Unravelling the mysteries of state-level performance

Jeffrey D Sachs, Nirupam Bajpai and Ananthi Ramiah
(Center for International Development, Harvard University)

Part I: Why some Indian states have grown faster than the others?

This section explores some of the mysteries of state level performance. We consider four such mysteries:

1. The mediocre growth of Kerala despite excellent social indicators;
2. The relatively fast growth of landlock, arid Rajasthan;
3. The improved growth performance of landlocked Madhya Pradesh; and
4. The poor growth performance of coastal Orissa.

Kerala

Kerala is a forerunner in human development terms. However, in the period under question, Kerala has moved from 6th to 8th place in per capita GSDP rankings and grew at 2.5 per cent between 1980-1990 and 5.2 per cent between 1992-1998.

Though its growth performance has improved, making it one of the biggest beneficiaries of the reform period (moving from 12th to 6th fastest growing state), the question remains as to why Kerala is not among of the top states in growth performance given its outstanding results in health and education.

We attribute this poor economic performance to three major factors.

First, Kerala traditionally has had a very low manufacturing base. In 1981, manufacturing as a percentage of GSDP was 13.9 per cent and that had risen to a meager 15.5 per cent by 1991.

Kerala's poor economic performance can be attributed to a limited focus on and growth of the commodity production sector. Although the economic structure has changed somewhat (i.e. a decline in the primary sector and a rise in the tertiary sector), it has not seen a deepening of its industrial base.

The secondary sector areas that have seen growth are construction, power etc. rather than actual manufacturing activity.

Why is it the case that resource-based industries do not provide the growth potential of manufacturing (capital goods or demand based) industries?

The difference between these industries lies in the fact that the latter confers inter-sectoral linkages and technical progress while the former has a tendency to stagnate.

We realise that a lopsided industrial structure is a symptom rather than the cause of the problem. The causes are an insufficiency of investment, both private and public largely due to the failure of the government to implement policies effective in encouraging private investment. Kerala's private investment is very low - as a percentage of GSDP, investment in private projects in Kerala accounted for a mere 1.77 per cent, making it the poorest state in this regard.

As one would expect, Kerala also receives very little of FDI. However it is one of the biggest recipient states of remittances from Keralite workers abroad (mainly in the Gulf countries).

The Rs 60 billion the state receives in remittances every year is about a fifth of its domestic product. These remittances are three times more than what the state receives from the Center as budget support. Between 1980 and 1995, more than Rs 313.50 billion flowed into the state from the Gulf.

This disproportionately large income is due to the fact that Kerala accounts for approximately 50 per cent of Indian migration abroad even though it represents only 3.4 per cent of the total population of the country.

Since remittance income is counted as part of the state's income but not its Gross State Domestic Product, Kerala may not be as poor a state as its GSDP figures suggest.

The lack of foreign direct investment and private investment is likely the consequence not only of the lack of an industrial tradition, but because of the relatively hostile attitudes of state governments over the years to private investment, and as a result of a highly militant labour force which has also resisted private investment.

The labour relations problems in Kerala are notorious, with frequent work actions and opposition to privatisation.

The Communist Party, which governed the state for many years until 2001, had part of its base in the unions, and did not resist the labour militancy. This reputation for aggressive labour tactics has dissuaded private investors, both domestic and foreign over the years.

With a change in government to Congress rule, there may also be a change in the investment climate in the state.

Rajasthan

Rajasthan recorded the overall highest growth in the pre-reform period. It grew the most in agriculture, tourism, construction and other services (among all 14 states) and was amongst the top three Group II states in manufacturing growth.

What spurred Rajasthan's incredible growth spurt in the 1980s? One part of the answer is that Rajasthan received the highest per capita transfers and grants from the union government among the four BIMARU states, and was one of the top recipients of federal transfers of all states.

This explanation is hardly sufficient, however, since other states such as Orissa, which received large transfers, did not experience such successful economic growth.

