Question

What is a macro-level challenge identified regarding the prices of factors of production in Kerala?

• A. Low inflationary trends in land, labour, and capital.
• B. Stable and predictable factor prices.
• C. High inflationary trends in the prices of all factors of production.
• D. Deflationary trends in the cost of labour.

Answer 1

Answer:

C. High inflationary trends in the prices of all factors of production.

Understanding Macro-Level Challenges in Kerala's Economy

• The term 'factors of production' refers to the essential inputs required for the production of goods and services. These primarily include Land, Labor, Capital, and Entrepreneurship.
• A 'macro-level challenge' implies an issue that affects the entire economy of a region or country, rather than just a specific sector or industry.
• The identified challenge of 'high inflationary trends in the prices of all factors of production' signifies a sustained increase in the cost of acquiring land, labor, and capital within Kerala.

Impact on Specific Factors in Kerala:

• Labor Costs:
  • Kerala is known for its relatively high wage rates compared to other Indian states. This is attributed to strong trade union movements, high literacy rates, better human development indicators, and significant out-migration leading to labor shortages in certain sectors.
  • The high cost of labor often impacts the competitiveness of manufacturing and agricultural sectors, making them less attractive for investment.
• Land Prices:
  • Due to its high population density, limited geographical area, and increasing demand for residential, commercial, and tourism purposes, land prices in Kerala are among the highest in India.
  • This significantly increases the cost of setting up industries, real estate development, and infrastructure projects.
• Capital Costs:
  • While interest rates are generally determined at the national level, the overall investment climate and perceived risks due to high land and labor costs can indirectly influence the cost of capital for businesses operating in Kerala.

Consequences of High Factor Costs:

• Reduced Competitiveness: High factor costs make goods and services produced in Kerala more expensive, reducing their competitiveness in national and international markets.
• Disincentive for Investment: Businesses, especially those in manufacturing and primary sectors, find it less profitable to invest in Kerala due to high operational costs, leading to slower industrial growth.
• Impact on 'Kerala Model': While the 'Kerala Model of Development' is lauded for its high human development indicators, the sustainability of its economic growth is often questioned due to these high production costs and limited industrial expansion.
• Increased Cost of Living: High land and labor costs contribute to the overall high cost of living in the state, affecting the common populace.
• Dependency on Remittances: The state's economy heavily relies on remittances from Non-Resident Keralites (NRKs), which somewhat masks the underlying issues of low domestic production and high costs. However, this also contributes to inflation due to increased purchasing power.