MacroScan (Printable Version) - Economic Performance of the States in the 1990s

It is commonplace, when talking about economic growth trends in the 1990s, to focus dominantly on all-India data. However, there are very important regional differences, not only in the per capita incomes of the different states, but in their patterns of growth over time, and especially in the recent period. These are important to examine periodically, not only because the regional variations themselves may change over time, but because it turns out that there are very quite standard misconceptions about relative performance across different states. These misconceptions are typically fed by the mainstream media, which has assumptions about which states are “good” and “poor” performers in growth terms, which are either outdated or else not borne out by actual experience. And since these misconceptions rarely get tested against the available data, they assume the status of stylised facts among the ordinary public.

Thus, for example, there is a general perception, which has been heavily stressed by the very successful media management of its Chief Minister, that Andhra Pradesh is one of the most economically dynamic states, not just in south India but among all the Indian states. By contrast, Kerala is frequently described as a state which has very good human development indicators but poor growth performance. Similarly, the state of West Bengal is frequently described as being characterised by “economic stagnation” by mainstream commentators.

How far all of these perceptions are from the reality is evident from Tables 1 and 2, which describe the annual rates of growth of GDP at constant (1993-94) prices over the period 1993-94 to 1998-99 for 14 major states. (Rajasthan has been excluded because data are only available until 1997-98.) These charts are based on national income accounts data released by the CSO.

From Table 1 it is clear that Andhra Pradesh is one of the worst performers of all states in India in terms of aggregate economic growth over this period. Not only is the annual rate of growth well below that of the other southern states, but its rate of growth has been only marginally superior to the much-maligned “BIMARU” states of Bihar and Uttar Pradesh. In per capita terms the growth rate appears in a slightly better light, largely because of the slower rate of population growth over the period, but still is the worst among southern states.

Also, the myth that the state of Kerala is a major laggard in terms of growth also gets blown by the evidence. As Tables 1 and 2 show, Kerala is the sixth most dynamic state in terms of aggregate state GDP growth, and the fifth in terms of growth of per capita income. It is a comment on the lack of knowledge of most analysts that the most common mainstream discussion on Kerala’s economy is not on what have been the elements and causes of such growth, but still on why the state has not grown and has exhibited relative stagnation, even though that is not the actual experience.

It is also evident that West Bengal has exhibited much greater economic dynamism than it has been given credit for. In fact, West Bengal shows up very well in comparison to other states, with the fourth highest annual rate of growth, after Gujarat, Karnataka and Tamil Nadu. Its growth performance has been superior to that of states like Maharashtra, Punjab and Haryana which are generally supposed to be high growth states.

And this growth in West Bengal appears to have been evenly spread across the different sectors. Thus, while certain service sectors such as communications and trade have experienced double-digit annual rates of growth, even the material producing sectors have performed very respectably, with agriculture growing at 6 per cent per annum and manufacturing at 7 per cent over this period.

However, it is also true that some standard perceptions appear to be confirmed, in terms of the low growth of states like Bihar, Orissa and Uttar Pradesh, and the extremely poor economic growth in Assam. The most rapidly growing states in economic terms over the period are Gujarat, Karnataka and Tamil Nadu. However, Maharashtra, Haryana and Punjab, typically thought of as high-growth states, do not appear to be so in relation to the performance of other states.

Tables 3a-3d show the behaviour of constant price GDP (in index number terms) of aggregate GDP over the period 1993-94 to 1998-99. While these broadly confirm the picture provided by Table 1, they do bring out some other interesting features. Thus, in Andhra Pradesh economic growth appear to be not just on the low side but also more volatile than elsewhere. Rajasthan, which is not covered in Chart 1, shows a surprisingly high rate of economic expansion. The common impression that the southern region economically outperforms the other regions is not borne out by the evidence, which show some high growth and some low growth states in all regions.

What all this means in terms of regional inequality is indicated in Table 4. While Maharashtra remains the richest state in terms of per capita income, the gap between it and other rich states has grown over the second part of the decade of the 1990s. The increase in the gap is particularly noticeable in the case of the second richest state, Punjab. Also, Gujarat has supplanted Haryana as the third richest in terms of per capita income. The poorest states of Assam, Orissa and Bihar, have actually experienced a relative worsening of their position, in terms of widening the gap between their per capita incomes and those of the richest state.

