Regional Disparities – Indian Experience Colonial Period Few pockets of growth around port towns emerged while vast hinterland remained untouched ( Dadabhai Naoroji, 1901 Poverty and unBritish Rule in India ) Emergence of port cities like madras, Calcutta, Bombay, as centers of primary goods exports and finished goods imports Railway and Roadways to collect primary goods from the hinterlands to the port cities, from where they were shipped. Thus the regional imbalances existed and grew as part of the colonial production and trade practices. The metropolitan port city was the hub from where goods were exported. There was satellite towns around the metropolitan cities which acted as feeder cities for the region.

1950s to 1980s –Trend 1: Overall patterns There has been very negligible change in the relative position of the various states Aside1: Measuring Rank Correlation d i = the difference between each rank of corresponding values of x and y, and n = the number of pairs of values. Per capita income Year 1 year2 States Per capita incomeRank Per capita incomeRank a b c Regional Disparities – Indian Experience

Rank Correlation matrix KRG Nair,1980 Trend 2: There was narrowing down of regional disparities in per capita income till mid sixties, however there is a rising trend from mid sixties till 80s. (Ashok Mathur, 1983 and KRG Nair,1980). The measure used here is per capita NSDP. Thus there is an u shaped CV curve, unlike the expected inverted U shaped curve, as hypothesized in theory. Regional Disparities – Indian Experience

Spatial Variability of Inter-state Per capita SDP Weighted Coefficient of Variation CV at pricesSourceCV at prices NCAER NCAER NCAER CSO SSB SSB SSB SSB31.35 Source: Mathur (1994) Regional Disparities – Indian Experience

Aside 3 Convergence/divergence test (sigma convergence) The σ-convergence hypothesis: if the dispersion is decreasing over a period of time across the states then it can be inferred that regional disparities is declining but if the dispersion is increasing over a period of time across the states then there is widening inter-regional disparities. CV = a + bt (linear) CV = a + bt +ct (quadratic ) A significant and positive b connotes widening disparity A significant and negative b connotes reducing disparity A significant and positive b and a significant and negative c denotes initial increasing disparity and later decreasing disparity Regional Disparities – Indian Experience

Sigma convergence regression CV = – 0.50t t2 (1.58) (0.23) (0.0075) R2 = 0.70 This confirmed the argument that there was initially some narrowing down in the regional disparity, however, it started widening later on. Trend 3: Over all trends Spells of comparatively slow growth in national income is associated with w decline or comparatively small increase in disparity (CV), while periods of fast growth are accompanied by an increase in it.

Change in CV of per capita income and national income growth rate Average annual growth rateAbsolute change in CV over past five years Mathur (1983) Regional Disparities – Indian Experience

Change in CV of per capita income and national growth rate - One of the important reasons for this trend of rising regional disparity along with rising average national income growth in the mid sixties is the coming of regionally concentrated green revolution. To look into the trend closely let us look at the sectoral patterns in regional disparity during this period. Regional Disparities – Indian Experience

Primary Sector: Displayed a marked narrowing down tendency in regional disparity till the early sixties. Thereafter regional disparities in this sector started increasing at a fast pace, though with some arrest at the first half of seventies. - Earlier to the green revolution, extension of cultivation was one of the policy prescriptions. By early sixties almost entire cultivable land brought under cultivation. Hence the decline in regional disparity till mid sixties. Thereafter the green revolution concentrated in a few state such as Punjab, Haryana, and the western parts of UP which led to very high increase in yield and productivity in the region while the remaining part of the country was left out.In the seventies the green revolution experiment was extended to states like Bengal, Bihar, Andhra Pradesh, which meant that the regional disparity in terms of agricultural yield and productivity declined.

Regional Disparities – Indian Experience Secondary Sector: 1950s saw a period of rising regional disparities, but thereafter this sector showed a declining trend in disparities. Regional balance was one of the goals of the five-year plans. The MRTP Act, Industrial licensing Act and the FERA acts made clear regulations for location of industries. This meant that the industries were established in a regionally dispersed manner with sufficient attention to the backward regions. All this led to the declines in regional disparity in the secondary sector.

