Post-reform regional variations

S. MAHENDRA DEV

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THE existence of wide inter-regional variations in a vast country like India is well recognized. All the five year plans stressed the importance of balanced regional development and policies were designed to direct more investments to the relatively backward areas. Nevertheless, regional disparity continues to remain a serious problem. In the post-reform period, due to deregulation, the degree of control of the central government declined in many sectors. State governments can now take more initiatives for economic development than ever before. Also, the role of private sector is becoming more important as compared to the public sector. In the changed economic scenario, it would be interesting to examine the economic performance at state level. This paper looks at regional disparities in important economic indicators in the post-reform period.

We first examine economic growth in the post-reform period as compared to pre-reform period.1 Table I provides growth rates in Gross State Domestic Product (GSDP) and per capita GSDP for two periods. It shows that in the 1980s, four states viz., Andhra Pradesh, Haryana, Maharashtra and Rajasthan showed higher growth than all India (col.2). The growth rates seem to be more balanced in the 1980s as some of the poorer states like Bihar and Orissa also recorded more than 4% growth per annum.

 

TABLE I

Growth Rates of Gross State Domestic Product (GSDP) and Per Capita GSDP (%)

State

G.r. in GSDP (%)

G.r. in per capita GSDP (%)

 

1980-81to 1990-91

1993-94 to 2000-01

1980-81to 1990-91

1993-94 to 2000-01

Andhra Pradesh

5.50

5.31

3.33

4.04

Assam

3.51

2.59

1.37

0.98

Bihar

4.55

4.50

2.42

2.81

Gujarat

4.96

5.98

3.00

4.39

Haryana

6.23

5.57

3.81

3.68

Karnataka

5.16

7.92

3.20

6.41

Kerala

3.51

5.17

2.13

4.05

Madhya Pradesh

4.46

4.33

2.10

2.36

Maharashtra

5.85

5.75

3.56

4.30

Orissa

4.20

3.22

2.39

2.00

Punjab

5.18

4.96

3.30

3.01

Rajasthan

6.39

6.26

3.84

4.22

Tamil Nadu

5.24

6.04

3.80

4.99

Uttar Pradesh

4.83

5.26

2.54

3.10

West Bengal

4.60

6.88

2.41

5.32

All India

5.37

6.13

3.24

4.38

Note: For Bihar, Madhya Pradesh and Uttar Pradesh the data are for the years prior to the reorganization of these states – 1993-94 and 1998-99. Growth rates are estimated by using semi-log function.

Source: Mahendra Dev and Ravi (2003).

 

At the all India level, growth rates increased by 0.8 percentage points in the 1990s compared to 1980s. Column three shows that four states viz., Karnataka, Rajasthan, Tamil Nadu and West Bengal, showed more than 6% growth in the 1990s. Gujarat and Maharashtra also recorded a growth of nearly 6%. On the other hand, poorer states like Bihar, Orissa, U.P. and Assam showed low growth rates compared to all India. It may be noted that a high-income state like Punjab recorded low growth in the 1990s. Eight states viz., A.P., Gujarat, Karnataka, Kerala, Maharashtra, Rajasthan, Tamil Nadu and West Bengal recorded a growth of more then 4% per annum in per capita SDP in the 1990s (col 5). On the other hand, states like Assam, Bihar, Orissa and Madhya Pradesh recorded less than 3% growth in per capita SDP in the post-reform period. Among the poorer states, Rajasthan seems to have done better. Poorer states suffer from high population growth rates and low economic growth. As a result, disparities in per capita GSDP are much higher than those for GSDP. Shetty’s study (2003) shows that the regional variations across 16 states, as shown by coefficient of variation, increased from 18% in the 1980s to 27% in the 1990s. The coefficient of variation in per capita GSDP increased from 25% in the 1980s to 43% in the 1990s.

