Garment firm’s decision to scrap investment sparks debate – what kind of industry does Kerala need?

Despite Kerala’s impressive achievements in the social sector, the state has been battling the perception that it is not investor friendly. But are all kinds of industrial growth really desirable in a state with relatively high educational levels?

A debate about this question has been triggered by the announcement in July by Kerala-based industrial group Kitex that is shelving its plans to set up a garment factory in the state. The group says that it will open the unit in Telangana instead.

The Kitex group had proposed fresh investments in Kerala amounting to Rs 3,500 crores in January 2020, at the state government’s ASCEND global investors meet. However, in July 2021, Sabu M Jacob, the managing director of Kitex Garments Limited, announced that his company was withdrawing the proposal. He cited harassment from officials and interference from some politicians.

That the allegation that Kerala’s industrial bureaucracy was obstructing growth has come from Kitex, a company with deep roots in the state, seemed curious. The Kitex group of companies was born in the late 1960s and has grown into a successful family-run enterprise, with interests in garments and home appliances.

In 1995, the group set up an export-oriented garment factory in Kizhakkambalam near Kochi, manufacturing children’s wear and other products for well-known brands (including Walmart and Carter’s) in the United States and Europe. Today, this factory employs around 10,000 workers, and claims to be one of the largest garment units in the world.

Interference alleged

The charges of political interference in the unit’s operations led to speculation about whether this was linked to the Kitex group’s support for a political outfit called Twenty20, which has been in power since 2015 in the grama panchayat in Kizhakkambalam, where the group’s factory is located.

Some of the interventions by Twenty20 and the Kitex owners have been popular, including the supermarket they operate in Kizhakkambalam offering goods at subsidised rates. Many expected Twenty20 to do well in the last state assembly elections in Kerala, held in May. However the corporate-backed political party was unable to win any of the eight constituencies it contested.

However, the larger issue relates to the limits to growth in Kerala of an industry such as garment exports, which does not require the mass of its workers to be educated. In Kerala, 72.5% of women aged 15 to 49 years have completed 10 or more years of schooling, compared to 35.7% only in India as a whole, according to the National Family Health Survey in 2015-’16.

So it isn’t surprising that close to 80% of the workers in the Kitex factory in Kizhakkambalam are migrant women from states such as Odisha, Assam, Jharkhand and Nagaland. Kitex’s garment factories, clearly, are not the solution to the problem of educated unemployment that Kerala faces.

In the highly labour-intensive garment-manufacturing industry, firms are in a race to reduce wage costs, shifting production to locations offering cheaper supplies of labour. China continues to be the largest player, accounting for 33.7% of the worldwide garment exports in 2018, followed by Bangladesh, Vietnam and India (in that order). Within China, garment factories have been relocating from the prosperous eastern region to the less-advanced western and central provinces.

The pressures to cut costs have intensified in the wake of the Covid-19 epidemic. In general, the garment industry does not have a great record when it comes to labour rights. For instance, after the outbreak of the epidemic in March 2020, global brands cancelled orders or even refused to pay for orders already delivered. Factories supplying to the brands passed on their losses to the workers.

Many garment workers have lost their jobs, are being forced to work overtime without additional payment, and some employers have not paid bonuses or social security contributions. This amounts to “wage theft” by the industry. Some of the processes in this industry, such as dyeing and finishing, have been major sources of water pollution.

Weak linkages

With regard to the Kitex unit, the economic linkages between the export-oriented factory and the villages around Kizhakkambalam have not been very strong. Only a small fraction of Kitex’s employees are locally recruited. Kitex claims that, unlike other garment manufacturers, they have been more vigilant about ensuring decent working conditions and controlling pollution. However, there have been allegations that Kitex’s dyeing units have been polluting the water bodies in the locality.

It seems that the tipping point came in June 2021 when, according to Kitex, there were several rounds of inspections of the factory premises by government agencies following fresh complaints about pollution by the company.

Ironic as it may seem, the image that Kerala is not conducive for private investments has gone hand in hand with the advances the state made in the social sectors from the 1960s. Kerala has been more successful than most other Indian states in providing social security benefits to workers in the unorganised sector and to other disadvantaged sections of the population.

There is no denying, of course, that businesses in the state have to contend with relatively high wage rates for manual workers, assertive trade unions, and a vibrant civil society.

Notwithstanding these perceived disadvantages, the economy has grown considerably faster in Kerala than in India as a whole over the last three decades. In 1987-’88, the per capita income of Kerala was 20% lower than that of India’s. Today, it is 60% higher.

The stimulus for this faster, qualitatively better economic growth has been provided by Kerala’s achievements in human and social development. Some of the key factors for the growth acceleration in Kerala have been its large body of skilled workers, the remittance incomes it receives from its migrant workers, and a growing domestic market that has benefitted from the relatively high wages of informal workers.

Unique challenges

However, Kerala faces a unique set of development challenges. Its working age population (in the age group of 15 to 59 years) is set to register a decline during the 2020s itself – almost two decades earlier than in India as a whole. For casual and manual work in most sectors, Kerala is growingly dependent on migrant workers from other states, especially West Bengal, Assam, and Odisha.

At the same time, it is indeed a tall task for Kerala to create job opportunities for its young graduates: 166,000 students in the state enrol for tertiary education every year, of whom 60,000 join engineering courses.

Land required for large industrial projects is difficult to find in Kerala. Concerns about environmental pollution are high in this densely populated state.

It is clear that there is a growing incompatibility between the low-wage and low-skilled nature of the garment export processing industry and the reserve of human capital that Kerala possesses. For an industry group such as Kitex, Telangana is in many ways a more suitable location than Kerala for setting up a large garment factory.