What explains this very wide variation in growth experience across the states of India ? At one level, it appears that the overall growth process in the Indian economy has widened income differentials not only across classes and economic groups, but also across the regions. Thus, richer states such as Gujarat, Karnataka and Tamil Nadu have also had among the highest growth rates over the recent period. Meanwhile, as is clear from the charts, the poorest states have also been the most laggard in terms of economic performance.

If, despite this, some of the relatively poorer states have managed to gain and to grow at relatively faster rates, there would have been particular specific factors at work, including the ability to the state government to deal with the problem of inadequate local resources and low tax base. Here it must be noted that among the poorer states (that is those with a per capita GDP of less than 60 per cent of the richest state) only West Bengal has shown a rate of growth that is significantly higher than the national average and higher than that of most other states.

The other poor states have exhibited low rates of growth as well. (Rajasthan, for which data are available only till 1997-98, also shows a relatively high rate of growth over that period.) This makes the performance of West Bengal even more exceptional, and clearly it is something that deserves further investigation as to the factors that have been associated with it.

One point is however clear for all the states. Only those states have shown relatively good performance which have managed to achieve some degree of structural change in terms of reducing the share of the primary sector in the economy. Alternatively, they must have started the period with a relatively low share of the primary sector. In particular, the high growth states show shares of the secondary sector of 20 per cent or more, and this is something which also typically increases over the period. By contrast, the low growth states exhibit secondary sector shares of less than 20 per cent. This is something that is clearly suggested by the different sub-tables in Table 5.

While this overall trend of differential performance and disparity in economic growth patterns reflects a wide range of factors, many of which are state-specific, it is also clear that overall macroeconomic policies of the Central Government have contributed to this. Not only have they tended to widen existing differentials, they have also not made any obvious efforts to mitigate such tendencies through countervailing measures. Thus, there has been no attempt to ensure that the poorest states are able to grow at faster rates, either direct Central transfers or through planned public investment which could have generated more such growth directly and indirectly.

This means that the poorer states are caught in a vicious circle : low aggregate incomes means that the tax base is low and the concerned state government finds it difficult to raise resources. This in turn means that public expenditure is limited. This also curtails public investment which could have generated more private investment as well through demand linkages. Further, it keeps infrastructure development woefully inadequate, which creates further supply constraints on growth.

In a sense only a substantive regionally redistributive policy of the Central Government can break this vicious cycle. Market functioning tends to aggravate the problem because it directs private investment to those regions with the higher purchasing power, that is the already richer regions, and does not of its own provide either resources or increased productive assets to the underdeveloped regions. Therefore, the effective disappearance of the planning mechanism and the much greater reliance on market mechanisms would have added to the tendencies for greater regional inequality.

Further, greater public investment, especially on infrastructure is essential to reduce the gap between states and bring the poorer states put of backwardness. But the 1990s have witnessed a substantial decline in such public capital expenditure, to less than 2 per cent of GDP in the late 1990s, and even this pitiful amount has not been distributed across states in a manner which would reduce the existing inequalities. All this means that the persistence - and even accentuation - of regional inequality, must be counted as one of the important failures of the aggregate economic reform strategy of the 1990s.

This problem can be addressed not only through purposive public investment and expenditure which is designed to create and maintain much-needed infrastructure in the backward states, but also through fiscal transfers. Indeed, the successive Finance Commissions which decide on the formula or revenue sharing between the Central Government and the State Governments are meant to focus particularly on this issue.

Unfortunately, even here the strategy of successive Central Governments in the 1990s has been to reduce the amount of resources garnered which must necessarily be transferred to the states. This has been accomplished through various devices such as imposing surcharges on income tax (which need not be shared) rather than raising the basic rates. Further, the loss of revenue through a range of indirect taxes such as customs duties and the associated need to reduce domestic excise duties has also operated to reduce the share of taxes in GDP, which in turn affects the states.

This has further reduced the manoeuvrability of those state governments which cannot raise much resources through taxation. And the tendency of Central Governments to treat any transfers as political largesse being offered to the party in power at the state level, rather than as a developmental requirement, has reinforced the tendencies towards inequality.

Thus, a disaggregated look a the states’ economic performance indicates that actual relative growth has been quite different from the picture that is often presented in the media. All in all, it appears that the uneven development of states is something that has been accentuated over the 1990s, and this reflects the effect of the macroeconomic policies of the Central Government as well.



