Kerala's welfare policies destroyed its cashew industry. Its public sector undertakings (PSUs) have become a drain on state finances. The state has missed its demographic dividend and is ageing rapidly before achieving prosperity. Kerala is also among the country's most indebted states, and most of the debt is hidden within state PSUs.

These are some of the critical observations made by former bureaucrats in a new book, 'Kerala Club: Keepers of the Flame'. The book is edited by former Union Cabinet Secretary KM Chandrasekhar and former IFS TP Sreenivasan. Chandrasekhar has also served as vice chairman of the Kerala State Planning Board.  

Kerala is long admired for its literacy rates, healthcare infrastructure and human development. However, some retired bureaucrats, who are either from the state or have served there for decades, share an inside account of how some of the policy decisions of Kerala have hurt the state and are contributing to slower economic growth.

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How Kerala Destroyed Its Cashew Industry

Kerala offers sobering examples of how political decisions - driven by populism, ideology or misplaced priorities - can distort realities, T Nandakumar, former IAS and one of the contributors, writes in the book.  

The cashew industry was once a thriving network of profitable private factories providing employment to a large number of women. However, this industry was reshaped by government intervention "under the guise of farmer welfare," according to Nandakumar, who has served as a member of the Spices Board in Kochi.

"Monopoly procurement was introduced, private units were taken over, and two state-run entities - the Kerala State Cashew Development Corporation and the Kerala State Cashew Workers Apex Industrial Co-operative Society - were set up and expanded to process Kerala's home-grown cashews," he states.

In reality, the former bureaucrat adds, this restructuring catered more to labour union demands than to farmers, and several efficient private factories were closed - some relocated to neighbouring states.

"Over time, the government's narrative shifted: instead of supporting local cashew growers, the focus turned to keeping factory labour happy by importing raw cashew, despite the enormous losses the factories incur annually. The local farmer became peripheral, even irrelevant."

In a telling episode, Nandakumar points out, a Kerala minister reportedly requested Andhra Pradesh and Telangana farmers to grow cashews for Kerala's processors.

Kerala has, according to him, also explored collaboration with African countries to buy raw cashews from them for processing and to keep the factories running, while adding to their losses every year. "So much for the original intent!"

Gulf Boom - But No Infrastructure

Kerala also failed to create infrastructure during its economic rise, triggered by the Gulf money, suggests former IAS T Balakrishnan in his chapter titled - When The Desert Bloomed.    

Kerala has benefited hugely from the Gulf Boom that came between 1977 and 2007. Gulf countries, with their newfound oil wealth, were on a construction spree. They offered good wages to workers. Malayalees, attracted by the high wages, were the first from India to go to the Gulf. This migration soon resulted in massive economic growth, fuelled by remittances of foreign exchange that, in some years, reached as high as one-third of the state's gross domestic product (GDP).

The proportion of remittances in Kerala's GDP almost never fell to single digits from the late 1970s through 2023. A large number of people - as many as 3.5-4.5 million (almost 10 to 12 per cent of Kerala's population) - eventually moved to the Gulf states. Unprecedented remittances from these Malayalee expats created a huge demand for all consumer goods and building materials, further accelerating the growth.

Remittances led to higher domestic spending, which in turn filled the government's coffers as tax revenues ballooned. However, this tax money did not create infrastructure in the state, writes Balakrishnan, a retired 1980-batch IAS officer of the Kerala cadre. "Nor did it focus on creating economic assets that would further growth."

This is because Kerala's successive governments did not focus on using this money for transformative reforms and instead directed it to welfare purposes and for the construction of government offices, the former bureaucrat flags. "They would compete with each other to increase the salaries and perks of organised labour, both in government and in the private sector, leading to wage inflation and pushing the state into a unique situation where labour would soon become unaffordable."

Loss of Demographic Dividends

The former IAS also details how successive governments opened more and more unprofitable PSUs "ostensibly to create employment and economic growth". According to him, many government policies, in fact, harmed the private sector more than they helped it.  

Balakrishnan acknowledges that the Gulf boom has certainly lifted the state of poverty and made it a better place to live. However, he warns, it may not be an unmitigated blessing for the state as "it has caused wage inflation and made many economic activities unviable".    

"Land prices have become unsustainable for any meaningful economic activity. More and more young people are looking to migrate, leaving behind old parents, probably never to return," the former bureaucrat writes, adding that many large buildings dotted around the state lie empty, "some falling behind in maintenance and upkeep, without anyone to live in them."

In short, the author states, the state has missed the demographic dividend and is growing old fast before being able to achieve prosperity. "Kerala is one of the most indebted states in India," he states. "Official figures may not reveal the whole picture, as much more debt is hidden in PSUs and other organisations that are not directly included in government records."

Kerala's Loss-Making PSUs

Till March 2022, Kerala had 150 PSUs - 130 government companies, 16 government-controlled other companies, and four corporations. Of these, only 131 were active. Out of these working PSUs, 55 reported a profit of ₹654.99 crore as per their finalised accounts submitted till September 2022, while 63 incurred losses of ₹4,065 crore, CAG said in July 2024.

Four PSUs had incurred no profit/loss. There were nine PSUs which were yet to furnish their first accounts for review.

Kerala's Debt: 'Heavily Stressed'

In its October 2025 report, the CAG said Kerala's outstanding liability was 34.96 per cent of GSDP as against the limit of 33.70 per cent. Further, if the quantum of the off-budget borrowings is included as part of debt, the overall liability, which includes public debt and public account liabilities of the government, was 37.84 per cent of the GSDP. "Going by the fiscal trends, the state finances are heavily stressed," the national auditor said.

The CAG further stated that Kerala's finances were marked by an increasing trend in liabilities (debt, off-budget borrowings), "which pose risk to the target of debt stabilisation and debt sustainability."

According to the Economic Review tabled in the Assembly this January, Kerala's public debt went up sharply in 2024-25. Total outstanding public debt reached Rs 3.10 lakh crore, up from about Rs 2.64 lakh crore the year before.