A New Year compact for laggard states

With the economy on track to achieve a growth rate of over 7.5% this fiscal, it is not surprising that our planners have set their sights on raising the bar. The Prime Minister has said that India must look at a GDP growth target of 10%. The Planning Commission may have already embarked on a number-crunching feasibility exercise to figure out the rate of savings, investments, etc required to generate 10% growth. While a look at macro parameters is no doubt essential, it is time a little more attention is paid to the geographical spread of growth in India. The fact is that in recent years, regional inequality in India has worsened and unless addressed systematically, poses perhaps the most significant roadblock to raising the national growth rate.

If one looks at our growth record over the past 15 years, India clearly gets divided into two distinct regions. The faster growing India comprises four states in the south, Maharashtra, Gujarat in the west, and Punjab, Haryana, Delhi and Himachal in the north and to an extent, West Bengal in the east. During the period 1990-2005, these states have grown faster than the national GDP growth rate of around 6%, and have, in fact, nearly trebled their per capita incomes. Within this set, the four southern states have clocked real GDP growth of over 8%, much higher than the national average. Lately, Gujarat has shown robust double-digit growth while Maharashtra is slowing down. Setting these variations aside, it is evident that contributions of these states has made the Indian economy vibrant and pulled up the average growth rate for the country as a whole.

These states have obviously benefited from economic reforms. They have been able to leverage these to raise the rates of investment and also diversify their economies to seize new opportunities in the fast growing services sector, as also in manufacturing. Superior governance and better implementation of economic policy and development schemes have clearly played a key role in boosting the economic performance of these states. In general, these states have better social indicators of literacy and health, enjoy better infrastructure and have been able to benefit more from globalisation.

In contrast, there is a vast region in central India, stretching from Rajasthan in the west through Uttar Pradesh, Madhya Pradesh, Bihar, Chhattisgarh and Jhar-khand, to Orissa in the east. Most northeastern states and J&K also belong to this category, where growth has been much lower than the national average. Taken together as a region, per capita income growth here has, in fact, decelerated during the 90s and has been less than 2%?much lower than the nearly 5% growth achieved in this parameter by the faster growing states. In some states, per capita income growth in the past decade and a half has been close to the population growth rate, indicating that poverty may have risen in some parts of this region. Social indicators for these states compare rather poorly with not just the better performing states, but also the national average.

Mercifully, the planners are not oblivious to this growing divide that seems to be cutting India into two countries, with one marching towards the status of a middle-income country and the other languishing behind to qualify as a least developed country. The mid-term appraisal of the Tenth Plan has recognised that regional imbalances have actually got accen- tuated, particularly over the past 15 years.

This gap would have to be addr-essed, and significantly, if the natio- nal GDP growth rate has to be raised beyond 7-8% per annum. There is no way India can grow faster if half of it continues to retard it with a growth of 4-5%. Therefore, even while the Planning Commission does its conventional sums of savings-investment rates and capital-output ratios, the approach to the new Plan has put forward an agenda for transformation of the LDC part of India. Indeed, this must become the priority for the New Year, the new Plan and any other new significant economic initiative to be mounted henceforth.

It has been clear for some time now that the past tendency to develop backward areas by setting up industrial estates or luring large projects such as steel plants have not achieved the objective of economic transformation. Industrial investment can create islands such as Bhilai, but cannot change the overall economic landscape, for which a holistic effort will have to be mounted. The core of this new effort would necessarily have to focus on a judicious mix of improved economic reforms and governance on the one hand, and investment and resource flow interventions on the other. For example, there is little point in investing in rural electrification if power is to be sold free, because very soon the investment made would become unviable and fail to achieve the purpose of delivering quality power round-the-clock to support economic activity. Likewise, the impact of an investment in rural roads or irrigation channels would be aborted in the absence of a system for their regular maintenance.

Clearly, some linkage will have to be worked out between reforms and allocation of plan investments to create sustainability and lasting results. There is now growing experience of linking release of funds for sectoral programmes, such as urban development or power, to policy change and reform that make new interventions viable. The areas where interventions are needed such as roads, power, education, urban management, watershed development, etc are well known. These will have to be matched by political will of governments in backward states to launch a comprehensive action plan of economic change in partnership with the central government. Enabling laggard states to catch up with their faster growing brethren should be one foremost thought for the New Year.

?The writer is an advisor to Ficci. These are his personal views