Uttar Pradesh occupies an unenviable position in the national economy. The state has come to be regarded as poor and backward, suffering from political instability, poor governance and as a drag on the national economy. Overall the state is characterized by low levels of per capita income, high incidence of poverty, sluggish economic growth, high population pressure with high rates of population growth, high birth and fertility rates, widespread illiteracy, high infant mortality and death rates and low life expectancy.¹ In many ways its position is comparable to some of the poorest countries of sub-Sahara Africa. In terms of most human development indicators, UP ranks 13th or 14th out of the 15 major states of the country, while in terms of poverty ratio it ranks 11th.

There are sharp variations in the levels of economic and social development across the four regions of the state, namely, western, central, eastern and Bundelkhand. The first three regions fall in the fertile Gangetic plains, well-endowed with good soil and water resources. Bundelkhand forms part of the dry central plateau region. Economically, the western region is the most developed with higher levels of urbanization, greater diversification of the economy, better infrastructure, higher agricultural productivity, higher per capita income and lower poverty levels. The eastern region and Bundelkhand are officially recognized as backward. The former suffers from high population pressure and low degree of diversification of the economy; the latter falls in the drought prone dry region. Economic infrastructure is also relatively less developed in these two regions. Though the central region scores relatively better in economic indicators as compared to the two backward regions, the incidence of poverty remains high. All the four economic regions also show considerable intra-regional variations at the district level.²

 

The state witnessed fairly successful land reforms in the fifties resulting in abolition of intermediaries and transfer of land to the tillers. This was followed by early attempts at consolidation of holdings. These measures laid the foundations for the success of the green revolution in the state in the seventies and eighties, starting initially from the western region but covering the central and eastern regions as well in a relatively short time span. The land reforms and the ensuing green revolution led to the emergence of a rich peasantry dominated by the intermediate land owning castes like the jats, yadavs and the kurmis.³ The growing economic clout of these farming communities made them a formidable political force, bringing about significant changes in the UP polity with power passing from the hands of the upper castes to the intermediate and the backward castes.

The pace of structural transformation has been slow in the state, still primarily dominated by agriculture. Even today around 80% of the population lives in the rural areas and agriculture still contributes about one-third of the state’s income, while at the national level the ratio has come down to below one-fourth. Nearly two-thirds of the workforce is still engaged in agriculture.

The high population pressure on land and slow pace of growth of non-agricultural employment has led to a continuous decline in the average size of holdings, which has come down to around two acres. Nearly 90% of the farmers in the state belong to the category of marginal and small farmers owning less than five acres of land. There are nearly 20 million farmers in UP and around 10 million agricultural labourers. Due to small size of holdings and foodgrain oriented cultivation with relatively mode-rate yield, an average cultivating family is unable to provide enough for its subsistence. The small farmers are therefore forced to work as labourers to supplement their income.

 

According to the recent NSS surveys on farmers’ conditions, per capita monthly expenditure for farmer house-holds in UP in 2003 was merely Rs 475, lower than the national average. For all rural households the corresponding figures were Rs 509 and Rs 554.⁴ The monthly household income of a farmer in UP is reported at Rs 1633, out of which only Rs 836, i.e. slightly less than half came from cultivation, while wage labour contributed Rs 559, i.e. around one-third.

According to the same survey about 30% of farm households and 37% of total rural households in UP were living below the poverty line of Rs 357.75 per capita monthly consumption expenditure in 2003. The poverty incidence at the national level was lower at 24% for farming households and 31% for all rural households.

Though the condition of the peasantry remains by and large poor, UP has not witnessed farmers’ suicides on a scale visible in other states like Maharashtra or Andhra Pradesh. In part this is because unlike the latter states where rainfed agriculture is dominant, in UP over 70% of the cultivated area is irrigated. Thus, agriculture is less prone to fluctuations due to adverse monsoon conditions. Moreover, agriculture in UP is dominated by foodgrains and is less commercialized. The level of indebtedness is also relatively low. Recent NSS surveys on farmers’ conditions reveal that only 40% of farming households in UP are indebted as compared to the figure of 55% in Maharashtra and 82% in Andhra Pradesh.⁵ Outstanding debt per farming household in UP is only Rs 7425 as compared to Rs 16973 in Maharashtra and Rs 23965 in Andhra Pradesh. Surprisingly, almost 60% of loans in UP were from institutional sources and only 20% from moneylenders, whereas over half of the loans in Andhra Pradesh were from the moneylenders.

