The sources of economic diversity

June 11, 2011 08:02 am | Updated August 17, 2016 06:18 pm IST

Within a context of overall backwardness lie substantial variations in the level of development of the different states of India. Six out of 28 states (Maharashtra, Uttar Pradesh, Andhra Pradesh, Tamil Nadu, Gujarat and West Bengal) account for a little more than 50 per cent of the GDP generated by all of them together. Per capita gross state domestic product in 2010 varied from a third of the national average in the state of Bihar to more than one-and-a-half times the national average in the case of Maharashtra and Haryana.

In a country as large as India, regional variations are inevitable. Variations in geographical terrain that affect agricultural productivity, differences in climatic conditions and differentials in the availability of crucial raw materials, among other factors, affect a state’s performance relative to that of others. But what stands out from an even impressionistic examination of differentials in economic performance suggest that these kinds of “initial conditions” are not the prime determinants of regional inequalities. States rich in mineral resources such as Bihar, Chattisgarh, Jharkand and Orissa are among the more backward, and the performance of the North-eastern states cannot be explained by their geographical weaknesses alone.

What seems to be crucial here is the evolution of economic policy over a long period of time, especially since the colonial period. The impact of colonialism came first through the operations of the British East India Company and then through the workings of the imperial government. The impact of colonialism was not only regionally concentrated, with its full force visible in the Presidencies of Bengal, Bombay and Madras, but indeed very different across even these regions.

In Bengal, for instance, the revenue-farming system developed under the Permanent Settlement, which resulted in absentee landlordism and a process of subinfeudation, adversely affected productive investment in land, more than it did elsewhere. Further, while imports of commodities like textiles from England resulted in the destruction of the handicrafts industry, colonial trade and investment did not generate a modern industrial sector that could adequately absorb the displaced labour. The result was a process of deindustrialisation. On the other hand, since the effects of British entry were felt less and later in the Bombay and Madras Presidencies and they were subjected to different land poliies, they were not as adversely impacted. In fact, some regions like the Punjab gained from investments in irrigation infrastructure which stood them in good stead for a long time thereafter.

The regional inequalities generated or strengthened by such influences were significantly enhanced in the post independence period, for a number of reasons. The first was the inevitable tendency towards cumulative divergence in economies where markets play an important role. Investments and the best human capital are attracted to already developed regions. They then suck in mineral resources from other regions that remain backward. The successful regions tend to generate more revenues for provincial governments that can strengthen infrastructure. And productivity and income growth creates vibrant local markets for goods and services.

A second reason for divergence was not the operation of spontaneous tendencies but the role of the central government. Mandated to collect a significant share of revenues and devolve a substantial proportion to the states through both statutory transfers determined by Finance Commissions constituted every five years and discretionary transfers through the Planning Commission, the Centre was expected to correct for regional imbalances. As numerous studies have shown, this did not occur in practice, resulting in the persistence or, according to some, widening of spontaneously generated regional inequalities.

The third were significant variations in agricultural growth. For close to two decades after Independence in 1947, agricultural growth was substantially driven by the possibilities for expansion of area under cultivation, supported by some productivity increase. By the mid-1960s, however, the possibilities of expanding area under cultivation were by and large exhausted. Growth now depended on raising cropping intensity and raising productivity in each cropping season. Pushed by an agrarian crisis precipitated by two bad harvests in the mid-1960s, the government of India chose to implement the Green Revolution strategy, which besides using high-yielding varieties of seeds, required a package consisting among other things of access to irrigation and use of chemical fertilisers and pesticides.

It was to be expected that such a strategy would be more successful in areas where farmers had access to irrigation facilities and access to the resources needed to finance this more expensive (even if more profitable) system of production. Further, the productivity increases delivered by HYVs varied across crops, benefiting farmers cultivating crops like wheat substantially more in the initial phases. Thus some increase in regional inequalities in agricultural growth was inevitable, though it was expected that over time as the early-starters lose their gains and the revolution spreads across geographies there would be a tendency towards convergence.

However, the experience has been disappointing. A study by G.S. Bhalla and Gurmail Singh (2009) found that while the “new technology matured during the period 1980-83 to 1990-93 when it spread widely to more areas and encompassed more crops”, leading to higher in the levels and growth rates of yields and output as in most states and regions of India, the post-reform period 1990-93 to 2003-06 is characterised by a serious retrogression both in the matter of levels and growth rates of yield and output in most states and regions. While in the north-western parts of the country growth slowed because of an erosion of productivity increase and profitability due to excessive use of inputs and decreasing input use efficiency, in many other parts including the eastern region the problem can be traced to a decline in public investment in irrigation, water management and flood control, and in scientific research.

Finally, underlying the increase in regional inequality were also variations in the growth of the other important commodity producing sector, namely, manufacturing. India’s limited manufacturing growth, which has rstricted the sector’s share to 16 per cent of India’s GDP in 2006 and 12.2 per cent of the country’s workforce in 2004-05, was also regionally extremely concentrated. According to a study by Jayan Jose Thomas, the combined share of Maharashtra and Gujarat in the total value added by India’s factory sector was 36 per cent in 1959-62 and 37 per cent in 2005-08. The share of these States in India’s population was only 14 per cent in 2004-05.

It is true that the southern States of Tamil Nadu, Andhra Pradesh and Karnataka had recorded significant increases in industrial activity during the five decades since the beginning of the Second Five Year Plan in 1956. The combined share of four southern States in total factory sector value added in India increased from 17 per cent during 1959-62 to 25 per cent during 2005-08. However, during the same period, the eastern States of West Bengal and Bihar suffered a sharp decline in factory production. West Bengal’s share in total value added by India’s factory sector fell from 20 per cent in 1959-62 to 3 per cent only in 2005-08.

Things seem to have worsened more recently. Between 1989-92 and 2005-08, the western States, especially Maharashtra and Gujarat, increased their shares in India’s factory sector value added (by 10 percentage points). On the other hand, the Eastern States further lost shares in the country’s factory sector value added, investment and employment, in a continuation of the decline they suffered during the earlier decades. The northern States too, which were gainers until the 1980s, lost their shares during the 1990s and 2000s.

Thus, economic liberalization and “reform” seem to be worsening rather than improving the degree of regional inequality in both agriculture and industry. This has been added too by the growing role of services. While services accounted for 43 and 48 per cent respectively of the increment of GDP at current prices in the 1970s and 1980s, the figure rose to 58 per cent and 62 per cent respectively during the 1990s and the years 2000-01 to 2004-05.

There are two components to the services sector. One is the low-income, low-productivity sink into which labour that is unemployed and not protected with social security is driven as a result of distress. The other are the “modern”, high productivity services such as financial, business and IT-enabled services. The latter are largely concentrated in the metropolitan cities and large urban agglomerations. Growth of this kind would only worsen regional inequality.

Thus it is clear that, besides overcoming the worst forms of deprivation everywhere in the country, India needs to address the substantial regional inequalities in growth and development to safeguard its unity as a nation.

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