When rich states get richer
- The economic disparity between states in India has been a persistent issue, with southern and western states often outperforming their northern, central, and eastern counterparts.
- Recent data illustrates this divergence: in 2023-24, the average income of individuals in Andhra Pradesh was roughly four times that of their counterparts in Bihar.
- This gap is projected to widen further if current growth trends persist, with Andhra Pradesh’s income being about four-and-a-half times that of Bihar by the end of the decade.
Current Growth Trajectories
Southern and Western States:
- Economic Advantages: Southern states like Karnataka, Tamil Nadu, and Andhra Pradesh have benefitted from historical accidents, strategic government policies, and favorable market forces. The emergence of a skill-intensive IT sector, significant industrial presence, and a robust financial network have solidified their economic standing.
- Employment and Productivity: These states account for 37% of all factories and a significant share of formal sector employees. They also house major global capability centers and leading manufacturing activities, such as those by Apple’s ecosystem.
Northern, Central, and Eastern States:
- Growth Challenges: States like Bihar, Uttar Pradesh, and Odisha face lower wages and fewer employment opportunities, which struggle to attract significant investment. The economic incentives for relocating businesses remain minimal compared to the developed southern and western regions.
- Migration and Infrastructure: There is a growing migration trend from poorer to richer regions, exacerbating infrastructure pressures and leading to calls for reservation and other forms of socio-economic support.
Potential for Convergence
Scenario of Reversed Growth Trajectories:
- If Bihar were to grow at the pace of Andhra Pradesh while Andhra Pradesh's growth slows to match Bihar’s, even after 15 years, an average person in Andhra Pradesh would still be three times as wealthy as one in Bihar.
- This hypothetical scenario underscores the magnitude of the existing gap and the difficulty of achieving economic convergence.
Driving Factors for Growth in Poorer States:
- Policy Interventions: Effective governance and targeted policies could address structural impediments. Investments in infrastructure, education, and skill development are crucial.
- Market Forces: Improving the business environment, enhancing connectivity, and fostering industrialization could drive growth. For instance, efforts to boost manufacturing through schemes like the production-linked incentive scheme may have a positive impact.
- Infrastructure Development: The development of key infrastructure such as highways and airports can provide economic momentum. Cities like Noida and Ghaziabad, benefiting from their proximity to Delhi, illustrate how infrastructure can spur economic activity.
Consequences of Divergence:
- Increased Migration: As poorer regions struggle to provide employment opportunities, migration to richer states will likely increase, further straining infrastructure and leading to heightened socio-economic tensions.
- Political and Social Pressures: Rising migration and economic disparities may prompt calls for reservation and other support measures, influencing both political discourse and policy decisions.
- Fiscal Transfers: The fiscal transfer system may continue to redistribute resources from richer states to poorer ones, potentially impacting economic incentives and fiscal health.
Conclusion:
- The task of achieving economic convergence is complex and requires substantial effort from both state and central governments. Structural reforms, effective policy interventions, and strategic investments are essential to address the growth disparities.
- While 15 years may seem short in historical terms, it is a significant period for implementing and observing the impact of targeted economic policies.
- Ensuring balanced development across regions is crucial for fostering a more equitable economic landscape in India.