 

The low asset base of the population is responsible for the endemic poverty. Poverty levels have been going down in the past three decades, coming down from over 50% in the mid-seventies to around 31% in 1999-2000. The absolute number of the poor has, however, remained around 50 million during the period, constituting over 20% of the country’s poor. Nearly 80% of the poor in the state live in the rural areas. Surprisingly, even the urban areas have nearly the same level of poverty, indicating little growth of modern industry and services sector and predominance of the informal sector.

Open unemployment rates in UP are relatively low. Only 1.1% of the rural labour force and 3.9% of the urban labour force was unemployed in UP in 2004-05, according to the usual status as compared to the all- India figures of 2.5% and 5.3% respectively. As per the daily status definition, which also takes account of under-employment, unemployment rates were higher – 3.7% of rural labour force and 6.3% of the urban labour force against the all-India figures of 8.2% and 8.3% respectively.

The problem of open unemployment among youth has emerged as an important problem in the urban areas. Thus, 8.6% of urban youth were chronically unemployed in UP in 2004-05 on usual status basis, while only 2.9% of rural youth are in this category. Similarly, 9.4 and 11.2% of the youth in the labour force in the urban areas are unemployed on the basis of current weekly and daily status respectively, while 3.6% and 6.2% respectively of rural youth are in this category. The highest unemployment rates are found in the age group 20 to 24 years.

 

The state has for long been facing industrial stagnation. Kanpur, the traditional textile centre of the state, has lost its industrial significance with a majority of the old textile mills sick and lying closed for decades. No government at the state or the central level has tried to revive these sick units. Barely one-tenth of the workers in the state are employed by industry. Small scale units dominate the industrial scene in UP. There are nearly 5.22 lakh registered SSI units in the states, employing about 20 lakh workers. A significant number of these units belong to the category of sick units. The traditional household and village industries are also facing a decline.

Successive state governments have announced a new industrial policy to attract private investment. Three industrial policy announcements were made in the last three decades in 1998, 2002 and 2004. Private investment has, however, remained elusive in the face of a non-congenial industrial climate. Between 1991 and 2005, 5031 IEMs (industrial entrepreneurs memoranda) were issued in the state envisaging an investment of Rs 87,888. However, the rate of implementation has been poor. Till 2004-05, only 1835 projects involving an investment of Rs 32,149 crore were implemented. The present government set up a State Development Council with some leading industrialists of the country as its members. Despite the initial euphoria the experiment did not yield much fruit. The Rs 10,000 crore gas based power plant to be set up by the Reliance group at Dadri near Delhi has yet to take off and is caught up in many controversies. The sugar industry has, however, attracted some new investment in recent years. It is revealing to note that only 1.5% of the FDI in the country has come to UP.

According to a CMIE study, private investment in medium and large projects in UP, involving investment of over one crore rupees amounted to only 1.27% of state domestic product during the period 1997-2005 against an all-India average of 1.73%. A disturbing feature of the new industrial investment is that most of it has gone to the relatively more developed districts of western UP bordering Delhi. Nearly 90% of the new investment in medium and large industry has been cornered by only nine districts, out of which six are in the western region.⁶ In fact, only two districts, Noida and Ghaziabad, have received nearly one-third of the total new industrial investment in the state.

 

A number of factors have impeded UP’s industrial progress and deterred private investment. An investment climate survey based on a survey of 300 entrepreneurs in the state revealed that lack of adequate and affordable infrastructure acts as the single-most important investment climate bottleneck followed by corruption and regulatory burden and law and order situation.⁷ Despite power as a critical bottleneck, in the last fifteen years UP did not invest anything to expand its power generation capacity, which is far below the requirements of the state. Line losses and theft have in most years remained above 40%. Even the urban areas do not get power for several hours in the day and there are frequent outages. Nearly 30% of power needs of industry is met through their own generation sets. In terms of roads, communications and other items of infrastructure too, UP is lagging behind most of the states.