Ahluwalia (2000) argues that ‘while inter-state inequality as measured by the gini coefficient has clearly increased, the common perception that the rich states got richer and the poor states got poorer is not entirely accurate’ (p. 1639). It is true that rich states like Punjab and Haryana recorded lower growth in the 1990s than 1980s. If you remove this outlier, the growth rates of poorer states (U.P., Bihar, Orissa) declined in the 1990s. In the case of Rajasthan and Madhya Pradesh there was no increase in the growth rate in the 1990s compared to 1980s. Therefore, in five major states there was no acceleration in the growth rate in the post-reform period. In contrast, acceleration occurred in western and southern states and West Bengal.

How does one explain the fact that whereas some states did experience a significant rise in their SDP growth rates in the 1990s by benefiting from economic reforms and thereby pushed up the all India average growth rate, some other states did not respond in a similar way? The answer lies partly in the initial or pre-reform level of social and economic infrastructure conducive to growth and partly in the rate of capital formation, physical as well as human, in the post-reform period.

 

 

Physical and social infrastructure is important for economic growth and higher human development. The reports of the 10th and 11th Finance Commissions provide an index of social and economic infrastructure for major Indian states. The index of social and economic infrastructure was much higher than all India in seven states viz., West Bengal, Maharashtra, Gujarat, Haryana, Tamil Nadu, Kerala and Punjab in both 1995 and 2000 (Table II). In general, there is a positive relationship between infrastructure and growth. However, there are some outliers. Punjab did not record high growth inspite of high level of infrastructure while Rajasthan registered high growth despite low infrastructure. Similarly, Karnataka and Andhra Pradesh have similar levels of infrastructure but the former recorded much higher growth than the latter.

 

TABLE II

Index of Social and Economic Infrastructure

States

Index

Rank

 

1995

2000

1995

2000

Andhra Pradesh

99.19

103.3

10

9

Assam

81.94

77.72

12

13

Bihar

92.04

81.33

11

11

Gujarat

123.01

124.31

6

5

Haryana

158.89

137.54

3

4

Karnataka

101.20

104.88

9

8

Kerala

205.41

178.68

2

2

Madhya Pradesh

65.92

76.79

14

14

Maharashtra

121.70

112.80

7

6

Orissa

74.46

81.00

13

12

Punjab

219.19

187.57

1

1

Rajasthan

70.46

75.86

15

15

Tamil Nadu

149.86

149.10

4

3

Uttar Pradesh

111.80

101.23

8

10

West Bengal

131.67

111.25

5

7

All India

100.00

100.00

Source: GOI, 1995 and GOI, 2000.

 

Detailed data also shows that the key infrastructure sectors of power, roads, telecommunications, posts and banking are better developed in richer and middle income states as compared to poorer states (see GOI, 2003). Investment generally flows to the states where infrastructure facilities are high.

 

 

Investment and capital flows: We do not have appropriate time series data on private investments in different states. Therefore, we need to look at important indicators of capital flows at a point of time towards the end of the 1990s. Ahluwalia (2000) examines the relationship between state plan expenditure as a percentage of GSDP and growth rates in GSDP. His study finds that plan expenditure as percent of SDP declined in both the better performing states as well as the poor performing ones. The lack of correlation between state plan ratio and growth rate of GSDP indicates that total investment, which includes private investment, is more important than state plan expenditure. In the post-liberalisation period, private, institutional and external investments have increasingly tended to become market determined. There is also a great deal of interest in the pattern of investment distribution across states.

The information on per capita capital flows to different states is provided in Table III. There are significant inter-state disparities among the five indicators in the table. The per capita public and private investment in Gujarat (Rs 33,875) was 10 times more than that of Bihar (Rs 2,852) and U.P. (Rs 3304). If we take per capita plan outlay and institutional investment, the disparities are lower than those for total investment.

The per capita total credit utilization in Maharashtra was more than 20 times that of Bihar and nine times of UP. Shetty’s study (2003a) shows that the credit-deposit (C-D) ratios have fallen in all regions of the country in the 1990s – the decline being much steeper in backward states and regions. For example, in the eastern region, the C-D ratios declined from 54% in 1981 to 50% in 1991 and to 37% in 2001.

