Freedom is not just the freedom to speak, write or to rule on our own. The real freedom lies in economic freedom.
J. Jayalalitha, Chief Minister, Tamil Nadu, August 15, 2016
We see that existence of regional economic inequalities in India can hardly be questioned, although the extent is debatable. Inter-state differences in levels of incomes are stark and persistent. There is a considerable concentration of the poor in specific regions. It seems that our economic growth has been regionally more differential than equitable. Poverty is emerging as more inter- and intra- regional with areas of rising economic well-being accompanied by stagnating economic zones. (Chakravarty, 1987)
While central governments have to criticized for overlooking this growing inter-state disparity, states too have a lot to explain for inter-district disparities. At both the levels, there has been the considerations of electoral politics, political expediency, lack of center-state synergy and lack of political consensus on long-term goals. While structural factors of Constitutional separation of responsibilities between the center and states explain this tension, we cannot overlook the dominance of one party for a substantial period of time – which would lead to the expectation of greater synergy. This is belied in the practice.
Since liberalisation, the divergence has become larger which suggests that economy, as it was pre-1991, was conducive to the polarizing influence of market forces and globalisation. Clearly, the ‘national cake’ has grown since the first Five Year Plan was launched. However, the share of some regions and persons have remained stagnant or worsened while other have flourished. This has social, economic and political implications for the policymakers in the course of national development.
If the trend toward divergence continues, and poorer states lag further behind richer ones, this is sure to put strain on our federal polity with its recently centralizing tendencies. Only ad-hoc measures, depending on short-terms political and electoral preferences, will exacerbate this already delicate disparity. Ideological, rather than practical and strategic, considerations – such as leaving things to market forces alone or controlling every aspect of economy, will only compound the problem. There needs to be a synergy between the forces of market and state as there should be between central and state governments.
Please understand, Your Excellency, that India is two countries in one: an India of Light, and an India of Darkness. The ocean brings light to my country. Every place on the map of India near the ocean is well off. But the river brings darkness to India—the black river.
Private investment has arrived abundantly in the more affluent states leaving little for the poorer ones. Since per-capita income reflects the savings rate, the conversion of savings into capital investment is lower in poor states. Additionally, richer states have better infrastructure, governance and a more skilled workforce. As with per-capita income, liberalisation seems to have further skewed this disparity in investment levels by increasing the mobility of private investment which was earlier allocated by political bargaining of licenses.
Data source: Reserve Bank of India
The states that have managed stronger growth recently, compared to previous decades, like Bihar, Assam, West Bengal Madhya Pradesh have retained their small, negligible in case of Bihar, shares of manufacturing in this growth. Manufacturing has had little or no positive role to play in the growth turnaround in these states although share of agriculture has dropped in states like Bihar and Assam.
Here, Nurkse’s vicious cycle of poverty is visible with low income states, which effectively have low savings, have low investment and hence a low late of capital formation and low productivity which ultimately means low output. We can safely conclude, “a state is poor because it is poor”.
Public Investment:
The public sector is still very important in India despite the process of liberalization 25 years ago. States with higher levels of per capita income can raise higher per capita tax revenue, thereby enabling them to finance higher levels of public investment. Poorer states do not have this luxury, hence they have to have had to rely on redistributive transfers from the centre to provide them with that extra revenue.
Data source: Ministry of Commerce and Industry, Govt. of India
However, the graphs above and below show that this redistribution has not been able to balance the regional disparities that persist. North-eastern states have see negligible growth in PSUs with the exception of Assam. Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Uttaranchal etc. have seen only moderate increases while staying low on the ladder of private investment as well.
Data source : Ministry of Heavy Industries & Public Enterprises, Govt. of India.
Priority in industrial licensing, incentive schemes for attracting greater private investment to backward areas, greater allocation of resources through plan investments, special programmes for building up infrastructural facilities in backward regions – these are some of the instruments that were used by policymakers. However, it did not materialize as expected. Thus, redistribution assumes more importance post liberalisation as market-reform and relaxation of state control can further accentuate these disparities across states, thereby putting a greater burden on the already ambiguous system of centre-state transfers.
Data source: Reserve bank of India
This mixture of public and private investment can be seen in the gross output produced by the states. The disparities of supply of capital are reflected in the output. While Gujarat, Maharashtra and Karnataka outshine others, followed by Andhra Pradesh, Karnataka, Haryana and Uttar Pradesh. The rest of the country have been virtually crowded out by these states.
Data source: Reserve Bank of India
Again, north-eastern states barely register themselves on the plot while Bihar, Jharkhand, Madhya Pradesh, Orissa and others slowly inch upwards. This shows that recent pick up in growth in these states has relied on services rather than on manufacturing as its engine which means that the benefits are concentrated into skilled and educated population, only slowly trickling down to the barely literate people – a major chunk of population dependent on daily wages.
Nexus of public and private investment:
Private investment and public investment seem to affect and are affected by state’s level of income, meaning that state governments can play an important role in enhancing their own growth prospects. Public expenditure on education and health is of critical importance. In practice, however, state governments are limited by their ability to increase levels of capital expenditure as well as to ensure efficiency in its use. The former, in turn, depends greatly on the tax-revenue, dependent on per-capita income, along with centre-state government transfers which are irregular.
There seems to be a complementarity in public infrastructure, which has influence on improving human capital, and private investment such that public investment, which is higher in richer states, “crowds in” private investment as well as skilled labor. Indeed, the backward states had high rates of outmigration while the developed states were absorbing these migrants – a sort of ‘suction mechanism’ is in operation within India. (UNESCO, 2013)
Foreign Direct Investment(FDI):
FDI was concentrated in few states with Maharashtra receiving highest chunk followed by Karnataka, Delhi, Andhra Pradesh, Punjab and Tamil Nadu. The North-eastern States have been largely untouched by FDI while poor but populous states like Bihar, Rajasthan, Uttar Pradesh etc. have seen scant FDI. Again the disparity that existed in private investment persists. Notably, this also reflects poorly on social conditions of the states that do not or only scantily receive FDI.
Data source:Ministry of Commerce and Industry, Govt. of India
Inter-state disparity in agriculture:
The irrigated area as a portion of sown area in Punjab and Haryana increased to lie in the range of 80-90% while in Kerala, Assam or even nearby Himachal Pradesh it lied between 10-20%. Similarly, use of High Yielding Variety of seeds increased multifold in the former states. This is visible in inter-state trade.
Share of major exporters in total internal trade in 2014 (per cent)
Source: Director General of commercial Intelligence and Statistics (2014)
While Punjab was the most important exporter of agricultural commodities followed by Madhya Pradesh, Andhra Pradesh, Haryana and Maharashtra. Similarly, Haryana, West Bengal, Gujarat and Uttar Pradesh were found to be the largest importers of agricultural products.
Share of major importers in total internal trade in 2014 (per cent)
Source: Director General of commercial Intelligence and Statistics (2014)
Dominance of few states indicates high degree of export concentration among states and this dependency is associated with various problems. Any supply side shock, a regular feature of droughts and bad monsoon, can drastically hurt the farm production and exports. On the import side, this shock means lower supply as well as higher prices for imported commodities in the short run. Hence, these importing states are left to the mercy of federal assistance and subsidies in order order to fulfill their demand. (Khanal, 2016)
Changing Economy and Politics 