Themes > Features	15.05.2001


Economic Performance of the States in the 1990s

It is commonplace, when talking about economic growth trends in the 1990s, to focus dominantly on all-India data. However, there are very important regional differences, not only in the per capita incomes of the different states, but in their patterns of growth over time, and especially in the recent period. These are important to examine periodically, not only because the regional variations themselves may change over time, but because it turns out that there are very quite standard misconceptions about relative performance across different states. These misconceptions are typically fed by the mainstream media, which has assumptions about which states are “good” and “poor” performers in growth terms, which are either outdated or else not borne out by actual experience. And since these misconceptions rarely get tested against the available data, they assume the status of stylised facts among the ordinary public. Thus, for example, there is a general perception, which has been heavily stressed by the very successful media management of its Chief Minister, that Andhra Pradesh is one of the most economically dynamic states, not just in south India but among all the Indian states. By contrast, Kerala is frequently described as a state which has very good human development indicators but poor growth performance. Similarly, the state of West Bengal is frequently described as being characterised by “economic stagnation” by mainstream commentators. How far all of these perceptions are from the reality is evident from Tables 1 and 2, which describe the annual rates of growth of GDP at constant (1993-94) prices over the period 1993-94 to 1998-99 for 14 major states. (Rajasthan has been excluded because data are only available until 1997-98.) These charts are based on national income accounts data released by the CSO. From Table 1 it is clear that Andhra Pradesh is one of the worst performers of all states in India in terms of aggregate economic growth over this period. Not only is the annual rate of growth well below that of the other southern states, but its rate of growth has been only marginally superior to the much-maligned “BIMARU” states of Bihar and Uttar Pradesh. In per capita terms the growth rate appears in a slightly better light, largely because of the slower rate of population growth over the period, but still is the worst among southern states. Also, the myth that the state of Kerala is a major laggard in terms of growth also gets blown by the evidence. As Tables 1 and 2 show, Kerala is the sixth most dynamic state in terms of aggregate state GDP growth, and the fifth in terms of growth of per capita income. It is a comment on the lack of knowledge of most analysts that the most common mainstream discussion on Kerala’s economy is not on what have been the elements and causes of such growth, but still on why the state has not grown and has exhibited relative stagnation, even though that is not the actual experience. It is also evident that West Bengal has exhibited much greater economic dynamism than it has been given credit for. In fact, West Bengal shows up very well in comparison to other states, with the fourth highest annual rate of growth, after Gujarat, Karnataka and Tamil Nadu. Its growth performance has been superior to that of states like Maharashtra, Punjab and Haryana which are generally supposed to be high growth states. And this growth in West Bengal appears to have been evenly spread across the different sectors. Thus, while certain service sectors such as communications and trade have experienced double-digit annual rates of growth, even the material producing sectors have performed very respectably, with agriculture growing at 6 per cent per annum and manufacturing at 7 per cent over this period. However, it is also true that some standard perceptions appear to be confirmed, in terms of the low growth of states like Bihar, Orissa and Uttar Pradesh, and the extremely poor economic growth in Assam. The most rapidly growing states in economic terms over the period are Gujarat, Karnataka and Tamil Nadu. However, Maharashtra, Haryana and Punjab, typically thought of as high-growth states, do not appear to be so in relation to the performance of other states. Tables 3a-3d show the behaviour of constant price GDP (in index number terms) of aggregate GDP over the period 1993-94 to 1998-99. While these broadly confirm the picture provided by Table 1, they do bring out some other interesting features. Thus, in Andhra Pradesh economic growth appear to be not just on the low side but also more volatile than elsewhere. Rajasthan, which is not covered in Chart 1, shows a surprisingly high rate of economic expansion. The common impression that the southern region economically outperforms the other regions is not borne out by the evidence, which show some high growth and some low growth states in all regions. What all this means in terms of regional inequality is indicated in Table 4. While Maharashtra remains the richest state in terms of per capita income, the gap between it and other rich states has grown over the second part of the decade of the 1990s. The increase in the gap is particularly noticeable in the case of the second richest state, Punjab. Also, Gujarat has supplanted Haryana as the third richest in terms of per capita income. The poorest states of Assam, Orissa and Bihar, have actually experienced a relative worsening of their position, in terms of widening the gap between their per capita incomes and those of the richest state. What explains this very wide variation in growth experience across the states of India ? At one level, it appears that the overall growth process in the Indian economy has widened income differentials not only across classes and economic groups, but also across the regions. Thus, richer states such as Gujarat, Karnataka