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January 15, 2024

Indian Economy

Geography of Unequal growth

By Nitin Desai


The geography of unequal growth

The weakness of lower-growth states in manufacturing and services needs to be corrected

Nitin Desai

Income differences between India’s states have widened significantly in the past 30 years. The geography of the division between the states whose per capita state domestic product (SDP) was above the national average in 2019-20 and those below that is quite clear. The higher-income states are in the south, west, and the northwest and the lower-income ones are in the north, centre, and east.

In 1990-91, the per capita SDP of the higher-income states was 1.7 times that of the lower-income ones. By 2019-20, this ratio had widened to 2.5 times. In two sectors the difference and the change are even greater. In manufacturing, the ratio of the higher- to lower-income states’ per capita SDP rose from 2.4 in 1990-91 to 3.6 in 2019-20. In the services sector over the same period, the rise was from 2.0 to 2.9.

The main reason for the difference is the substantial strength in the growth of manufacturing and services in higher-income states — in the south, west, and Delhi and the ones around it. The weakness of lower-income states in these sectors is what needs to be corrected for widening the growth process. How can this be done?

These days, there is a great deal of emphasis on substantially raised investment in infrastructure in lower-income states. Could this make a difference to their growth potential? Actually if one looks at infrastructure in higher- and lower-income states, one does not find a significant difference. In fact, the Gangetic states are above the national average in road length (which was 165 km per 100 square km in 2019) and rail length (which is 21 km per 1,000 square km in 2022). Moreover, several high- growth states are below the national average. (Telangana and Andhra Pradesh in road length and Maharashtra, Telangana, and Karnataka in rail length).

An area of infrastructure where one sees a significant difference is in per capita power availability, which is significantly below the national average (1,221 Kwh in 2022-23) in the Gangetic and eastern states. This is despite the fact that eastern states are the principal source of coal, the main input in electricity generation. Could this difference be explained at least partially by the rapid spread of renewable energy power supply? Or is it simply a consequence of the difference in demand because of higher growth?

The most visible difference between lower-income and higher-income states is in entrepreneurship. One measure of the difference is the distribution of organised-sector factories, the ones included in the Annual Survey of Industries (ASI). In the 2019-20 ASI, the share of higher-income states in the number of factories, fixed capital, and employment was around 75 per cent. One other telling measure of the skewed geographical ovation of entrepreneurship is the location of the richest 100 Indians, all of whom are entrepreneurs. Of the 91 resident in India, 87 live in high-growth states.

A major source of growth in the post-liberalisation era has come from services, particularly information-technology companies. They now account for 7.4 per cent of gross domestic product and employ 5.4 million people. They are almost entirely located in the few higher-income states with West Bengal (Kolkata) as an exception. There have been some signs lately of the emergence of some cities like Jaipur, Indore, Bhopal, and Bhubhaneshwar in low-growth states as infotech centres, but none as yet in northern states.

The principal explanation for the widening difference in per capita SDP lies in the fact that in the post-1991 liberalisation era, there has been a major shift in investment from the public to the private sector. Between 1990-91 and 2019-20, the share of the public sector in gross fixed capital formation has fallen from 40 per cent to 23 per cent while the share of the private sector has risen from 18 per cent to 38 per cent. Hence the highly lopsided distribution of large-enterprise entrepreneurial capacity in the private sector is the most important reason for the widening spread of per capita income between the north, centre, and east, on the one hand, and the south, west, and northwest, on the other.

Another important source of difference in growth performance is the labour availability condition, particularly in northern and central states. In these states, the urban labour force participation rate and the percentage of workers with regular wage/salary income is below the national average. One may also note that women’s participation in the urban labour force is also below the national average. But more than this deficiency, what really matters is the vast difference in access to engineering education. About 70 per cent of the engineering seats in India are in higher-income states and that is a major reason for their capacity to attract knowledge-intensive and higher-technology industries.

A strategy for evening out the geography of per capita incomes must rest on measures to promote entrepreneurship and labour skills in lower-income states. The promotion of independent entrepreneurship may be difficult (but not impossible) in north and central India and perhaps even in the east. What is needed is connecting these regions with higher-income states. At present the national value chains in industries like vehicle manufacturing are more or less confined to these higher-income states. Hence, we need a national policy that promotes value chains that link enterprises in southern and western states with potentially lower-cost opportunities for input supply or assembly operations in northern and eastern states. This will require measures to encourage the expansion of medium and small enterprises, which are present in large numbers in lower-income states. But what is most important are urgent measures for skill development and engineering education, which will generate the potential that can attract enterprises from higher-income states which are past the stage of a rising share in the working-age population, or soon will be so.

This matters not just for equity but also for goals of national growth because 75 per cent of the medium-term and 90 per cent of long-term growth in the working-age population will take place in northern states. If we fail to boost income and growth potential in northern states, in particular, our so-called demographic dividend will become a demographic downfall, which could worsen political instability.

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