Growth in India’s state economies before and with reforms: shares and determinants

The overall growth performance of the Indian economy has been characterized by substantial regional variation in growth over the decades (Shand and Bhide 2000). This is despite the focus in successive Five-Year Plan policies and programs on reducing the incidence of poverty and of achieving balanced regional development (Bhide and Shand 1999). A close understanding of the regional patterns of growth within India is desirable for several reasons. First, central importance in policy continues to be the objective of achieving and sustaining a higher overall growth rate in the Indian economy. Policy makers need insights on past performance at state level in order to formulate future policy directions more effectively. Second, high levels of foreign and domestic investment are needed to reach the growth target. Foreign and domestic investors need information on state level performance and prospects to guide their choice of location between states. Third, there are fiscal problems in the states, which are exacerbating those at the Centre, and the issue of fiscal stability now requires these problems at state level to be addressed. Finally, with greater decentralization of policy making process consequent to the economic reforms in the 1990s, information on the states’ performance is important for the policy makers at the state level also. Policies will be based on such assessments in each state. The economic reforms that began in the early 1990s brought to the fore the role of State governments in attracting new investments from the private sector needed for growth. In the previous regime of centralized planning, the states’ role was largely limited to lobbying for public sector investment. Private investment was influenced by the incentives offered by the states for such investments, but the centralised planning process laid down the criteria for new investments. In the new environment of liberalised economic policies, state governments are increasingly recognising the need for a more competitive approach to attracting new investments in their own states. The economic reforms in the 1990s at the national level have also led to a greater focus on the activities of the States. The dominance of central planning and the grip of economic controls have waned with the change in focus to market-driven and private sector-fuelled development and by growing globalisation. There is a shift towards decentralization of government, with local urban and rural government strengthened by the Constitutional amendments of 1992. It is recognized too that the priority areas in government expenditure for development are in physical infrastructure (roads, waterworks, power), and in social infrastructure (schools, hospitals, family planning), where public funding and provision are determined mainly by State governments. While there is evidence of changes in perception of the role of the states among the policy makers in the various policy statements, actual implementation of the new policies is less impressive. Lahiri and Fardoust (2000) have commented “As a direct consequence of …economic and political developments of the past decade, appropriate policy responses, expenditure allocations and revenue efforts of the Indian State governments have become very important for growth and welfare. Perhaps, most States have lagged behind the central government in introducing economic reforms in the post 1991 period. This relative lack of progress is evident in the areas of tax reforms, disinvestment and liberalization of rules and procedures. A large majority of the States has followed shortsighted, populist policies that have harmed their economic and social development. The composition of expenditures as well as the stock of infrastructure assets has deteriorated with the neglect of cost recovery mechanism for maintaining public assets. Reform at the State level is critical for the country.” Clearly a large part of the onus for stimulating economic development and attracting the necessary investment resources lies with the States. Their capacity to rise to this challenge is central to the theme of this paper. States “will be competing more intensely than before, in market place for resources in future and, States may find it somewhat difficult to place a significant responsibility on the Centre for their relative performance” (Reddy 2000). This paper profiles India’s regions and most progressive states, with particular reference to recent growth, development and investment outcomes. It examines growth rates, and shares and their determinants