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Tuesday, Aug 12, 2003

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Per capita income growth in the States

C. P. Chandrasekhar
Jayati Ghosh

Much of the discussion of the growth performance of States stems from perceptions of aggregate output performance rather than per capita output growth. In this edition of Macroscan, C. P. Chandrasekhar and Jayati Ghosh investiga te trends in per capita State Domestic Product of the major States since the 1970s, and consider the implications for regional inequality in India.

THERE has been a lot of discussion about the relative performance of the States in India recently. A spate of analyses has been devoted to considering the growth performance of the different States, and many of the traditional prejudices regarding the "dynamic" and "stagnant" regions seems to be confirmed by such analyses. These patterns are then explained typically by the usual arguments with respect to backward and forward States.

In the period of the 1990s, it has further been argued that those States that have been more open to economic liberalisation have shown faster growth rates of growth in general.

However, much of such analysis has been in terms of aggregate growth rates, whereas obviously what is more significant is the change in per capita income. It is well known that regional inequalities in this respect are large in India, and there is a widespread perception that they are likely to have increased in the recent past.

Chart 1 indicates the relative position of States with respect to aggregate net SDP (State Domestic Product) and per capita net SDP in 2000-01 (at constant 1993-94 prices). The importance of considering per capita patterns becomes immediately obvious from this chart. Among the largest economies in terms of aggregate SDP, only Maharashtra is among the top in terms of per capita income.

Uttar Pradesh, the second largest state economy in aggregate terms, is among the lowest in per capita terms. Meanwhile, Punjab and Haryana, which have relatively small total SDP, have the highest and third highest per capita incomes.

Of course, all this says nothing about intra-State inequalities, which also cannot be assumed to be similar across states. The NSS estimates show that some of the States with highest per capita income have also the highest internal inequalities in terms of per capita consumption expenditure. Thus, the two States with the highest Gini coefficients for per capita consumption (indicating the greatest inequality) are Tamil Nadu (with a Gini ratio of 0.398 in 1999-1000) and Maharashtra (with a Gini ratio of 0.345). These two States are among the highest in per capita SDP.

However, other States with high per capita SDP show relatively less inequality in consumption expenditure. Thus Punjab showed a Gini coefficient of 0.29, while Haryana had a Gini ratio of 0.285 in the same period, for per capita consumption expenditure. Conversely, some States with low per capita SDP had relatively high inequality — such as Uttar Pradesh with a Gini ratio of 0.327 and Bihar with a Gini ratio of 0.318.

In what follows, we will ignore intra-State income inequalities, and focus on patterns across States, in terms of per capita income and growth. We will also ignore rural-urban differentials within States, which are also estimated to have increased over time and especially in the past decade.

Charts 2 to 5 show the per capita SDP of each State as per cent of the highest (which in all of the years happens to be Punjab) and the rank of the various States in the four years 1970-71, 1980-81, 1990-91 and 2000-01. A comparative look at these charts reveals a number of interesting trends.

First of all, it emerges that over time, the basic hierarchy has remained broadly the same, with Punjab, Haryana and Maharashtra at the top in per capita terms, and Bihar and Orissa at the bottom. Within this, however, a number of the States with relatively higher per capita income have been improving their position vis--vis the highest, that is Punjab.

This was especially the case in the latest period, when there were four States (Haryana, Maharashtra, Tamil Nadu and Gujarat) with per capita incomes of more than 80 per cent of that of Punjab, compared to 1970-71, when only the state of Haryana could cross that line. In other words, there has been less inequality at the top of the rankings, than previously.

Another feature that emerges is the variation in the relative position of the "middle income" States vis--vis the highest, not only in terms of ranking, but as proportions of the highest per capita SDP. States such as Tamil Nadu, Karnataka and Kerala show significant increases over the longer period, with some fluctuations in 1990-91. Andhra Pradesh shows wide fluctuations with an increase in the latest period, while West Bengal shows no clear trend, despite a dip in 1990-91 and a recovery thereafter.