Rajasthan's high growth remains unexplained in the literature, but should also probably be explained by four additional factors:

1. The benefits of the Green Revolution in the wheat growing areas of the state;
2. The impact on the State's agricultural output as a result of building Rajasthan's Command Canal in the early 1980s;
3. The tremendous boost in tourism during the 1980s and 1990s; and
4. The rapid electrification of the state that took place in the 1980s.

Madhya Pradesh

Madhya Pradesh practices direct democracy at a rate unparalleled by other Indian states. The extent to which all these reforms have aided growth in Madhya Pradesh is unclear.

One would expect these experiments in direct democracy to work as long-term rather than short-term measures.

However, if the reforms were both targeted and quickly and effectively implemented, there is no reason why they should not be a big determinant of Madhya Pradesh's growth in the 1990's.

Madhya Pradesh was the first state to conduct elections to panchayats in 1994. By this method, it aims to give power to the people directly, rather than to their representatives. Empowering the people has enabled the government to overcome difficult situations such as water shortages.

The state supplies the panchayats with some funding and technical support in order to "widen, de-silt and deepen village ponds, dig new wells and build dam checks".

Thus the state government has moved to a supervisory rather than directly administrative role. Drought relief work has also particularly targeted women. For instance, the Madhya Pradesh government supports a 'food for work' program where women are given a certain amount of wheat and some limited cash in exchange for their manual labour.

Orissa

Orissa is traditionally one of India's poorest states (3rd lowest GSDP in 1980). It was also the slowest growing state in the 1980s, at a miniscule 1 per cent per annum.

Its poor growth is partly attributable to its even lower agricultural growth, at 0.72 per cent, though it is unclear why agricultural production has fared so poorly. Its soils and suitability for irrigation do not stand apart from more successful states.

One explanation may be Orissa's vulnerability to floods and resulting devastation each year, as the result of tropical cyclones.

Orissa is also notable for having the most productive mines and quarries in the country (which grew by 15.6 per cent during 1980-90), adding further to the mystery of poor performance.

In the post-reform period, Orissa grew somewhat more rapidly than in its pre-reform phase, 2.53 per cent per annum, but was still near the bottom of the states in growth performance (12th during 1991-98 as opposed to the 14th during 1980-90).

In some ways, moreover, Orissa became an innovator in economic reforms. It was the first state to reform its power sector and it has strongly set out industrial policy. Orissa is also the first state in India that has announced new agricultural and tourism policies.

In the post-liberalisation period, Orissa ranks 6th in foreign investment, and at the top in per capita terms. The reason for Orissa's sudden emergence is its industrial policy, which has directed investors towards Orissa's abundant natural resources.

Orissa has 90 per cent of India's chrome ore and nickel reserves; 70 per cent of bauxite; and 24 per cent of coal reserves. With no other state having such abundance of natural resources, the big business houses have no option but to set up steel, alumina and coal based power projects in Orissa only.

Orissa's post-reform ability to attract both private and foreign investment makes it plausible that its pre-reform failure was due primarily to ineffective or non-existent industrial policy to exploit its mineral wealth.

However, it remains a puzzle as to why its agriculture sector grew so poorly. In the post-reform period, the sector declined more, experiencing a contraction in growth of 0.5 per cent.

Despite its resource wealth, Orissa is still a predominantly agricultural state, and thus its poor agricultural performance augurs very badly for its future income growth and income distribution.

One possible explanation that needs further focus is the very high proportion of tribal populations in Orissa. There are 62 distinct tribal groups in the state, concentrated heavily in the Western hills.

Around 25 per cent of the state population is tribal, the highest in all of the country. As elsewhere in India, these tribal populations tend to have distinctively lower social indicators in health and education, and to suffer social and political exclusion.

Our main finding in conjunction with the study on China is that the forces of convergence, absolute and conditional, are very weak. We should probably expect that India's growth will continue to be urban-led, favoring those states where urbanisation is already high - perhaps due to coastal access or to the relatively high productivity of agriculture.

There is little to ensure that growth will equalise across regions. Still, the assessment is hardly a pessimistic one, for several reasons.

