part of a sustainable healthy economy.