Can Bihar and UP do a TN?

In the early 1980s, India was still largely a closed economy and major economic reforms were a few years away.

Even in those days, Gujarat was one of the most prosperous States in terms of per capita income. Tamil Nadu wasn’t much better than Uttar Pradesh (UP) with per capita income in the State only 15 per cent higher than that in UP. Bihar had the lowest among major States — around 37 per cent lower than Tamil Nadu.

Fast forward to the present day. Gujarat remains one of the most affluent States. UP and Bihar remain laggards in terms of per capita income. Tamil Nadu, in contrast, has turned the tables and become one of the most prosperous States of the country.

The gap between Tamil Nadu and UP with regard to per capita income has increased from around 15 per cent in 1980-81 to over 65 per cent in 2011-12.

TN success story

Why has Tamil Nadu succeeded while UP and Bihar haven’t? The obvious explanation is the role of economic policies and governance over this period.

But, is that it? Is there anything else that was responsible for Tamil Nadu’s swing to prosperity?

The differences in economic performance can broadly be clubbed into three factors — policies and governance, initial conditions, and shocks such as frequent natural disasters.

The economic policies followed by Tamil Nadu have been markedly different from those pursued by UP and Bihar.

Despite frequent regime changes in the government, Tamil Nadu’s policy towards investors remained relatively friendly, stable and predictable. (Until recently, that is; in the last couple of years, businesses have been facing acute power shortage, raising the cost of acquiring power from alternative sources.)

In contrast, barring Bihar’s push in the last decade, the investment climate and business environment have not been favourable in UP and Bihar. While the role of policies is known, what is often ignored in the success story of Tamil Nadu is the role of initial conditions and endowments.

Although per person income in Tamil Nadu was only around 15 per cent higher than UP in 1980-81, Tamil Nadu’s preparedness to take advantage of opportunities created by India’s economic reforms since the second half of the 1980s was much higher. Tamil Nadu was much more industrialised in 1980, with industry accounting for nearly 35 per cent of GDP in 1980-81 — much higher than the all Indian average of 26 per cent in the same year. In contrast, the industry’s share of GDP in UP was only 17 per cent in 1980-81.

Tamil Nadu also had a better stock of human capital supported by a relatively good education system with a cultural approach that strongly enforced the importance of education. In 1980-81 the gross enrolment ratio for primary education in Tamil Nadu was much higher at 67.4 as compared with 30.7, 33.6 and 33.9 for All India, Bihar and UP, respectively.

In short, with only a 15 per cent higher average income than Uttar Pradesh, Tamil Nadu’s initial conditions were relatively better to begin with, before its economic take-off really began.

The positive influence of better initial conditions was reinforced by relatively business-friendly policies as well as policies that further improved the stock of human capital.

These policies also reduced the volatility in growth. As the availability of skilled labour increased, the IT/ITES sector grew in and around Chennai. But manufacturing still remained an important multiplier of GDP.

Although the share of services in GDP has grown fast, Tamil Nadu still remains one of only three States in the country (the others being Gujarat and Maharashtra) where industry’s share in GDP exceeds 30 per cent.

Employment, the key

Can Bihar and Uttar Pradesh replicate the success of Tamil Nadu? The answer will depend naturally on the role that industry, especially manufacturing, plays in their future.

Both the States still have a relatively low level of human capital and it will take time to build a good stock of human capital. Until then relatively high-skill based service industries cannot be expected to flourish here.

To begin with, these States would have to create large-scale employment in the industrial sector, especially manufacturing.

In recent years, the construction sector has provided millions of jobs, especially in Bihar. But the surge in employment in the construction sector cannot continue forever unless manufacturing picks up.

Given that Bihar and Uttar Pradesh both do not have an advantage of ports to directly ship goods abroad to attract manufacturing investment, they would need to compensate by better access to electricity and better roads. There are no signs of this happening any time soon.

(Mahambare is Principal Economist, CRISIL, and Pareek, Senior Research Analyst, CRISIL Research)

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