Growth Convergence and Spillovers Among Indian States: What Matters? What Does Not? By Sanjay Kalra and Piyaporn SodsriwiboonIMF working paper.

Do the incomes of various states converge over a period of time? In simple terms, the question is whether the poorer states are able to at least lower the gap between themselves and the richer states.

Kalra and Sodsriwiboon consider data on 15 major Indian states between 1960 and 2004, using real per capita net state domestic products. They find that:

Illustration: Jayachandran/Mint

The authors find that while growth in the richer states accelerated, the poorer states grew at much slower rates. High-income states grew at average annual rates of 3-4% over 1970-2003, while low-income states grew at only 1.5-2%. As a result, the income difference between high- and low- income states more than doubled. By the end of the period, the average per capita income of the five richest states in 2003 was 2.5 times as much as that of the poorest states.

Convergence in incomes does occur within the groups, which the authors call “club convergence". Within the middle-income group, however, incomes have begun to diverge, because Andhra Pradesh and Karnataka are growing faster than the other states within the group.

How has liberalization affected state incomes? Here is what Kalra and Sodsriwiboon have to say: “Starting 1981, growth picked up strongly (3% in 1980-92), and the reforms seemed to benefit all states equally. After 1992, on an average, the states continued to grow at nearly 4%, but differentially. Thereafter, the growth momentum was sustained in the high-income states, and some medium-income states also speeded up. However, growth slowed down in most low-income states."

In other words, liberalization has led to an increase in inequality among the states, with the rich growing richer.

What are the factors that have helped growth in these states? The paper identifies three chief reasons: a higher share of the service sector in the state economy, a higher private sector credit per capita and a higher development expenditure.

Another reason could be because it is the private sector that is now the engine for growth. The authors conclude that “from a policy perspective, states that forged ahead were those that benefited from advances in the services sector, those with better infrastructure and credit availability, and those that engaged efficiently in development spending. The lack of dynamic spillovers may also be pointing to a need for better infrastructure and connectivity throughout the country, to allow a dissemination of the benefits of growth across the country".

Perhaps the reason for the divergence post-liberalization is that given in a 2006 paper by Raghuram Rajan et al, “India’s Pattern of Development: What Happened, What Follows", in which the argument is that after liberalization, with the Union government no longer enforcing inter-state equity, divergences between states have increased.

They concluded pessimistically that “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". Expect more friction between “sons of the soil" and outsiders, more civil unrest and more Dantewadas, unless the Centre redresses the balance.

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