Finally, the deterioration of the relative position of the lowest per capita income States, is worth noting. In the 1970s and 1980s, Orissa and Bihar (the two States with the lowest per capita SDP) had per capita incomes between 40 to 50 per cent of that of Punjab; by 2000-01, the figures had fallen to 34 per cent for Orissa and only 22 per cent for Bihar.

In other words, in some of the more backward States, the disadvantages of the low base combined with other factors to create relative stagnation in per capita incomes, which then meant increasing gaps with the richer States.

This phenomenon of increasing gaps between richest and poorest States is shown very clearly in Chart 6, which describes the per capita SDP of the richest State (Punjab) as a multiple of the poorest (Bihar). It shows that the divergence increased even in the period 1970-1990, but not very substantially, and in 1990-91, the ratio was still only just above three times. But over the 1990s there was an explosive increase in such inequality, which caused the gap to increase dramatically to more than 4.5 times by 2000-01.

Clearly, the causes for such increasing divergence over the most recent period require further investigation. Some possible causes and factors are discussed below. But before that, it may be worth looking into the patterns of growth of aggregate SDP, to see if there are any trends that emerge from such overall performance.

Chart 7 indicates that there has been no such thing as a common pattern across States in terms of SDP growth rates, and also that the trends have varied widely across decades. While it is true that some of the more "backward" States exhibit lower rates of growth overall, this has not been consistently true over all three decades. Thus, in the 1980s, several of the supposedly "BIMARU" States (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) grew faster than the national average in terms of aggregate SDP, thereby providing challenges to the more common perception. By the 1990s, however, growth had decelerated in these States (except Rajasthan), but so also did it slow down in a number of the higher income States such as Maharashtra, Punjab and Haryana.

Interestingly, in the 1990s, West Bengal showed the highest rate of aggregate SDP growth after Karnataka, even though it has not been generally recognised as a fast growing State. Indeed, its aggregate rate of growth appears to have been faster than that of Gujarat and Tamil Nadu, both of which are more commonly described as dynamic States.

This comes out even more sharply in per capita terms. Chart 8 gives some indication of the rates of growth of aggregate and per capita SDP in the second half of the 1990s, for the six largest State economies. Karnataka clearly grew at the fastest rate, in both aggregate and per capita terms, followed by West Bengal and then Tamil Nadu.

The gap between West Bengal and Tamil Nadu, on the one hand, and Gujarat and Andhra Pradesh, on the other hand, was significantly greater in terms of per capita growth, than in aggregate SDP growth. This is possibly reflective of the greater success of West Bengal and Tamil Nadu in controlling fertility and, therefore, also population growth. But once again, these patterns are not generally recognised.

What is well known, of course, is that economic growth and per capita income may not be directly correlated with human development indicators. Table 1 presents the human development rankings of the major States as calculated by the Planning Commission, from 1981 to 2001. It is immediately evident that Kerala, which consistently holds the top position in terms of human development indicators, is among the middle-income States. Some of the higher income States are only in the middle ranks of human development.

Further, growth trends also do not seem to be necessarily correlated with human development improvement. It is true that Tamil Nadu, which experienced a relatively higher rate of growth, has also shown a substantial improvement in human development ranking. However, other fast growing States such as Karnataka, Gujarat and Andhra Pradesh actually slipped in terms of human development ranking. Meanwhile, Rajasthan, a low income and low growth State, showed continuous improvement in its human development rank.

The question, of course, is what explains such regional (or rather, State-wise) disparities in income and human development, and in particular, what explains the increase in disparity between richer and poorer States in the most recent decade. What was it about the overall growth pattern of the 1990s which caused the poorer States to stagnate relatively speaking, while some States, especially in the Southern and Western regions, seem to have accelerated their growth even in per capita terms? And what explains the performance of States such as West Bengal and even Kerala, which are not generally accepted to be fast growing States? And why do income and human development indicators diverge so much?

