Social Economic

Indian States drifting apart on Income/Consumption

Since liberalization in 1991, growth rate of India has been remarkable. India moved from Hindu rate of growth to 21st century. Higher growth rate increased prosperity across India, with this healthy growth all major indicators of prosperity shows significant upward move in trend. We found a structural break at liberalization for all these indicators. One such structural breakdown is found for divergence also. But it’s is not for good, it shows increasing inequality among Indian states. Since 1990, the world had moved towards convergence, whereas India moved to divergence. Even China, also a developing economy which was at a similar level in 1990 as India, had moved to convergence. Economic Survey 2017, shows this concern of divergence among Indian states.

What is Convergence/Divergence?

Convergence is a metric to compare relative growth rates of economies over time. Convergence means that a state which starts off at low-performance levels on an outcome of importance (Income or Consumption), should see faster growth on that outcome over time. It improves its performance faster so that it catches up with states which had better starting points. In the figure, the growth of per capita GDP is on the y-axis and the log value of the initial level of per capita GDP (in PPP terms) on the x-axis. For convergence or catch-up to occur, the relationship should be negative (the line of best fit should be downward sloping because convergence theory says that the less developed you are to start off with the faster you should grow subsequently). The blue, red, and green lines plot the relationship for India, China, and the world respectively.

World and China have shown the signs of Income convergence for the period from 2004-14. This means that Income in poor economies of world and poor provinces of China had grown at faster rates than Income in rich economies of world/ rich provinces of China respectively. In contrast, India had shown divergence, i.e. Income in rich states had grown faster than Income in poor states and therefore, the gap in Income of rich and poor states had further increased. A similar trend has been found for consumption also. Based on National sample survey data for consumption, no sign of convergence has been found. For the last two decades, the 1990s and 2000s consumption have been diverging.

Economic Puzzle

Although since 2000, the poor states like Bihar, Madhya Pradesh, and Chattisgarh had started improving their relative performance. But these developments were not consistent and also were not sufficient to outpace rich states, to have convergence.

Convergence becomes possible because of internal trade and movement of factors of production. A less developed state that has abundant labor & scarce capital must export labor intensive goods & imports capital intensive goods. Therefore, the poor region provides high returns to capital and must attract capital thereby raising the productivity of labor along with high returns on capital.

As per the economic survey findings, India stands out as an exception. India has porous borders within and the trade flows freely. The report finds internal trade within India quite higher when compared to global or with China. The mobility of peoples within India has doubled in the 2000s. Despite this, convergence has not taken place in India.

Different Economics of India

The convergence in China has become possible because of migration of peoples from farming to industries. In China, people had migrated from interior farming to factories on the coast, raising productivity and wages in the poorer regions faster than richer regions.

On the opposite of this growth in India has relied upon skill intensive sectors rather than low skill ones. This raises questions on the possibility of high labor productivity in the capital scarce states. This makes skill generation imperative for convergence. The possibility of convergence in India will be low unless less developed regions generate required skills.

Poor Governance

India has failed to tap the available resources because of failure of governance & lack of efficient institutions.  For example, If compared to China, where coastal areas flourished because of coastal trade and had spillover effects on internal areas; India’s huge coastal regions remained poor(except few regions) because of lack of facilities at port & corrupt, lethargic practices which makes trade extremely cumbersome. Poor governance could make the risk adjusted returns on capital low even in capital scarce states.

(The article is based on the findings in Economic Survey 2017.)

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