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Covid is taking an unequal toll on poor states

Projections made by the 15th Finance Commission, prior to the second wave show that richer state economies were likely to experience much faster growth in the next few years compared to poorer states that are hamstrung by low revenues and high debt (AP)Premium
Projections made by the 15th Finance Commission, prior to the second wave show that richer state economies were likely to experience much faster growth in the next few years compared to poorer states that are hamstrung by low revenues and high debt (AP)

States such as Bihar and Uttar Pradesh have been able to generate very few industrial jobs relative to the size of their working age populations so far, and this imbalance may only widen in the coming years.

When covid-19 first struck India last year, the richer parts of the country bore the brunt of the viral attack. Unlike in the ongoing wave, the rural areas of the country were spared the worst of the pandemic. Hence, mobility levels and economic activity did not take as big a hit in overwhelmingly rural states such as Bihar and Odisha as they did in urbanized Gujarat and Maharashtra. This also reflects in the performance of key indicators across states over the past year. While economic activity weakened in all states, relatively poorer states took a less severe hit.

This year could be very different. The pandemic has spread far and wide, with ‘excess death’ numbers from poorer parts of the country suggesting a much harder hit than what official covid death tolls suggest. Meanwhile, the only potent antidote to the disease, vaccines have reached fewer people in the less prosperous parts of the country because of both supply inequities and vaccine hesitancy.

Richer state economies were closing the gap with other states in terms of mobility and levels of economic activity before the second wave. With a larger share of the population vaccinated, they would likely see a faster recovery in the coming months as mobility levels rise.

This would mean the gap between richer states, largely in the west and the south, and the poorer ones, largely in the east and the north, is set to widen. The regional gap has been growing over the past two decades, and will likely widen in this fiscal.

Resource Crunch

Projections made by the 15th Finance Commission, prior to the second wave show that richer state economies were likely to experience much faster growth in the next few years compared to poorer states that are hamstrung by low revenues and high debt. The actual growth gap may be even higher than what was projected, given the second wave impact.

Poor state governments face a double whammy: they need to spend more to ramp up medical infrastructure and to offer aid to the impoverished, and they have fewer resources to tap. Borrowing costs may also be much higher than last year given that higher central borrowing has reduced the appetite for bonds. Faced with rising inflation, the central bank may no longer be as accommodative in facilitating government borrowings as it has been thus far. The space for countercyclical fiscal policy is therefore likely to be limited for states, and the state budget numbers for fiscal 2022 largely reflect that reality.

Poverty Gap

Given the uncertainty surrounding a third wave and the possible lockdowns that it could invite once again, the lack of generous state aid can mean widespread poverty and malnutrition in some of the most populous parts of the country.

National Sample Survey (NSS) data suggest that consumption levels in some of the poorest states had declined the most between 2011-12 and 2017-18. While overall poverty levels went up by 1 percentage point, the rise was much higher in states such as Bihar, Jharkhand, Odisha, and Assam.

Data from the latest National Family Health Survey (2019-20) also suggest that rates of stunting among children (an indicator of chronic undernourishment) were much higher in poorer states. If a large segment of the population in these states were in dire straits even before the pandemic, the situation has only worsened since then, as a number of ground reports suggest.

Demographic Crisis

Beyond immediate relief measures, poor populous states need to create high quality jobs. But that's easier said than done. They are already saddled with high debt levels, and Finance Commission projections suggest that these levels will remain elevated in the coming years. This means they will struggle to develop the physical and social infrastructure that they need to catch up with the rest of the country. This in turn would impact the flow of private investments and regular jobs. States such as Bihar and Uttar Pradesh have been able to generate very few industrial jobs relative to the size of their working age populations so far, and this imbalance may only widen in the coming years.

Central assistance beyond what the Finance Commission mandates can help bridge the resource gap between the rich and poor states. But in a polity where several prosperous states are now governed by opposition parties, any large redistributive initiative may invite political resistance.

(This is the second of a four-part series on how the pandemic is widening economic inequalities. The first part looked at growing inter-country inequality.)

Nikhil Rampal contributed to this piece.

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