The states ranking higher in respect of social and economic infrastructure could attract greater foreign direct investment (FDI). Between 1991 and 2003, the top five states in terms of attracting FDI, viz., Maharashtra, Delhi, Tamil Nadu, Karnataka and Gujarat, accounted for 52% of total FDI approvals in the country (Table III). Despite its reforms, Andhra Pradesh managed to attract only about 4.6% of total FDI in the country. There seems to be a positive relationship between FDI inflows and physical and human infrastructure.

 

TABLE III

Per Capita Capital Flows and Share in FDI: 1999/2000/2001

Major States

Per capita NSDP(Rs) 1999-00

Per capita public and private investment(Rs)

Per capita plan- outlay (Rs)

Per capita institu tional Investment (Rs)

Per capita total credit utilization (Rs)

Per capita per annum extermally aided projects (average 1997-02) (Rs)

Share in total foreign direct investment approved 1991-03 (%)

Andhra Pradesh

14715

21447

1032

910

4668

221

4.61

Bihar

6328

2852

319

546

669

11

0.25

Chhattisgarh

N.A.

12209

631

32

1803

n.a.

0.22

Goa

N.A.

56057

3423

1821

14489

25

0.34

Gujarat

18685

33875

1285

720

5827

138

6.47

Haryana

21551

9201

861

827

5098

106

1.33

Jharkhand

N.A.

9105

836

37

1759

n.a.

0.05

Karnataka

16343

24775

1499

688

6420

125

8.25

Kerala

18262

12235

710

1173

5872

19

0.53

Madhya Pradesh

10907

7287

652

725

2528

62

3.19

Maharashtra

23398

17556

1120

660

14890

52

17.44

Orissa

9162

25525

627

1049

1706

118

2.83

Punjab

23040

12688

1244

1078

7707

68

0.83

Rajasthan

12533

6763

822

914

2419

35

1.03

Tamil Nadu

19141

26292

837

709

9194

83

8.53

Uttar Pradesh

9765

3304

293

619

1638

47

1.69

West Bengal

15569

7113

710

662

3674

89

3.18

Source: GOI, 2003.

 

The top five leading states in the selected indicators on capital flows are shown in Table IV. The table shows that Karnataka and Goa figure in four, Orissa and Punjab in three and Gujarat, Tamil Nadu and Maharashtra in two out of five categories (GOI, 2003). Generally speaking, there is a positive relationship between higher levels of infrastructure/income and capital flows, particularly the per capita total investment. There are some exceptions like Orissa. In the case of Orissa, relatively high levels of external aid and higher levels of private investment in the power sector could be responsible for its figuring in three categories. Rajasthan, with lower infrastructure, only figures in one category. On the other hand, Andhra Pradesh appears in one category due to very high per capita level of externally aided projects (EAPs). The correlation between per capita EAPs and infrastructure/income levels is weak. It shows that there is a large scope for getting funds through additional central assistance in the form of EAPs.

 

TABLE IV

Leading States in Per Capita Flows

Per capita flows of

Top five among major states

Plan outlays

Goa, Karnataka, Gujarat, Punjab, Maharashtra

Public & private investments

Goa, Gujarat, Tamil Nadu, Orissa, Karnataka

Institutional investment

Goa, Kerala, Punjab, Orissa, Rajasthan

Credit utilisation

Maharashtra, Goa, Tamil Nadu, Punjab, Karnataka

Additional central assistance for externally aided projects

Andhra Pradesh, Gujarat, Karnataka, Orissa, Haryana

Source: GOI, 2003.

 

 

Income poverty: According to official estimates, poverty declined from 37.3% in 1993-94 to 27.1% in 1999-00. It declined 10.2 percentage points over the six year period indicating a 1.7 percentage point decline per annum. Studies by independent researchers,2 however, show that rates of decline in poverty during the reform period was much lower than official estimates after adjustment for non-comparability.