Regional Disparities – Indian Experience Tertiary sector: follows the pattern of the primary sector and not that of the secondary sector. Though in developed economies tertiary sector closely follows and grows with interlinkages with the manufacturing sector, in India, the growth of tertiary sector is more closely linked with that of the primary sector.

Regional Disparities – Indian Experience Trend 5: Widening regional disparity without any reduction during the period 1980 to 2001.During the eighties the CV increased by 3.96 % points, during the nineties CV increased by 3.37 % points

-States above national average per capita income during to – Punjab, Haryana, Maharashtra, Guj, J&K, Himachal, Kerala, Tamil Nadu -States below national average per capita income during to – Karnataka, Andhra, Assam, West Bengal, Rajasthan, Orissa, UP, MP, Bihar. -After dividing the states into developed and less developed states (on the basis of national average of the per capita income) we find that though in the pre liberalization phase both the groups had increasing disparities, after liberalization both these groups show different patterns. Among the developed states the regional disparity has been declining in nineties, while in the developing states the regional disparities started widening at a much greater pace. -Developed states, which have good infrastructure, financial resources, and entrepreneurial dynamism found the liberalization favorable to growth, but for developing economies it meant less support form the government and falling back in growth performance. Regional Disparities – Indian Experience

This is similar to the observation made by Paul bairoch( 1981) that among the developed economies the disparity seems to reduce, while the disparity between the developed and the developing economies continue to widen unabated. Regional Disparities – Indian Experience

Primary sector: compared to the eighties there is some decline in disparities in the nineties. Secondary Sector: continuous increase in regional disparity through out the eighties and nineties, but the period of full fledged liberalization (nineties) saw a much larger increase in disparities (+6.93) than during the period of creeping liberalization ( +2.69) Tertiary Sector: During the eighties there was a slight decline in disparities (-0.56) but in the nineties there was substantial increase in disparities (+5.66) The maximum regional disparities are found within the secondary sector. Growth in the manufacturing sector is clustered around better off regions since capital formation is a cumulative process and the regions that already have a greater capital stock will have greater returns.

Regional Disparities – Indian Experience

Primary sector shows a declining trend in disparities during the nineties mainly due to the spread of the non-farm activities within the primary sector ( forestry, fishing, mining and quarrying) In all other non-agricultural segments of productive activity shows some declining trend in the eighties but a rising regional disparity in the nineties. This points to the retrogressive effects of the process of liberalization as far as the regional industrial and service sector disparities go. Regional Disparities – Indian Experience Inter State Variations in Growth and Beta Convergence Aside 4: Beta Convergence Neo classical theory states that the growth rate of rich regions would be stable, while growth rate of poor region would be much faster, which would lead to convergence in regional disparity in the long run. To test this hypothesis : Gr r = a + bY r Where Y is the log of SDP per capita of the region r at the beginning of the growth period. Gr r is the growth rate during the given period for the region r. If b is negative and significant then it signifies that there is convergence, if b is positive and significant there is divergence.

Regional Disparities – Indian Experience -As per the beta convergence analysis the study concluded that there was no definite trend to support the convergence hypothesis in the eighties. However there was clearly a case of divergence in per capita income growth in the nineties.

Regional Disparities – Indian Experience Regional pattern of employment and wages

Regional patterns in Employment - - Decline in employment generation across all states. The growth rate declined from 2.72 percent during 1983 to to 1.02 percent during to 99-00, signifying a low growth rate during the liberalization era. - - All states recorded a decline in employment growth during the period to The CV of growth rate increased from 0.19 to 0.84 during the same period, implying that the fall in employment growth had been more severe in certain regions in comparison to other regions. The measure using CDS (current daily status) shows that Kerala, W.Bengal, Himachal Pradesh and Andhra Pradesh had experienced decline of more than 2 percent units, while other states fell by nearly 1 percent unit. Regional Disparities – Indian Experience

- Wage differential is measured as the ratio of mean wage of richest quintile (Q5) upon poorest bottom quintile (Q1).Higher the ratio, higher the wage differential in favor of the richest quintile group. - The relevant group for discussion among the rural areas is the casual wage earnings. There is not much gap between the Q5 and Q1 in Moreover the gap is declining over the years till but after the ratio increases to 1.57, implying rising wage differentials across quintiles in India - This rise in wage disparity is uniformly felt across most states.

