Inter-State disparities

Context

  • India, as the world’s fastest-growing major economy, may well be catching up with the richer economies in terms of absolute size.
  • The economic convergence within the country remains a distant dream as poorer States continue to lag behind the richer ones in economic growth.

Key Facts

  • A report from the rating agency Crisil 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.
  • Many low-income States have experienced isolated years of strong economic growth above the national average.
  • Bihar, in fact, was the fastest-growing State this year among the 17 non-special category States evaluated by the report.
  • But they have still failed to bridge their widening gap with the 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.
  • The report found that 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.
  • In fact, only two of the eight low-income States in 2013 had growth rates above the national average over the next five years.
  • On the other hand, six out of the nine high-income States recorded rates higher than the national average during 2013-18.

The report suggests

  • The report suggests that, at least during fiscal year 2018, government spending may be what boosted gross domestic product growth 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, however, have not managed to achieve growth above the national average.
  • Punjab and Kerala, which are at the bottom of the growth table, are ranked as profligates by the report.

Way forward

  • This suggests that the size of public spending is probably not what differentiates the richer States from the poorer ones.
  • 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, and the quality of public spending could be crucial determinants of the long-run growth prospects of States.

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