Proof that India’s growth mostly benefits India’s rich

The states of India just keep getting further apart economically.
The states of India just keep getting further apart economically.
Image: Reuters
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India is a 1.3 billion person anomaly. As a whole, the country is doing exceptionally well. It is the fastest growing major economy in the world, and is catching up with wealthier nations with impressive speed. Yet over the last several decades, defying economic theory, the Indian states with the strongest development are those that were already best off.

According to economic models, low-income regions should grow faster than high-income regions. Poor places can grow more quickly because they can copy the technologies and economic policies of those that are already wealthy. This phenomenon is referred to as “convergence” or the “catch-up effect” by economists.

For the most part, the theory holds true. Within countries like the United States, Japan and China (pdf), less developed states are growing faster than wealthy ones. In India, however, convergence across states is not happening.

The relative lack of growth in the poor states like Uttar Pradesh, Bihar and Odisha over the past 30 years is a major contributor to India’s increasing inequality. Given that India contains nearly 18% of the world’s population, this divergence also has important consequences for global poverty and inequality.

The following chart shows the growth of gross domestic state product per capita (GSDP) in the four Indian states that were wealthiest in 1984, with populations over 20 million. (Of the 29 states in India, 18 have more than 20 million people.)

Per capita GSDP rose by an average of over 400% in these four states—which account for over 220 million people. The largest increase was in the state of Maharashtra, where the per capita GSDP went up more than 4.5 times in just three decades.

The poorest states have not seen such rapid growth. The chart below shows the growth in the same period for the four large Indian states that had the lowest per capita GSDPs in 1984. Though these states did experience substantial economic gains, the growth was about 60% as fast as in the four wealthiest states. The population of just these four states is over 350 million.

Many observers expected regional inequality to decline in the 2000s due to promising economic outlooks for poor states like Bihar and Madhya Pradesh. ”But the data show that those developments were neither strong nor durable enough to change the underlying picture of divergence or growing inequality,” writes the Finance Ministry.

The ministry offers two possible explanations for the puzzle of India’s lack of convergence.

First, it suggests that economic policy in low-income states may be holding them back. Although it would appear they should be ripe for investment, places like Uttar Pradesh are unappealing due to poor governance. According to a study by the National Council of Applied Economic Research (pdf), India’s poorest states are among the least attractive for investment due to concerns about the political climate and infrastructure.

Another explanation is that, in contrast to other emerging economies, India’s growth has come in “skill-intensive sectors rather than low-skill ones.” In manufacturing-growth-led China, regions with low labor costs are enticing because the labor needed can be done by pretty much anyone. But in India, where the service sector drives far more growth than manufacturing or agriculture, high-skill people are the engines of growth. The most educated Indians tend to cluster in cities like Bangalore where high-tech firms are located, exacerbating regional inequality.

It is unclear from the most recent data whether convergence is on the horizon. Poor states were among the fastest and the slowest growing states in 2014-2015—Bihar and Madhya Pradesh are booming, while Uttar Pradesh and Rajasthan are plodding along. If global poverty is to continue to fall, whether the poorest Indian states begin to catch-up to the richer ones will be a major factor.