Dutch Disease & Kerala

The short-term and even the medium-term outlook of growth in India is positive. That is, ironically, the crux of the problem. With growth rate expectations in the 8-9 per cent range, foreign funds will continue to pour in, in pursuit of returns from growth. We seem to show symptoms of an economic malady called ‘Dutch Disease’. It refers to negative consequences arising from large increases to a country's income. Dutch disease is primarily associated with a natural resource discovery, but it can result from any large increase in foreign currency inflows: including foreign direct investment, foreign aid or a substantial increase in natural resource prices.
This condition arises when foreign currency inflows cause an appreciation in the affected country's currency. This has two main effects for a country afflicted with Dutch Disease:
1. A decrease in the price competitiveness, and thus the exports, of its manufactured goods. Exports from the affected country become expensive vis a vis exports from a competing country.
2. An increase in imports, as the appreciating currency makes imports cheaper.
3. Labour begins to migrate to the sectors performing better or booming sector. This flux will create a labour shortage in the lagging sector and an artificial increase in wages in the lagging sector making the sector uncompetitive. This can snowball into other industries or even agriculture.
The cascading effects of increased imports is a killing of the domestic manufacturing sector as domestic firms are more expensive to operate in terms of labour and exchange rate. In the long run, these factors can contribute to manufacturing jobs being moved to lower-cost countries.
In the absence of action by the regulatory authority (Reserve Bank) to stem this inflow, the rupee, can only appreciate, if this keeps adding, rather than subtracting, to the returns earned by these foreign investors, then inflows will continue to cascade. Lesser rupees continue to provide more dollars to the foreign investor if the rupee continues to appreciate, thus reinforcing the incentive to the foreign investor to bring in further investment. This will happen as long as the rupee remains under-valued, and the pressure on it to appreciate will continue to increase.
As such there are many recommendations to immunize the Dutch Disease, however since I am no economist; it would worth our while to look at the effects of ‘Dutch Disease’ specific to the state of Kerala rather than endemic to the country as a whole.
Kerala has the largest inflows in foreign currency; manufacturing sector has gone for a toss, incidentally our agriculture industry too has gone for a toss. Labour is the most expensive and for all I know the best thing they do is ‘strike’. I would have hoped that our commie government would bring about some motivation or induce some supply in labour, but it is this labour that keeps these commies in power so our over-expensive labour serves the comrades vested interest to remain in power. We import all that we require from Tamil Nadu or Karnataka. We even provide our natural resource 'water' to Tamil Nadu.
Any inoculation please start with us!