A factory in Telangana would be much closer to regions that have plentiful supplies of labour for the garment industry, including Odisha, Chhattisgarh and Jharkhand. Moreover, land for industry is much cheaper in Telangana: land there is only 10% of the cost in Kerala, says Jacob of Kitex.

A new industrial policy for Kerala

Given Kerala’s limitations with respect to land and labour, the state needs to prioritise the development of those industries that contribute more to employment creation and long-term economic growth of the state. Consider, for instance, alternative investment proposals on a 100-acre plot of land. For Kerala, the economic and social multipliers will be much greater if a biotechnology or advanced technology park comes up on that plot of land, rather than a garment factory.

The Technopark in Thiruvananthapuram provides a good illustration. Approximately 50,000 engineers and other skilled workers from all over the country find employment on its 300-acre campus (before the recent expansion). They form a critical mass of knowledge workers, which has, in turn, encouraged the setting up of educational and research institutions and the emergence of new technology firms in the vicinity.

In addition, thousands of families earn their livelihoods working in the shops, hotels and entertainment avenues that have sprung up to meet the needs of the Technopark employees.

This is not to suggest that Kitex’s garment factory was a wrong-headed investment to begin with. In 1995, when Kitex set up their garment factory in Kerala, Kerala was not facing as acute a shortage of manual workers as it does today. In fact, during the initial years, the Kitex factory in Kizhakkambalam could recruit a large part of its workforce from the neighbouring regions.

Today, for Kerala to succeed in the clothing industry, it will have to identify niche areas for future growth, while recognizing that the gains to be made from the low-value-adding segments of the garment export business may be limited. The large domestic market (within Kerala) for a wide variety of clothing items is a big opportunity for employment creation.

There are a number of institutions and professionals in Kerala in the area of fashion design. It is possible to revive some of the unique traditions in Kerala’s handloom industry. The state should encourage entrepreneurs and skilled workers, especially women, who are capable of taking advantage of these strengths in designing new products and styles.

Learning from East Asia

Kerala and other Indian states have much to learn from the experience of the East Asian countries in building technologically advanced industries. As wage rates rose and educational levels of the workforce improved, the tiger economies such as Singapore and South Korea moved up the value chain in global manufacturing.

In the hard disc drive industry, for instance, as Singapore began to nurture semiconductor fabrication from the late 1980s onward, the assembly of low-end drives shifted to countries having cheaper supplies of labour, including Malaysia and Indonesia (and subsequently China).

These transformations in industrial structures have occurred not through the operation of market forces but instead they have been the result of well-planned industrial policy measures directed by the governments of the various East Asian countries.

India faces severe challenges in pursuing an independent industrial policy, especially at the level of the states. Indian states have limited financial autonomy as they depend on the financial resources devolved to them from the Central government. With the declining importance of public investment, state governments have little option other than to compete against each other to attract private investments.

This has resulted in a race to the bottom, with states trying to outdo each other by offering tax incentives and relaxing regulations on labour and environment. This is quite different from the way the East Asian countries have forged economic partnerships among themselves, acknowledging their relative strengths and enhancing their collective might in global manufacturing.

‘Ease of doing business’ rankings

In many ways, the ranking of Indian states based on the “ease of doing business reforms” is fuelling indiscriminate competition among states rather than helping them to pursue distinctive industrial growth paths. The ranking of states is based on the World Bank’s ease of doing business surveys of countries, the methodology for which has been subject to several criticisms.

One of the key factors that determine the ranking is the perception of the firms (which participate in the survey) about the ease with which they can obtain land for industry as well as hire and fire workers. It is not surprising then that Kerala’s rank among states and Union territories of India slipped to 28 in the latest (for 2019) rankings.

At the top of the list of the ease of doing business rankings in India are Andhra Pradesh, Uttar Pradesh, Telangana and Madhya Pradesh – all states with a relative abundance of land and labour.

Kerala recognises that the future of its economy does not lie in industries that require vast tracts of land or in industries that are based on exploitative use of labour or environment. Instead, the state envisages knowledge-led economic growth, drawing on the skills and resources of its educated youth, its universities and research institutions, and of the diaspora of professionals and entrepreneurs from Kerala spread all over the world.

These growth possibilities were outlined in the “Kerala Looks Ahead” conference organized by the Kerala State Planning Board in February. Some of the sectors offering high potential for future expansion in Kerala include the healthcare industry, life sciences, biotechnology, pharmaceuticals, space and aeronautical technologies, and artificial intelligence.

Given Kerala’s rich agricultural, forest and marine resources, there is scope for the growth of food- and agro-processing industries. Opportunities exist also in petrochemical industries, port-based industries, shipbuilding and logistics (Kerala has four international airports and two major seaports).

More than anything else, the Kitex episode highlights the importance of public discussion in shaping industrial policy priorities of any region. The print and social media in Kerala have been quick to characterise the announcement by the industry group as a confirmation of the “business unfriendly” policies of the state. They cited how, in comparison, the Telangana government arranged a chartered flight for the Kitex management team to visit the facilities in that state.

However, there has been little discussion about the costs and benefits associated with a new garment unit or, for that matter, about the future industrial growth direction for Kerala given its constraints and opportunities.

Rather than joining a race to attract any investment, Kerala should be bold enough to turn away projects that may erode the state’s achievements in the social spheres. At the same time, the state should encourage sectors that harness the talents of its educated workers and the potential of new technologies.

Kerala needs to nurture a class of entrepreneurs who take pride in the state’s remarkable record in public action and understand the possibilities of the knowledge economy.

Jayan Jose Thomas is a Professor of Economics at the Indian Institute of Technology Delhi and a former Member of the Kerala State Planning Board.