In 2006, an International Monetary Fund (IMF) working paper titled India’s Pattern of Development: What Happened, What Follows authored by Kalpana Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramanian, and Ioannis Tokatlidis examined India’s dependence on services-led growth and pointed to a sharp divergence between the growth rates of the faster-growing states and the traditional laggards of the north, such as Bihar, Uttar Pradesh and Madhya Pradesh. The paper was pessimistic about the ability of these states to benefit from the country’s growth spurt and predicted that the divergence in growth rates would increase.
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Well, it hasn’t actually. The poorer states have been notching up rates of growth that put many of the more developed states to shame. In 2010-11, for example, Bihar, whose growth under chief minister Nitish Kumar has been extraordinary, clocked a growth rate of 14.15% in gross domestic product, or GDP, (at 2004-05 prices). Chhattisgarh under chief minister Raman Singh has been doing equally impressively, and its growth rates were 11.57% in 2010-11, 10.29% in 2009-10, 8.39% in 2008-09, 8.61% in 2007-08 and 18.6% in 2006-07. The state’s per capita income, at constant 2004-05 prices, has gone up by 52.7% in the five years to 2010-11. India’s most populous state, Uttar Pradesh, too saw its GDP at constant prices rise by over 8% in 2010-11. This is the state that used to grow at abysmal rates in earlier years—for instance, the state’s GDP grew at 2.2% in 2000-01 and 2001-02. But growth has been much better under chief minister Mayawati, with GDP increasing by 7.3% in 2007-08, 6.75% in 2008-09, 6.99% in 2009-10 and 8.08% in 2010-11. Rajasthan grew by 9.69% in 2010-11, while Madhya Pradesh grew by 8.49% in 2009-10 (GDP data for this state for 2010-11 are still not up on the CSO’s website). Orissa’s growth performance too has been excellent, though its growth rate fell quite a bit in 2010-11. But the point is that the states generally thought of as laggards have been growing at a fine clip, beating the growth rates of the richer states. Uttar Pradesh, whose GDP is more than two-and-a-half times that of Punjab and therefore suffers from the effect of a higher base when percentages are computed, grew at a higher rate than Punjab last fiscal. It also beat Karnataka in growth last fiscal, despite its GDP being one and a half times Karnataka’s. Bihar’s economy was 80.3% that of Punjab in 2004-05—in 2010-11, it was 94.5%.
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Of course, the picture is by no means black and white. Some of the poorer states haven’t been doing well, Jharkhand being a case in point. And the performance of some of the rich states continues to be excellent. The achievements of Gujarat chief minister Narendra Modi have recently been in the limelight and there’s little doubt that the state’s growth has been very rapid—its GDP growth rate (at constant 2004-05 prices) has been 14.95% in 2005-06, 8.39% in 2006-07, 11% in 2007-08, 6.96% in 2008-09 and 10.23% in 2010-11. (The state’s GDP estimates for 2010-11 are unavailable on the CSO website). Less well-known is Maharashtra’s stellar performance over the same period. Tamil Nadu’s growth too has been very high in the last two fiscal years.
The IMF paper assumed that growth would lead to a severe shortage of skilled personnel and that skilled personnel would migrate to the faster-growing states of peninsular India. It said, “if this process continues, the fast-growing states will not only suck the more mobile skilled labour from the slow-moving states leading to a further hollowing out of prospects, but also the divergence in growth rates will increase further.” The authors said that the very fact of skill-based development in the fast-growing states may impede labour-intensive development because of the rise in the price of skilled labour.
There is no doubt that the price of skilled labour has gone up. In fact, wages of unskilled labour too have risen, thanks to government programmes such as Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). So how have the poorer states been able to grow so fast? The social programmes may be the reason. If we look at the 2009-10 growth numbers for Bihar, for instance, construction grew by a huge 32%. The compounded annual growth rate of the construction sector over 2004-11 was 25.55%. The question is, is this growth the result of government spending and is it sustainable? A report by Citigroup, Heartland Hues: Up and Down in UP, says the growth in that state has come from a combination of the wage increases in the Sixth Pay Commission, minimum wages and guaranteed employment on account of MGNREGS and the strength in agricultural and commodity prices. They then raise a note of caution about the sustainability of this kind of growth, unless supplemented by productivity increases, power sector improvement and more manufacturing activities. Nevertheless, the fact remains that some of the poorer states have clearly benefited from the higher growth rate of the country as a whole.
Manas Chakravarty looks at trends and issues in the financial markets. Comment at email@example.com
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