Growth, poverty and employment in states

: The political class is well aware of the “revolution of rising expectations.” There is increasing empirical evidence that high-growth states are best able to attack poverty and increase employment, that there is no meaningful alternative to policies that focus on high economic growth. State governments need to focus on improving infrastructure, achieving sound law and order and attracting private investment in order to raise growth.

Based on the level of per capita income in 2003-04, states in India can be divided into three groups—the rich states, the middle-income states and the poor states. Punjab, Maharashtra, Haryana, Gujarat and Tamil Nadu are in the group of rich states. Karnataka, Kerala, West Bengal and Andhra Pradesh are the middle-income states. Rajasthan, Madhya Pradesh, Orissa, UP and Bihar are among the set of poor states.

A recent study on growth variation in Indian states examines the policies of state governments that impact growth rates. The paper, titled ‘Mind the Gap— Is economic growth in India leaving some states behind,’ by Catriona Purfield, finds that inequality among states has increased in the past 30 years. The gap in per capita income levels between the richer and poorer states has widened. In 1970, the richest state (Punjab) was 3.4 times richer than the poorest (Bihar). By 2004, this ratio had risen to 4.5.

The econometric analysis presented in the paper finds that state-level policies are a key factor influencing the pattern of economic growth across Indian states. The paper has an interesting innovation: the extent of T&D losses of the electricity sector in the state is viewed as a measure of the quality of governance there. Three factors are found to be associated with higher growth: greater private sector investment, smaller governments and better governance.

How does growth impact the welfare of the electorate? Purfield finds that richer and faster growing states have been more effective in reducing poverty and in generating employment. A state’s record in reducing poverty reflects differences both in the level of growth and in the effectiveness of this growth in reducing poverty. On average, richer states have been about 50% more effective in reducing poverty than poorer states for each percentage point of growth.