Has development led to a narrowing of the gap between Indian states? Are the poorer states catching up with their richer sisters? What policies do they need to pursue to do so? Such questions are important for our federal polity. Too much inequality between states has to be ameliorated by fund transfers to weaker states. Such transfers are often a bone of contention, leading to tensions between states. It would be best then if the poorer states can develop faster.
How can this be done? A World Bank paper in December last year titled ‘States Diverge, Cities Converge’, by Yue Li, Martin Rama and Qinghua Zhao, attempts to answer this question.
There have been many studies by economists on whether income levels or living standards between the states are converging. Unfortunately, most of them found increasing divergence, which means that the richer states are growing faster than the poorer ones. That is bad news, as it would mean people in the poorer states would be left further and further behind and the gap between the rich and poor would increase, with all its attendant social ills. To be sure, migration from poorer to richer states is a solution, but that too has often led to social tensions and is in any case, not the optimal solution.
One of the latest studies on this subject was in the Economic Survey of 2017. Its conclusion was that, ‘Despite rapid overall growth, there is striking evidence of divergence, or widening gaps in income and consumption across the Indian states, in sharp contrast to patterns within China and across the world.’
The World Bank paper arrives at the same conclusion: at the state level, economic growth has led to a bigger gap between richer and poorer states. But thankfully, that is not the whole story.
The World Bank study looks beneath the level of the states and finds a different picture. The researchers say that if, instead of states, the districts are taken as the unit of observation, then there is evidence of convergence, which means the gap between the richer and poorer districts is narrowing. The World Bank study says, ‘A district whose household expenditure per capita in 2004 was 10 percentage points lower than the average district experienced an annual growth rate that was about 0.25 percentage points above the average.’
How is it that the data show convergence at the district level but divergence at the state level? The study says that is because ‘all states have fast‐growing locations, and even low‐income states host locations growing at outstanding speed and catching up. However, low‐income states are failing to converge because they face a shortage of these fast‐growing locations. The distribution of fast‐growing locations is skewed toward rich states.’
The researchers also find that average growth rates are higher in large rural and small urban places than in either small rural or large urban places, which suggests that it is the process of urbanisation that is driving change.
What distinguishes these high-growth centres spread across the country? The study sums it up thus: ‘Market access, the availability of electricity and connectivity are strong drivers of growth, whereas irrigation and housing investments are not. We do not find evidence that the sectoral structure of economic activity – such as the share of manufacturing – plays a role, but locations with a bigger share of large firms perform substantially better.
On human capital, the attainment of primary education is important, but that of tertiary education less so. Importantly, all of the indicators of inclusion considered ¾ higher access to finance, lower gender gaps in educational attainment and greater social homogeneity ¾ are strongly correlated with local growth. As for governance, law and order at the state level matters, as do state‐level labour and land regulations.’
In short, states need to develop the right type of infrastructure and social environment to attract medium and large-sized firms to their districts. Put another way, the objective should be to provide alternative avenues of income generation for the underemployed masses in agriculture and to ensure that people have the skills to make the most of these opportunities. That is what will drive employment as well as productive growth.
Unfortunately, governments seem to be fixated instead on providing handouts.