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September 29, 2022

Indian Economy|Governance & Politics

Convergent growth

By Nitin Desai


Convergent growth

Nitin Desai

Making lower-growth states part of a national value chain is an imperative, but difficult because of political rivalry

The prime minister’s August 15 speech spoke of a united and integrated India as one of the five focuses for policy in the years ahead to the centenary of independence. However, the disparity in the growth and development performance of states will stand in the way of this very necessary goal. Can this disparity be corrected?

The data on income growth suggests a two- fold division of states. The low-growth states are in the northern, eastern, and central parts of the country (1) (NEC group) and the higher-growth states are in the south, west, and north-west of the country (2) (SWNW group). A measure of the widening gap between the low-growth and the higher-growth states is given by the increase in the ratio of per capita state product in 1990-91 and 2019-20 in the
aggregate and at two crucial sectoral levels:

  • Total state product per capita: From 1.6 to 2.6
  • Manufacturing state product per capita: From 2.3 to 3.4
  • Services state product per capita: From 1.9 to 2.9.

Clearly the disparity between these two groups grew during the liberalisation period; but it was there before that.

The discrepancy goes back to how the economy was managed during colonial times. The geography of the higher-growth states coincides well with the Madras and Bombay presidencies of the colonial era and several large princely states, notably Hyderabad, Mysore, and Travancore. The two presidencies in the west and south were not dominated by British companies and saw significant growth in domestic entrepreneurship, often shaped by nationalist considerations. This was also true of the large princely states, which gave significant governmental support for development-promoting activities in agriculture, education, and even industry. Hence they were better-placed to benefit from the acceleration of growth and development after independence. One higher-growth area that does not fit into this pattern is the northwest, where the development impulse came after independence mainly through early investment in irrigation and agriculture.

The low- growth area coincides with the old Bengal presidency, whose remit originally extended all the way to the northwest, but which was later subdivided into the United Provinces and several others. The princely states in this low-growth area were relatively small and less able to finance and promote governmental efforts to boost development, though there were exceptions like Gwalior. Bengal (undivided) and the nearby regions did experience significant development initiatives, particularly in mining and material manufacturing. Agriculture was also commercialised with the establishment of tea and indigo plantations. But one special characteristic of this eastern region was the dominance of British companies, not just in industry but also in plantation agriculture and trade. The departure of the British after independence left a colonial economy and a vacuum in the entrepreneurial base.

After independence, during the planning era, substantial public investment in manufacturing and mining was directed mainly at the eastern and central regions. But this heavy investment did not have the spin-off effects of generating opportunities for private enterprises. Moreover, this “machines to make machines” strategy was stymied in the mid-sixties and, in West Bengal the spread of extreme leftism had a further slowing-down effect. The states in the south and the west grew well during this period despite the limited role assigned to the private sector, perhaps because it could focus on engineering, chemical and consumer industries, in which the more modest scale of investment required also stimulated new entrepreneurship. They also benefited from the shift in public investment to petroleum and chemicals.

The big change in the Indian growth process since liberalisation has been the substantial shift in manufacturing and even infrastructure investment from the public to the private sector, the rapid growth of export-oriented high-tech services, the proliferation of start-ups in the IT sector, the growing integration with the global economy, and the increasing dependence on higher-end skills. The higher-growth states were better-placed to benefit from this change because of their strong private sector, a long tradition of higher education, and coastal locations, which eased global interactions.

Looking ahead, one crucial factor is the need for better use of a rising working-age population, in which we have not done well so far. The demographic projections for India show that five northern and central (NC) states — Rajasthan, UP, Bihar, Jharkhand, and Madhya Pradesh — will account for 91.6 per cent of the national increase in the working-age population between 2030 and 2050. If this increase is to be a demographic dividend rather than a debt, the case for narrowing the large gap between low-growth and higher-growth states becomes an economic imperative. The low-growth states in the eastern region are different. They are on their way to the demographic transition and will not face the risk of an accumulating demographic debt.

The focus of convergent-growth policies must, therefore, be on the five NC states, where a failure to narrow or even close the rising income and employment gap will lead to a serious challenge to the unification and integration of the Indian economy and could also slow overall growth because of the failure to benefit from a rising working-age population. West Bengal is a very special case because it has most of the growth factors that the higher-growth states have. Not only can it catch up with the higher- growth states, it could also prove a driver for neighbouring states.

The northern states cannot be integrated easily with the global economy. The only plausible answer is to connect them with the higher-growth states through encouraging a national value chain in manufacturing. We have seen this type of a national value chain emerging in the case of the automobile industry, except that most of the component suppliers are in the higher-growth states. Making the northern states part of a national manufacturing value chain will require serious investment in logistics and infrastructure for manufacturing, skill development, and organised support for local micro, small, and medium enterprises, which can become part of it and much more. The northern states will not be able to do this without some form of Union government support because their revenue per capita is just half that of the higher-growth states.

Will this happen with the present state of our politics? At present three of the NC states are ruled by the opposition and two by the party heading the Union government. The real risk is that acrimonious political rivalry will stand in the way of a unified and integrated Indian economy.

(1) UP, Bihar, Jharkhand, Rajasthan, J&K, West Bengal, Assam, the smaller north-eastern states, Odisha, Madhya Pradesh & Chhattisgarh

(2) Tamil Nadu, Kerala, Andhra Pradesh, Telangana, Karnataka, Maharashtra, Gujarat, Punjab, Haryana, Himachal Pradesh and a couple of smaller states.

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