The low volume of economic activity is evident from the poor credit-deposit ratio in the state, which had continually slipped from 45.8 in the beginning of the nineties to below 30 in the late nineties. Though picking up somewhat in recent years, it remained at only 37 in 2004-05.

 

Economic growth in the first twenty five years of planning in the state not only remained below the Hindu rate of growth of the national economy, it barely exceeded the population growth. However, growth rates picked up in the wake of the green revolution and UP experienced a relatively satisfactory growth of state income of around 5% per annum during the period from mid-seventies to the end of the eighties. It then appeared that the state had emerged out of its prolonged economic stagnation.

However, since the beginning of the nineties the growth rates in all the major sectors of the economy have witnessed a fairly sharp downward movement. The state domestic product (SDP) grew at a miserly rate of around 3% per annum during the eighth and the ninth five year plans. During the first three years of the tenth plan period, growth rates of SDP were slightly higher at 3.7% per annum. The trend growth of SDP during the period from 1993-94 to 2004-05 was only 4% per annum. The corresponding rate was 2.60% per annum in case of primary sector, 4.3% in case of the secondary sector and 5.3% in case of the tertiary sector.

As a result of the relatively slower growth in the state as compared to the country as a whole, the distance between the per capita income of the state and that of the country as a whole has been constantly increasing. While UP’s per capita income was nearly at the same level as that of the country in 1951, today it is almost half that of the latter.

 

The deceleration in the growth rate of the state economy since the nineties can be attributed partly to the decline in public investment, which has its roots in the deep fiscal crisis the state faced throughout this period.⁸ Due to the mounting pressure of non-developmental expenditure on salaries, pensions and interest payment, the government budget has been running into unabated high revenue deficit. Revenue deficit, which was around 1.5% of GSDP in the early 1990s, has hovered around the 3.5% level till recently. Similarly, fiscal deficit has remained around 5-6% of GSDP.

Successive governments failed to show the necessary political will to either curb the mounting non-developmental expenditure or to raise more resources. Instead, they took the easy option of borrowing, gradually pushing the state into a virtual debt trap. The total debt of the state government has risen steadily, going up from a modest Rs 17,966 crore in 1990-91 to Rs 72,766 crore in 2001-02 and crossing the level of Rs 1,00,000 crore in 2003-04. It is projected to touch the figure of Rs 1,37,915 crore in 2006-07. The ratio of debt to SDP in UP at around 50% is the highest among Indian states. Debt servicing ratio to revenue receipts was as high as 46% during 2004-05. Interest payment alone now amounts to almost 30% of the revenue expenditure.

A large part of the borrowing was diverted to meet the current revenue expenditure. As a result the state government was not in a position to raise its expenditure on development plans and other priority sectors like education, health and infrastructure. The plan expenditure which was over 7% of NSDP during the eighties came down to around half of that level in the nineties. The sharp decline in the plan expenditure gave a jolt to the growth momentum in the state. Revenue expenditure constituted a growing and large part of the plan expenditure. Barely 5-6% of the huge and mounting public expenditure was spent on building the capital expenditure of the state government. Declining public investment, in turn, has adversely affected the growth rate of the state’s economy.

 

The story of UP’s economic growth will remain incomplete if we fail to take note of the positive signals on the fiscal and economic front over the last couple of years. A close scrutiny of the recent state budgets reveals a somewhat surprising and marked improvement in the fiscal situation of the state government. The revenue deficit, which was Rs 6993 crore in 2004-05 came down to Rs 1268 crore in 2005-06. According to the revised estimates for 2006-07, the state is likely to have a revenue surplus of Rs 3359 crore. If this materializes it would be a remarkable achievement for the state, which has continuously faced a revenue deficit for the last eighteen years. The gross fiscal deficit which stood at an alarming level of Rs 16,648 crore in 2003-04 came down to Rs 10,078 crore in 2005-06 and is projected at the same level in the current fiscal year.

