First Post – India: Regional Disparity in Growth (#1)

INDICATORS OF REGIONAL DISPARITY (#4):

• Industry:

Private Investment:

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.

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.

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.

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.

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.

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.

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.

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.

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)

Seventh Post – India: Regional Disparity in Growth (#7)