Regional Disparities – Indian Experience

- The data shows that the interpersonal wage disparities in urban areas than in rural areas in both salaried and causal workers. - The wage disparity between the poorest group and the richest quintile is the highest in the urban salaried class. During the period 1983 to there was some decline in the ratio from 2.49 to 2.25, but this ratio increased vastly during the period to , to The sharp rise in wage differences is especially visible in the states of AP, Bihar, Delhi, Gujarat, MP, TN. In conclusion- There is not much interstate variations in the trends in wage differentials across regions during the neo liberal period. There is widening interquintile wage rates across most states in both rural and urban areas, among both salaried and casual wage class.

Comparing Regional Patterns of Employment and Income Regional Disparities – Indian Experience The ranking of the states according to the level of their respective shares in employment reveal that the pattern of ranking has been largely unchanged during the entire period.

Regional Disparities – Indian Experience

However, the rank correlation matrix expressed for the income share in states shows a different pattern from the ranking of the employment shares. In the case of services sector the rank correlation between 1983 and was positive but not significant (r = ). Similarly the correlates between 1983 and is low and not significant (r = ). The rank correlates between and , however turned out to be highly significant and positive (0.8929). This demonstrates that during the period 1983 to there has been a shift in the ordering of the states in terms of their share in service sector NSDP. However, this shift is noticeable only in case of service sector. Regional Disparities – Indian Experience

- Most states had a deceleration in the employment growth rates in service sector along with acceleration in the income growth rates. - In Kerala and Tamil Nadu there was a simultaneous acceleration of growth rate in both employment and income, while U.P., Andhra Pradesh and Maharashtra experienced deceleration. - All the rest of the states had a deceleration in employment growth accompanied by acceleration in income growth rate, suggesting labour saving growth within the sector. This tends to corroborate with the argument of jobless growth within the sector. - Interestingly we find that all poor states, in terms of per capita income, lies south of the 45 o tangent line between the negative side of the x-axis and the positive side of the y- axis, the exceptions being Maharashtra and Haryana. - All the richer states in terms of per capita income lie above the 45 degree tangent. Regional Disparities – Indian Experience

-It essentially connotes that the poorer states have experienced a greater deceleration in the employment growth rates in the Service sector compared to their corresponding acceleration in income growth rates during the two periods, while the richer states have experienced a greater acceleration in income growth rates during the two periods compared to that of the deceleration in their corresponding employment growth rates. Thus there seems to be some widening regional divergence in the growth pattern in the Service sector within the economy Implications - Given that the poorer states have a higher population growth rate than the richer states, the greater deceleration in employment growth rate than acceleration of income growth rate in service sector of poorer states there could be a widening of disparity in percapita income growth rate between the poorer states and the richer states, on condition that the growth in other sectors are constant. Regional Disparities – Indian Experience

Regional patterns in consumption - the degree of regional consumption disparities are lower than the corresponding per capita income disparities. This is due to the Keynesian consumption function, wherein marginal propensity to consume is a positive but less than one, declining function of income. - Interstate consumption disparity is higher in the rural areas than in the urban. - There has been a continuous rise in regional disparity in the rural segment in consumption across states. In the urban segment the rise had been limited during the liberalization period. But in total there has been a rise in the interstate consumption disparity. -

Regional Disparities – Indian Experience Infrastructure Hirschman (1973) & Myrdal (1964)- crucial role of infrastructure in regional development. Infrastructure of various types- Physical (transportation, irrigation, consumption of electricity, telephone) Social ( related to human development and quality of life, such as literacy rate, infant mortality rate, type of house, ), Financial (bank deposits, tax revenue etc ) Functions of Infrastructure Direct Production and consumption - investment to build infrastructure is very large, which leads to increased production and consumption in the economy Transformative role of infrastructure- as an intermediate and also it permits and invites Directly Productive Activities (DPA) to come in. (Hirschman) Creation of employment: through large flow of expenditure

Regional Disparities – Indian Experience Infrastructure, Income growth and regional disparity - Unequal distribution of basic infrastructure facilities across regions in an LDC may be so pervasive so as to nullify the operation of the law of diminishing returns in the neoclassical sense (Kaldor, 1972) - Economies of agglomeration create a backwash effect against the waning regions - Widening regional disparities in India since 70s - Variations in the core infrastructure endowments across largely explain persisting regional income inequalities.