 

The improvement has come about due to a remarkable surge in the tax revenues of the state as well as larger flow from the centre. The own tax revenue which was Rs 13,601 crore in 2003-04 went up to Rs 15,693 crore in 2004-05 and further to Rs 18,858 crore in 2005-06 and is projected at Rs 24,381 crore in the current year. That amounts to a creditable increase of about 80% in state revenues during the last three years. The increase in state tax revenue has been contributed mainly by an increase in the trade tax, even though the UP government has shied away from introducing VAT. This indicates a picking up of economic activity in the state. The sharp rise in the price of petroleum products also contributed to an increase from receipt of tax on these items, which constitute nearly one-third of the state tax revenue.

An improvement in tax collection at the central level and the award of the Twelfth Finance Commission also led to a substantially larger flow of central transfers to the state. Thus, the share of UP in total central tax revenue transfer posted a sharp jump from Rs 10,832 crore in 2002-03 to Rs 18,203 crore in 2005-06 and projected at Rs 21, 881 crore in the current fiscal year. UP also got a fair share in the grants for the social sector announced by the Twelfth Finance Commission.

The improved fiscal situation is reflected in the higher plan and capital expenditure. Annual plan expenditure in UP has remained around Rs 7000 crore during the period 2001-02 to 2003-04. It went up to Rs 9662 crore in 2004-05 and further to 13,639 crore in 2005-06. The size of the annual plan for 2006-07 is Rs 19,000 crore, nearly three times the plan size, five years back. Similarly, capital expenditure out of the state budget has increased from Rs 3794 crore in 2002-03 to Rs 9,718 crore in 2005-06. It is projected at Rs 13,437 crore in the budget for 2006-07.

The improved fiscal situation and an increase in public investment is also reflected in an improvement in the rate of economic growth in the state. Thus, the growth rate of GSDP, which had stagnated at around 3% during 1990-2002, has increased to an average of around 5% during the period 2002-05.

It seems that the UP economy is once again showing signs of picking up the momentum of growth. How the improved economic situation will affect the voting pattern in the forthcoming elections is difficult to predict. For one, the signs of change are still feeble and concentrated regionally as well as across sections and are not wide enough to change people’s perception or their quality of life. Moreover, elections in UP are seldom fought on economic issues. In fact, development has not been the main political agenda of any party in the state. Instead, the political parties seek support on narrow caste or communal considerations. The three major contenders of power in UP, namely, BSP, BJP and SP, have their own committed constituencies, which they try to woo and consolidate. The downside is that the coming elections are once again likely to throw up a fractured verdict, leading to horse-trading of the worst kind in the post-election period.

 

Footnotes:

1. Ajit Kumar Singh, Mohd. Muzammil and Sanatan Nayak, ‘Economic Growth and Human Development Linkages in Uttar Pradesh’, Working Paper No. 190, Giri Institue of Development Studies, Lucknow, 2005.

2. Ajit Kumar Singh, Uttar Pradesh Development Report 2000, New Royal Publishing Co., Lucknow, 2001.

3. Ajit Kumar Singh, Socio-Economic Status of the Farming Communities of Northern India, New Royal Publishing Co., Lucknow, 2003.

4. G.S. Bhalla, Condition of Indian Peasantry, National Book Trust, New Delhi, 2006.

5. Ibid.

6. The World Bank, Unleashing the Industrial Growth Potential of Uttar Pradesh, New Delhi, 2006.

7. Ibid.

8. Kripa Shankar, ‘Uttar Pradesh: Deeper Into the Debt Trap’, Economic and Political Weekly 37(49), 2002. See also Ajit Kumar Singh, ‘UP Finances: Budgetary Illusion and Reality’, Economic and Political Weekly 34(16-17), April 1999; and Ajit Kumar Singh, ‘UP Budget 2000-2001: Fiscal Crisis Deepens’, Economic and Political Weekly 35(18), 2000.