Disparities in Economic Growth of States

Economic Convergence within India remains a distant dream due to inter-State disparities as poorer States in the country continue to lag behind the richer ones in economic growth, although India is catching up with the richer economies in terms of absolute size as the world’s fastest-growing major economy, according to a report from the rating agency Crisil, which found that the inter-State disparities have widened in recent years even as the larger economy grows in size and influence on the global stage.

Economic Divergence in the fortunes of States is explained in the Crisil report by the fact that the government spending may have boosted gross domestic product growth at least during fiscal year 2018 in the top-performing States, particularly in Bihar and Andhra Pradesh whose double-digit growth rates have come along with a burgeoning fiscal deficit. The impact of greater spending was that 10 of the 17 States breached the 3% fiscal deficit limit set by the Fiscal Responsibility and Budget Management Act.

• Many other big-spending States have not managed to achieve growth above the national average.
• Many low-income States have experienced isolated years of strong economic growth above the national average.
• Bihar was the fastest-growing State this year among the 17 non-special category States evaluated by the report.
• Punjab and Kerala being at the bottom of the growth table are ranked as profligates.
• Low-income States have still failed to bridge their widening gap with richer States since they have simply not been able to maintain a healthy growth rate over a sustained period of time.
• Richer States like Gujarat, for instance, have been able to achieve sustained economic growth and increase their gap over other States.
• Size of public spending is not the reason behind divergence between richer States and poorer ones, but the quality of public spending is what makes the difference.
• Other variables like the Strength of State-level institutions, as gauged by their ability to uphold the rule of law and create a free, competitive marketplace for businesses to thrive is the crucial determinant of the long-run growth prospects of States.
• There was a slight, albeit weak, convergence in the per capita income levels of the poorer and richer States between fiscal years 2008 and 2013, but the trend was reversed in the subsequent years.
• Between fiscal years 2013 and 2018, there has been a significant divergence rather than convergence in the economic fortunes of the poorer and richer States.
• This was the result of richer States continuing to show strong growth while the poorer States fell behind.
• Only two of the eight low-income States in 2013 had growth rates above the national average over the next five years.
• Six out of the nine high-income States recorded rates higher than the national average during 2013-18.