Deaton and Dreze show that the growth rate of average per capita consumption expenditure (APCE) during 1993-94 and 1999-00 is positively correlated with the growth in state domestic product (SDP) across states. The correlation coefficient between the two series is 0.45. They also show that the proportionate changes in poverty ratios across states are highly correlated with corresponding growth rates of APCE (correlation coefficient 0.91). The low growth states in APCE are the eastern ones (Assam, Orissa and West Bengal) and BIMARU states (Bihar, M.P., Rajasthan and U.P.). The high growth states are from the South (except Andhra Pradesh), the West (Gujarat and Maharashtra) and North-west (Punjab, Haryana and Himachal Pradesh). In fact, there is a divergence in poverty ratios and growth in APCE in the post-reform period – the poorer states showing lower reduction in poverty.

Poverty is concentrated in a few states. The share of six states (Bihar, U.P., M.P., West Bengal, Orissa and Assam) in all India rural poor increased from 68.8% in 1993-94 to 74.4% in 1999-00 (Table V).

 

TABLE V

Percentage Share of States in All India Rural Poor: 1993-94 and 1999-00

States

Share in All India Rural

States

Share in All India Rural

 

Poor

 

Poor

 

1993-94

1999-00

 

1993-94

1999-00

Bihar

20.4

20.6

Andhra Pradesh

3.0

2.9

Uttar Pradesh

21.3

21.9

Gujarat

2.3

1.9

Madhya Pradesh

8.5

11.3

Haryana

1.4

0.6

West Bengal

8.8

8.9

Karnataka

3.4

3.2

Orissa

6.2

7.2

Kerala

2.3

1.2

Assam

3.4

4.5

Maharashtra

7.5

6.5

Total of above 6 states

68.8

74.4

Punjab

0.6

0.6

     

Rajasthan

3.4

2.9

     

Tamil Nadu

4.9

3.9

     

Other states and U.T.

2.4

1.9

     

Total of above 9 states and other states/U.T.

31.2

25.6

     

All India

100.0

100.0

Source: GOI, 1995 and GOI, 2000.

 

One consequence of economic reforms is that inequalities have increased over time. Apart from a rise in regional disparities, rural-urban inequalities in consumer expenditure have increased. The salaries of public sector employees have grown at 5% per annum while agricultural wages grew at the rate of 2.5% per annum in the 1990s. Intra-rural inequalities have not risen while intra-urban inequalities have increased.3

 

 

Policy implications: Our analysis on economic performance of states reveals that regional disparities have increased in the post-reform period. The disparity between the group of eastern and northern states and the group of western and southern states has increased. There are bound to be disparities across regions in a vast country like India. However, a reduction in regional disparities is important not only for raising economic growth and human development but also to reduce social tensions. What should be done to reduce regional disparities in economic performance?

A multi-pronged strategy is needed to narrow down regional disparities. First, investment should be increased in less developed states for higher growth and reduction in poverty. Public investment is crucial for raising physical (irrigation, power, roads etc.) and human (health and education) infrastructure. Resources have to be used for infrastructure from central assistance, including externally aided projects and the state’s own resources. The central government’s role is important in allocating more resources to the less developed states. The role of private investment has become more important in the post-reform period. Private investment will increase if physical infrastructure and skilled labour are available.

Second, fiscal management of states must improve in order to allocate more expenditure for physical infrastructure and health and education. Many state governments are facing severe fiscal problems although there are signs of improvement in recent years. Third, the less developed states are facing both low economic growth and high population growth.4 These states have to focus on policies for reducing population.

Fourth, agriculture sector problems have to be solved in backward states. Public investment has declined as have credit deposit ratios for rural areas. There seems to be an increase in farmer’s suicides. There is also a challenge of involving small and marginal farmers in diversification. Investment in irrigation and watershed development is important, particularly for dry land areas. Similarly credit, research and extension have to be improved in backward regions.