Some part of the last question can be answered in terms of the difference between income and consumption, which is indicated in Table 2. This table suggests several features of interest.

First, there is quite a wide divergence between the per capita consumption estimates of the NSS and the per capita SDP data, even at the top of the hierarchy. Thus, Kerala, which is only seventh in ranking in per capita SDP, tops the list in per capita consumption. Maharashtra, which is second in per capita SDP ranking, is only fifth in per capita consumption.

Second, the inter-State disparities are less in terms of per capita consumption that which emerges in terms of per capita SDP. Thus, the gap between the highest per capita consumption figure (in Kerala) and the lowest (in Orissa) was 1.98 times in 1999-2000, which is much lower than the gap of 4.5 times which we observed for per capita SDP in 2000-01.

Clearly, human development indicators (which capture longevity and educational attainment along with income) are more likely to be affected by per capita consumption in a State than by per capita income. Therefore, it is not surprising that we find greater correlation between the consumption and human development rankings, than we do between SDP and human development rankings.

The question remains why some of the high-income States exhibit relatively less per capita consumption. This anomaly points to higher savings and investment ratios in such States, but it should be noted that some of these States, such as Maharashtra, are not necessarily high growth States, especially in the most recent period.

Until the 1970s, there was actually a convergence of per capita incomes across States, or at least a decline in the extent of inter-State disparities in this regard. This reflected deliberate government intervention, expressed in various ways.

The successive Finance Commissions favoured some amount of positive discrimination in favour of poorer States in the transfer of tax revenues of the government, and plan funds also were at least partly directed with this in mind.

Incentives for industrial investment and activity in poorer States and more backward regions were also provided. As these became less significant, the forces making for convergence also got weakened, and the greater play allowed to market forces actually strengthened the process of divergence of per capita incomes across States.

In general, the 1990s are likely to have been associated with greater inequality of per capita SDP across States, also because of fiscal patterns across India and within particular States. This was a period of greater centralisation of all tax revenues, and reduced fiscal transfers from the Central to the State governments.

It is important to remember that, unlike the Central Government, State governments do face a hard budget constraint, and this affects their ability to spend in important ways. This meant that State governments found they had much fewer resources to undertake important infrastructure and other investment, which in turn had adverse effects on growth and subsequent economic activity.

While all State governments were adversely affected, and indeed there is now a fiscal crisis in practically every State, some States were worse off than others.

These were precisely those States in which previous growth was low and per capita incomes were already low, because they were unable to generate more sales taxes and other such revenues from economic activity.

Those States where economic activity was growing at a faster rate were able to generate more tax revenues and were therefore able to invest in much needed infrastructure, in transport, power and so on. This was certainly true in the southern States of Karnataka and Tamil Nadu, where there has been substantial expansion of transport infrastructure in particular, in the recent decade.

By contrast, States such as Bihar, Orissa and Uttar Pradesh found themselves to be so cash-strapped that they could not even maintain existing infrastructure projects, and there was further decline of the provision of basic facilities in per capita terms. So the fiscal constraint operated to add to the stagnationary tendencies already present in certain states, which meant the widening of the gap between the richer and poorer States over the 1990s.

In this context, the relatively better growth performance of States such as West Bengal and Kerala in the 1990s obviously deserves further investigation. Different forces may have been operating in the two States. In West Bengal, while agriculture led the growth of the 1980s, in the 1990s the impulse seems to have come more from the expansion of services and rural industrialisation.

In Kerala, services growth played a significant role, especially driven by the effect of the inflow of remittances from migrant workers from Kerala in the Gulf region.

What all this discussion does indicate is that the actual behaviour over time of per capita SDP in the various States, and of per capita consumption, is rather different from that projected by the more stereotypical notions regarding regional economic differences in India.

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