While I do believe that many excellent authors who write in their local languages face a diminishing readership, malayalam literature (another link), with its vast array of talented writers, is still able to hold its own. Stalwarts in malayalam literature such as MT Vasudevan Nair, OV Vijayan, Thakazhi Sivasankaran Pillai, Vayalar Ramavarma, Changampuzha Krishna Pillai, Vaikkom Mohammad Basheer, etc., still command enormous respect and readership across all age groups of Kerala (and expat, fraud* malayalees) -- in fact, perhaps more than indian authors who write in English (yes, definitely more popular than Arundhati Roy), or popular english language books. Many have gone on to win great literary awards (including the Jnanpith Award). While some of these writers have passed on, their works and movies/television serials/plays/etc. inspired by their works, still remain immensely popular - within cities and towns as well as the rustic countryside of Kerala. To find someone who lives there and has not heard of or even read and admired at least one of the seminal works of any of the above authors, is well, a next-to-impossible task, in my opinion. In fact, they have inspired many authors in succeeding generations, (V C Sreejayan comes immediately to my mind), who are also popular.
A related topic, perhaps, is malayalam cinema. While malayalam has seen its share of "blockbusters" and lavish locales and song-and-dance sequences that are prevalent throughout most of Indian cinema, most popular movies have been of the intelligent, thought-provoking variety. They encompass the complete spectrum of movie-making -- social issues, personal relationships, soul-searching and character studies, comedies, intense tragedies, family entertainers, literary adaptations, and even action movies ! And very rarely will you find tacky movies being produced in this film industry. The most interesting part, is that what the rest of the world would consider "art"/"off-beat" cinema will run to packed movie halls in Kerala, which has been proven time and again, by Adoor Gopalakrishnan (IMDB link), who has been a prominent influence in the industry for decades now, and has been responsible for many films (Elippathayam, Mathilukal, Vidheyan, etc.) that have brought national and international repute to Malayalam and Indian cinema in general. Jayaraaj, with his vast array of relatively low-budget, intense, social movies, is in my opinion, one of the finest directors of all time. Many of his movies (Paithrekam, Kaliyattam, 4 the People, etc.) have not only been fantastic movies with cult followings, but have also topped box-office charts and find a special place in our hearts. Other prominent filmmakers include -- Fazil, I. V. Sasi, Priyadarshan, Sreenivasan, etc. (the list of talented directors is really long actually). Various malayalam actors, actresses, directors, musicians, etc. have received state, national and international awards for their performances/creativity on numerous occasions (Mammootty, Mohanlal, Suresh Gopi, Shobhana, Yesudas, etc.).
Be warned though, that the public in Kerala is highly intelligent, educated and well-read. Mediocre or sub-standard efforts are treated with as much disdain as in the rest of the country - perhaps even more. In fact, a big name does not equate to instantaneous success -- many of the people mentioned above have had to find out the hard way !
So what makes Kerala and malayalis in general different ? If I were to venture a guess (an educated one at that), I'd say it is
- the high rate of literacy -higher than 90% in most places, and as high as 100% in some villages and districts
- education at the primary level in the local language (which not only provides increased knowledge about the cultural, literary and historical traditions of the state, but also instills a sense of pride in them).
* fraud malayalis - people who were raised outside of the state of Kerala (yours truly included) !