Fifth, productive employment should be generated in order to reduce poverty in low income states. Employment can be increased if economic growth is labour intensive. Development of agriculture and rural non-farm sector will improve employment and wages in rural areas. Direct employment programmes such as wage and self-employment schemes have to be effectively implemented in less developed areas. Sixth, social sector performance should be improved in backward regions. It is necessary to ensure the expansion of public services for the poor at a low cost, effective public regulation of private services like health care, and accountability of these systems, public as well as private, to the local communities. Improvement in health and education in backward regions would improve economic growth and human development.

Seventh, to improve accountability and development, there is a need to devolve more finances, functions and powers for panchayats in order to make these institutions self sustaining. Over time, decentralization would increase accountability. Governance has to be improved in less developed regions. Also, social inclusion has to be an important agenda for governments. There is a need to garner support for the reform process from wider sections of the population by encouraging participatory models of development.

To conclude, in the post-reform period, there were some improvements in indicators such as foreign exchange reserves, physical infrastructure (like telecommunications and roads), the stock market and IT leading to prospects of an 8% growth in GDP in 2003-04. Due to these improvements, some people feel that India is shining. However, we have seen above that inter-regional, inter-class and rural-urban disparities have increased in the post-reform period. India cannot ‘shine’ unless we reduce these disparities through better public policies.

 

References:

Montek S. Ahluwalia (2000), ‘Economic Performance of States in Post-Reform Period’, Economic and Political Weekly, 6 May.

B.B. Bhattacharya and S. Sakthivel (2004), ‘Regional Growth and Disparity in India: Comparison of Pre and Post-Reform Decades’, Economic and Political Weekly 29(10), 6 March.

A. Deaton and Jean Dreze (2002), ‘Poverty and Inequality in India: A Re-examination’, Economic and Political Weekly, 7 September.

R.H. Dholakia (2003), ‘Regional Disparity in Economic and Human Development in India’, Economic and Political Weekly, 27 September.

GOI (2003), ‘Tenth Five Year Plan 2002-07’, Planning Commission, Government of India, New Delhi.

S. Mahendra Dev and C. Ravi (2003), ‘Macro-economic Scene: Performance and Policies’, in C.H.H. Rao and S. Mahendra Dev (eds), Andhra Pradesh Development: Economic Reforms and Challenges Ahead, Centre for Economic and Social Studies, Hyderabad.

R. Nagaraj, Aristomene Varouadakis and Marie-Ange Veganzones (1998), ‘Long Run Growth Trends and Convergence Across Indian States’, OECD Technical Papers, No. 131.

M. Govinda Rao, R.T. Shand and K.P. Kalirajan (1999), ‘Convergence of Incomes Across Indian States – A Divergent View’, Economic and Political Weekly, 27 March.

Abhijit Sen and Himanshu (2003), ‘Poverty and Inequality in India: Getting Closer to the Truth’, Centre for Economic Studies and Planning, Jawaharlal Nehru University, mimeo.

S.L. Shetty (2003), ‘Growth of SDP and Structural Changes in State Economies: Interstate Comparisons’, Economic and Political Weekly, 6 December.

S.L. Shetty (2003a), ‘Credit Flows to Rural Poor’ EPW Research Foundation, Mumbai, (mimeo).

K. Sundaram and S.D. Tendulkar (2003), ‘Poverty in India in the 1990s: Revised Estimates’, Economic and Political Weekly 38(46), 15 November.

 

Footnotes:

1. There are a number of recent studies on regional disparities in India. Among others, see Ahluwalia (2000), Nagaraj et al (1998), Rao et al (1999), Shetty (2003), Dholakia (2003), Deaton and Dreze (2002), Dev and Ravi (2003), Bhattacharya and Sakthivel (2004).

2. Deaton and Dreze (2002), Sundaram and Tendulkar (2003) and, Sen and Himanshu (2003).

3. See Deaton and Dreze (2002) for details.

4. See Bhattacharya and Sakthivel (2004).

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