First, there is much more growth potential in India than has been achieved to date. While India's states have varied in per capita growth rates between 2 and 8 per cent per annum, China's provinces have ranged between 8 and 13 per cent per year during 1992-98.

There are many coastal cities that have not begun to attract foreign direct investment for export-led growth. The most stunning example is Thiruvananthapuram, Kerala, which boasts a skilled labour force, a natural harbor, and yet almost no FDI to show for it.

With a new government in that state declaring its intention to begin attracting FDI, it is quite likely that FDI-led exports will begin to grow from that state.

Other coastal cities that could be much more dynamic include Cochin, also in Kerala; Bhubaneshwar, the capital city of Orissa; and Vishakhapatnam, the major port of Andhra Pradesh.

There are many reasons why these other coastal port cities have not rapidly developed, but the continuing power of the central government over regional infrastructure (airports, major highways, power, telecom) have certainly frustrated the capacity of reform-minded state governments to move more rapidly in economic reforms.

In China, the provincial governments have had ample leeway in making key infrastructure investments, while in India, the powerful monopoly state enterprises in key infrastructure sectors have resisted competition, especially from potential foreign investors. This is changing, but gradually and not without continued resistance.

India, like China, but unlike the United States, boasts several cities of population greater than 1 million that are far from the coast or navigable waterways.

These include: Lucknow (Uttar Pradesh), Kanpur (Uttar Pradesh), Hyderabad (Andhra Pradesh), Bangalore (Karnataka), all 100-500 km from the sea; and Delhi, Jaipur (Rajasthan), Bhopal (Madhya Pradesh), and Nagpur (Maharashtra), all 500-1,000 km from the sea.

In the United States, only Dallas among cities of 1 million or more population is more than 100 km from the sea. 11 US cities are far from the coast, but excepting Dallas, they are close to a navigable waterway. These large interior cities are: Buffalo, Chicago, Cincinnati, Cleveland, Dallas, Detroit, Milwaukee, Minneapolis, Pittsburgh, Portland, and St. Louis.

These cities can readily support industry for the internal market, as well as IT-based services. With a high-quality internal highway system among these major cities, though, even these inland urban areas could become export oriented.

Establishing improved transport and communications networks (including fiber optic cables) across the major cities is surely a high priority.

India will, however, likely continue to face the same problems as China in the inland areas, particularly the inland rural areas.

Even with faster overall growth, the inland areas are likely to grow more slowly than the coastal areas, opening a widening gap between the fast and slow-growing regions.

This does not mean absolute immiserisation of the interior, of course, but it will likely provoke political pressures as well as increasing internal migration from rural areas to cities and from the interior to the coast.

India, however, probably has an advantage over China in that China's far west is much farther from the coast than India's heavily populated interior regions of the Gangetic valley.

China has 4 cities of more than 1 million that are more than 1,000 km from the coast (Chengdu, Lanshou, Urumqi, and Xian), while India has none. All of India's large interior cities are within 1,000 km of the coast.

Just as in China, a careful balance will have to be struck between two kinds of investments in the rural hinterland (e.g. in Uttar Pradesh and Bihar): physical infrastructure in roads, rail, airports and telecom to bring these regions closer to the international markets, and investments in human capital, mainly education and health, to raise the productivity of the rural population.

The latter investments may end up attracting jobs to the interior, eager to benefit from an increasingly skilled labour force; or it may provoke large-scale migration to more economical coastal regions.

Either way, however, the currently impoverished populations would benefit from rising living standards, wherever in India they are enjoyed.

Jeffrey D Sachs is Director of the Center for International Development at Harvard University and the Galen L Stone Professor of International Trade at the Department of Economics.
Nirupam Bajpai is Development Advisor at CID and the Director of the Harvard India Program.
Ananthi Ramiah was a Summer Intern at CID when this study was undertaken in 2001.

YOU MAY ALSO WANT TO READ:
The Rediff Budget Special
The Rail Budget 2002-03
The Economic Survey 2001-02
Run-Up To The Budget
Money