Regional Disparities – Indian Experience Transportation - The density of National Highway per 1000 sq km has increased from 10 km to 18 km during the period to However there was no change during the period first period. - Also, the degree of regional disparity has reduced over the years from 1.21 to1.16 to While in case of railway route length the rise in density had been very marginal. In fact it is almost stagnant. And the CV had also been constant across the time period. Both these comes from the central list, hence depends on the states relation with the centre in acquiring larger investment in their state. Communication - Regional variation in Teledensity has widened - Electrification and drinking water availability regional variations have declined.

Regional Disparities – Indian Experience

infrastructure Development Index PIDI- Transport facitlities (raiel and road route per sq. km of area) - GIA/GCA - per capita consumption of electricity - telephone mainlines per population SICI – Literacy rate - infant mortality rate - proportion of people living in pucca houses FICI – credit deposit ratio - tax revenue as proportion of NSDP

Regional Disparities – Indian Experience - Largest regional variation in human development and quality of life related social index - Regional variation in both physical and social index had been substantially high in the year , but is declining over the years, but there is no definite trend regarding the financial infrastructure. - PIDI – Punjab, Haryana, Maharashtra, Gujarat occupy top position in the index in all years while Assam, Bihar, Orissa, MP, and UP occupied the lower positions - SIDI- Kerala along with the high profile PIDI states are in the top position, lower states are the same as PIDI

Regional Disparities – Indian Experience - - OLS regression of state Per capita income with the 3 infrastructure index shows that PIDI and SIDI explain a very high proportion of the per capita income in all the four years. - - Lagged regressions with per capita income of , regressed to PIDI, SIDI and FIDI of 71-72, showed that per capita income in was explained to a large extent by the infrastructure availability in This meant that the effect of infrastructure in creating long term regional disparities in considerable. Therefore it is to be strongly suspected that the current experience of widening regional disparities is a product of the regionally variant infrastructure investment in the 70s.

Regional Disparities – Indian Experience Investment Private investment - Competition among states for attracting investment, both private and foreign by offering various tax concessions and other special facilities to new investors on a competitive basis. - As a percentage share, the forward states that include AP, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, TN, accounted for 66 percent of the investment proposals received by the states during 1991 to 1998, while the backward states like Assam,Bihar, MP, Orissa, Rajasthan, UP, West Bengal accounted for the rest. - Again, the cumulative share of financial assistance disbursed by All India Financial institutions (like IDBI, IFCI, ICICI, UTI, LIC, GIC, IRBI and SIDBI) more than 64 percent were concentrated in the forward states, the rest in the backward states. - Financial assistance disbursed by State Financial Corporation again gave more than 67 percent to the forward states, the rest to the backward states. Share of bank credit shows a 64.5 percent share to the forward states, and the rest to the backward states.

Regional Disparities – Indian Experience

- - Foreign investment is also highly regionally concentrated. Maharashtra alone accounts for more than 17 Percent of the total FDI approvals during The forward states including Delhi accounted for more than 60 percent of the total FDI during Between the share was only %, but during the share increased to more than 70 percent. - Incl In conclusion- investment and regional disparities- Since investment is one of the crucial determinants of growth in an economy the widening regional disparities in both domestic and foreign private investment would only widen the regional disparities in growth. - Attracting private investment to a region depends on many factors that include infrastructure (both physical and social), past growth performance, market size, abundant supply of factors of production, functioning of political and legal institutions, state incentives, social climate, etc.

Regional Disparities – Indian Experience Human development (Dholakia, 2003) - HDI in the 15 major states shows a clear declining trend in regional disparity during and However when the number of states is increased to 26, the statistical significance of the results decline sharply. - Regional inequality in Inflation and Inequality adjusted Per capita consumption expenditure declined sharply during , but remained the same during

Regional Disparities – Indian Experience

- Thus the trends largely tell the story of regional convergence in human and social development during the 80s. The 90s also have a similar story to tell except that the disparity in poverty increased significantly during the decade. - This trend is in variance with the trend in per capita income. Regional disparity in Per capita income is widening since the 80s as per many studies, which is opposite to the HDI movement. What is the relation between human development and economic development in a regional perspective?