Growth rate in India’s states in 2000s – A case of divergence or convergence?

Utsav Kumar and Arvind Subramanian write this interesting paper on India growth story. They look at states performance in the high growth decade 2000s and claim to be the first paper to do so. There are number of papers which have looked at states (many references are there in the paper) performance but all are before 2000s.

There are four broad findings (covered in BS as well):

a. Growth in the main states, except three, increased in 2001–09 compared to 1993–2001.
b. Despite the strong performance of the hitherto laggard states, we do not find any convergence across states. On the contrary, we find that divergence in the growth performance across states continues.
c. States with the highest growth in the pre-crisis years, 2001–07, suffered the largest deceleration during the crisis years (2008 and 2009). 
d. For the period 2001–09 we do not find any positive effect of the so-called demographic dividend, namely that the growth in the share of the working-age group in total population boosts growth of per capita income.

Interesting stuff especially the third and fourth finding.

Which 3 states do not grow faster than 1990s: Himachal Pradesh, Rajasthan, and West Bengal..

figure shows that all the states, with the exception of Himachal Pradesh, Rajasthan, and West Bengal, lie above the 45 degree line, i.e., their growth in the 2000s was substantially greater than in the 1990s. Indeed, average growth across the 21 states doubled from 2.8 percent in the 1990s to 5.8 percent in the 2000s. Table 1 shows the growth rate in the 21 states for the period of 1993 to 2009 and the sub-periods.

The largest improvements were posted byUttarakhand (7.0 percentage points), Maharashtra (5.8 percentage points), and Chattisgarh (5 percentage points) with Gujarat, Orissa, and Bihar not far behind. The figure provides a clue both to the longstanding success of the Communist party in West Bengal and its overthrow in the recent elections: West Bengal was one of the strongest performers in the 1990s but was one of the few states whose growth remained unaffected in the 2000s while others surged

Surprised to know HP figuring here. HP Govt gave tax breaks to companies and you have many pharma units there. Then tourism revenues should be decent as well. Need to understand the details…Even Rajasthan has revamped its infrastructure and has superb road connectivity. May be it is Governance issue. Surprised not to see UP in the list..

What about divergence? The divergence between high growth and low growth story was there even in studies done for earlier periods.

Figure 2 provides initial evidence on this question. It plots the growth rate of the states for the period of 2001–2009 against the income per capita in 2001. If there is convergence with the income level of the richer states, the relationship should be downward sloping. But, as figure 2 shows, richer states on average grew faster so that the inequality across states is actually increasing. We find that far from changing directions the forces of divergence continue. The strong growth performance of the laggard states should not obscure the more general pattern that across the Indian states, namely, that we still do not see the phenomenon of convergence, whereby the poorer states, by virtue of growing faster than the richer states, start catching up with the latters’ level of income.

The point that more open states like Gujarat, Maharashtra etc took a bigger hit in the 2008-09 crisis is a nice one:

Could it be the case that states that were the most open or globalized before the crisis were affected the most during the crisis? We cannot easily measure the degree to which each state trades internationally  but we can estimate crudely how tradable is the economic profile of each state. Since manufacturing and business services tend to be highly tradable, we use these—specifically, the share of manufacturing and the share of manufacturing and business services in total state output—as proxies for the openness of each state.11 We then plot this share against the change in growth during the crisis. These plots are shown in figures 7A (where manufacturing share in output is the proxy for openness of a state) and 7B (where the share of manufacturing and business services combined is the proxy for openness). They show a clear negative correlation. Karnataka, Maharashtra, Tamil Nadu, and Gujarat are among the most open states and they also experienced the greatest growth declines. In contrast, Bihar,  Jammu and Kashmir, and Assam, which produce relatively few tradable goods, were the most resilient during the crisis.

They point Karnataka being a IT hub was natural for growth to slowdown more in that state.

Finally the much talked about demo dividend. Interestingly, this dividend was more evident in earlier decades:

Figure 8 (panels A through D) shows a scatter plot of the growth of income per capita for each decade from 1971–2009 and the growth in the share of the working-age population in the corresponding decade.14 For the first three decades, 1971–81, 1981–91, and 1991–2001, there is a positive correlation between the two variables (figure 8, panels A through C). However, for the latest period, 2001–09, the two are negatively correlated (figure 8, panel D). Is it the case that the demographic dividend has vanished in the 2000s?

This could be due to the fact that there are significant differences before and after 2001 in the states which see a favorable demographic structure (table 6). Post-2001, based on the population projections from the 2001 census, Kumar (2010) shows that the growth in the working-age population is likely to have been concentrated in four states, the so-called BIMARU states.17 Close to 49 percent of the increase in India’s working-age population during 2001–11 was likely contributed by these four  states. Growth in the share of the working-age population in the four states was among the highest. While the BIMARU states, especially Bihar, did perform better in the 2000s than in the 1990s, they still lagged behind the other states. That might explain why we find here that the growth in the share of the working-age population is not positively correlated with economic growth in the 2000s. At least so far, these states have not been able to fully utilize the young population to their advantage. But this might change in the future.

Lots of things happening so may be we do see the dividend. But for it to turn dividend we need to meet many challenges with education and employment being the most important.

Finally, some myth busting on Kerela:

The analysis of growth in the 2000s throws up one more quirk, relating to Kerala. The conventional wisdom is that this state is Scandinavian in its social achievements but sclerotic in its growth performance because of investment-chilling labor laws and strong trade unions. This is reflected in a labor force that has voted with its feet by emigrating to the Middle East. The abiding caricature is of the lazy, argumentative Malayali, discussing Foucault and Gramsci over endless cups of chai while living parasitically off the remittances sent by relatives in exile. However, the data suggest that the conventional wisdom and the caricature are dead wrong. Kerala posted among the highest rates of growth in the 1990s (4 percent per capita), continued its stellar performance in the go-go 2000s (7.5 percent), and exhibited great resilience during the crisis, experiencing virtually no decline in growth.

India, evidently, is capacious enough to allow both Bania, reforming Gujarat and Marxist, and reform-resistant Kerala to flourish. Or, to put it more honestly, the Indian growth miracle, including the experience of the 2000s, continues to confound.

🙂 Complexity thy name is India..



One Response to “Growth rate in India’s states in 2000s – A case of divergence or convergence?”

  1. India as a monetary union…how does it work? « Mostly Economics Says:

    […] will also be different and effected by different shocks (see this paper by Arvind Subramanian which shows open states suffered more in the crisis). Deepak Mohanty of RBI has been enlightening us on […]

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