and Tamil Nadu have also had among the highest growth rates over the recent period. Meanwhile, as is clear from the charts, the poorest states have also been the most laggard in terms of economic performance. If, despite this, some of the relatively poorer states have managed to gain and to grow at relatively faster rates, there would have been particular specific factors at work, including the ability to the state government to deal with the problem of inadequate local resources and low tax base. Here it must be noted that among the poorer states (that is those with a per capita GDP of less than 60 per cent of the richest state) only West Bengal has shown a rate of growth that is significantly higher than the national average and higher than that of most other states. The other poor states have exhibited low rates of growth as well. (Rajasthan, for which data are available only till 1997-98, also shows a relatively high rate of growth over that period.) This makes the performance of West Bengal even more exceptional, and clearly it is something that deserves further investigation as to the factors that have been associated with it. One point is however clear for all the states. Only those states have shown relatively good performance which have managed to achieve some degree of structural change in terms of reducing the share of the primary sector in the economy. Alternatively, they must have started the period with a relatively low share of the primary sector. In particular, the high growth states show shares of the secondary sector of 20 per cent or more, and this is something which also typically increases over the period. By contrast, the low growth states exhibit secondary sector shares of less than 20 per cent. This is something that is clearly suggested by the different sub-tables in Table 5. While this overall trend of differential performance and disparity in economic growth patterns reflects a wide range of factors, many of which are state-specific, it is also clear that overall macroeconomic policies of the Central Government have contributed to this. Not only have they tended to widen existing differentials, they have also not made any obvious efforts to mitigate such tendencies through countervailing measures. Thus, there has been no attempt to ensure that the poorest states are able to grow at faster rates, either direct Central transfers or through planned public investment which could have generated more such growth directly and indirectly. This means that the poorer states are caught in a vicious circle : low aggregate incomes means that the tax base is low and the concerned state government finds it difficult to raise resources. This in turn means that public expenditure is limited. This also curtails public investment which could have generated more private investment as well through demand linkages. Further, it keeps infrastructure development woefully inadequate, which creates further supply constraints on growth. In a sense only a substantive regionally redistributive policy of the Central Government can break this vicious cycle. Market functioning tends to aggravate the problem because it directs private investment to those regions with the higher purchasing power, that is the already richer regions, and does not of its own provide either resources or increased productive assets to the underdeveloped regions. Therefore, the effective disappearance of the planning mechanism and the much greater reliance on market mechanisms would have added to the tendencies for greater regional inequality. Further, greater public investment, especially on infrastructure is essential to reduce the gap between states and bring the poorer states put of backwardness. But the 1990s have witnessed a substantial decline in such public capital expenditure, to less than 2 per cent of GDP in the late 1990s, and even this pitiful amount has not been distributed across states in a manner which would reduce the existing inequalities. All this means that the persistence - and even accentuation - of regional inequality, must be counted as one of the important failures of the aggregate economic reform strategy of the 1990s. This problem can be addressed not only through purposive public investment and expenditure which is designed to create and maintain much-needed infrastructure in the backward states, but also through fiscal transfers. Indeed, the successive Finance Commissions which decide on the formula or revenue sharing between the Central Government and the State Governments are meant to focus particularly on this issue. Unfortunately, even here the strategy of successive Central Governments in the 1990s has been to reduce the amount of resources garnered which must necessarily be transferred to the states. This has been accomplished through various devices such as imposing surcharges on income tax (which need not be shared) rather than raising the basic rates. Further, the loss of revenue through a range of indirect taxes such as customs duties and the associated need to reduce domestic excise duties has also operated to reduce the share of taxes in GDP, which in turn affects the states. This has further reduced the manoeuvrability of those state governments which cannot raise much resources through taxation. And the tendency of Central Governments to treat any transfers as political largesse being offered to the party in power at the state level, rather than as a developmental requirement, has reinforced the tendencies towards inequality. Thus, a disaggregated look a the states’ economic performance indicates that actual relative growth has been quite different from the picture that is often presented in the media. All in all, it appears that the uneven development of states is something that has been accentuated over the 1990s, and this reflects the effect of the macroeconomic policies of the Central Government as well.



© MACROSCAN 2001