Per Capita Income Growth in the States of India

Aug 10th 2003.

Of late, there has been a lot of discussion about the relative performance of the states in India. A spate of analyses has been devoted to considering the growth performance of the different states, and many of the traditional prejudices regarding the ‘dynamic’ and ‘stagnant’ regions seem to be confirmed by such analyses. These patterns are then explained by the usual arguments with respect to backward and forward states. During the 1990s, it has further been argued that those states that have been more open to economic liberalization have shown faster rates of growth in general.

However, much of such analysis has been in terms of aggregate growth rates, whereas obviously what is more significant is the change in per capita income. It is well known that regional inequalities are large in India, and there is widespread perception that they have increased in the recent past. Chart 1 indicates the relative position of states with respect to aggregate net State Domestic Product (SDP) and per capita net SDP in 2000–01 (at constant 1993–94 prices). The importance of considering per capita patterns becomes immediately obvious from this chart. Among the largest economies in terms of aggregate SDP, only Maharashtra is among the top in terms of per capita income. Uttar Pradesh, the second largest state economy in aggregate terms, is among the lowest in per capita terms. Meanwhile, Punjab and Haryana, which have relatively small total SDP, have the highest and third highest per capita incomes.

Chart 1 >> Click to Enlarge

Of course, all this says nothing about intra-state inequalities, which also cannot be assumed to be similar across states. The NSS estimates show that some of the states with highest per capita income have also the highest internal inequalities in terms of per capita consumption expenditure. Thus, the two states with the highest Gini coefficients for per capita consumption (indicating the greatest inequality) are Tamil Nadu (with a Gini ratio of 0.398 in 1999–2000) and Maharashtra (with a Gini ratio of 0.345). These two states are among the highest in per capita SDP.

However, other states with high per capita SDP show relatively less inequality in consumption expenditure. Thus Punjab showed a Gini coefficient of 0.29, while Haryana had a Gini ratio of 0.285 in the same period, for per capita consumption expenditure. Conversely, some states with low per capita SDP such as Uttar Pradesh and Bihar had relatively high inequality with a Gini ratio of 0.327 and 0.318 respectively.

In what follows, we will ignore intra-state income inequalities, and focus on patterns across states, in terms of per capita income and growth. We will also ignore rural–urban differentials within states, which are also estimated to have increased over time and especially in the last decade.

Charts 2 to 5 show the per capita SDP of each state as per cent of the highest (which in all of the years happens to be Punjab) and the rank of the various states in the four years 1970–71, 1980–81, 1990–91 and 2000–01. A comparative look at these charts reveals a number of interesting trends.

Chart 2 >> Click to Enlarge

Chart 3 >> Click to Enlarge

Chart 4 >> Click to Enlarge

Chart 5 >> Click to Enlarge

First, it emerges that over time the basic hierarchy has broadly remained the same, with Punjab, Haryana and Maharashtra at the top in per capita terms, and Bihar and Orissa at the bottom. Within this, however, a number of the states with relatively higher per capita income have been improving their position vis-ŕ-vis the state with the highest, which is Punjab. This was especially true for the period 2000–01, when there were four states (Haryana, Maharashtra, Tamil Nadu and Gujarat) with per capita incomes of more than 80 per cent of that of Punjab, compared to 1970–71, when only the state of Haryana could cross that mark. In other words, as compared to the earlier years, at present there is less difference among states at the top in terms of per capita incomes.

Another feature that emerges is the variation in the relative position of the ‘middle income’ states vis-ŕ-vis the highest, not only in terms of ranking, but as proportions of the highest per capita SDP. States such as Tamil Nadu, Karnataka and Kerala show significant increases over the longer period, with some fluctuations in 1990–91. Andhra Pradesh shows wide fluctuations with an increase in 2000–01, while West Bengal shows no clear trend, despite a dip in 1990–91 and a recovery thereafter.

Finally, the deterioration of the relative position of the lowest per capita income states, is worth noting. In the 1970s and 1980s, Orissa and Bihar (the two states with the lowest per capita SDP) had per capita incomes between 40 to 50 per cent of that of Punjab; by 2000–01, the figures had fallen to 34 per cent for Orissa and only 22 per cent for Bihar. In other words, in some of the more backward states, the disadvantages of the low base combined with other factors create relative stagnation in per capita incomes, thus increasing gaps with the richer states.

This phenomenon of increasing gaps between richest and poorest states is shown very clearly in Chart 6 that describes the per capita SDP of the richest state (Punjab) as a multiple of the poorest (Bihar). It shows that the divergence increased even in the period 1970–90, but not very substantially, and in 1990–91, the ratio was just above 3 times. But over the 1990s there was an explosive increase in such inequality that caused the gap to increase dramatically to more than 4.5 times by 2000–01.

Chart 6 >> Click to Enlarge

Clearly, the causes for such increasing divergence over the most recent period require further investigation. Some possible causes and factors are discussed below. But before that, it may be worth looking into the patterns of growth of aggregate SDP, to see if there are any trends that emerge from such overall performance.

Chart 7 indicates that there has been no such thing as a common pattern across states in terms of SDP growth rates, and also that the trends have varied widely across decades. While it is true that some of the more ‘backward’ states exhibit lower rates of growth, this has not been consistently true over all three decades. Thus, in the 1980s, several of the supposedly ‘BIMARU’ states (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) grew faster than the national average in terms of aggregate SDP, thereby providing challenges to the more common perception. By the 1990s, however, growth had decelerated in these states (except Rajasthan), but so also did it slow down in a number of the higher income states such as Maharashtra, Punjab and Haryana.

Chart 7 >> Click to Enlarge

Interestingly, in the 1990s, West Bengal showed the highest rate of aggregate SDP growth after Karnataka, even though it has not been generally recognized as a fast growing state. Indeed, its aggregate rate of growth appears to have been faster than that of Gujarat and Tamil Nadu, both of which are described as dynamic states. This comes out even more sharply in terms of per capita incomes. Chart 8 gives some indication of the aggregate rates of growth and per capita SDP in the second half of the 1990s, for the six largest state economies. Karnataka clearly grew at the fastest rate, in both aggregate and per capita terms, followed by West Bengal and Tamil Nadu.

Chart 8 >> Click to Enlarge

The gap between West Bengal and Tamil Nadu, on the one hand, and Gujarat and Andhra Pradesh on the other hand, was significantly greater in terms of per capita growth, than in aggregate SDP growth. This is possibly reflective of the greater success of West Bengal and Tamil Nadu in controlling fertility and therefore also population growth. But once again, these patterns are not generally recognized.

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