What prospects do higher overall economic growth hold for regional disparity? The official 11th Five-Year Plan thinking has reiterated the importance of inclusive growth. Without active policies to bring about some evenness, will backward regions prosper? The new surge in capital inflows to developing economies and the growing importance of foreign labour to developed economies have demonstrated that convergence of income across economies is now more feasible than ever before.
Trade in capital and services complement trade flows that tend to expand opportunities for growth. The lowering of barriers for trade has led to the expansion of international trade flows. What are the consequences of this rise in international economic flows to inter-regional disparities? Barring differences in resource endowments, capital flows can be determined by the initial conditions of development and infrastructure.
States like Orissa and Jharkhand can benefit from investment flows to develop mineral resources. States with a stronger infrastructure and industrial base such as Maharashtra and Gujarat have attracted far more capital than the other states. The national capital region of Delhi has also benefited from good infrastructure.
States with poor infrastructure such as Bihar and Madhya Pradesh have attracted very little foreign investment. If we consider the top three states in terms of per capita GDP–a proxy for income–it would be Maharashtra, Punjab and Gujarat. Chances are that the list was the same even ten years ago before the trade and investment regime began to change. The distance between the top performers and those at the bottom may have, however, increased.
The pattern of regional inequality, therefore, is not a special consequence of rising foreign investment or globalisation. Even when foreign investment was not in view, regional disparity was not necessarily on the decline. Special attention to the development of less developed regions has always been a policy goal. The various fiscal transfers and incentives for location of industries in backward regions were meant to remedy some of the disadvantages that lagging regions suffered.
The stress from imbalance, in whatever form it was manifested, was limited by the very fact that overall growth itself was limited. But now that the pace of growth has accelerated, the chances of leading states and regions flying further up the development ladder have increased, if nothing happens to improve the investment attractiveness of laggard states.
Can those who invest in developed states be lured to less developed states just as they were lured by less developed economies such as India and China? Or, would poorer states have to wait until congestion in richer states makes further investments there unattractive? To take the case of China and India, we can argue that in one case it was the domestic market and in the other an efficient export base that appeared to have attracted foreign capital.
Were investors as disinterested in India some 30 years ago because of low income and a small market? The extent to which we had policies to keep out foreign investment would suggest that this was unlikely. Therefore, even for a relatively backward region, it may not be merely its backwardness keeping investment away. It may well be policies that limit the size of markets to producers in the region. There do not appear to be quick fixes to even out the growth process. Competition among states to attract industries is likely to be limited to fiscal sops. The USP of regions or states cannot be limited to only mineral and natural resources. The usual prescription to development is better infrastructure and public investment to build this infrastructure.
But it is also necessary to build the strengths of the other main reason why capital is drawn to a particular local economy: labour. National policies can influence improving the quality of the labour force across all regions. In that sense, as much emphasis on building skills and education in lagging regions as on building infrastructure is necessary.
Building the local economy as a potential market for investors will also take time. What may strengthen the process is ensuring that the labour market is open at the national and not just regional level. Without exaggeration, the role of non-resident Indians in the course of current globalisation can only be termed highly significant. The migration of educated labour has helped generate savings for investment back home. Labour migration from less developed states to states with more opportunities has been a well-established phenomenon in the country, although its potential as a driver of local economies is not yet clear. Its potential as a long-term source of growth for the region can only be enhanced if labour is also better educated.
The uneven growth across regions within the national economy can hardly be avoided. However, faster economic growth may actually provide more opportunities to even out the imbalances as it also gives more resources to help build a better educated and trained labour force everywhere.
?The writer is senior research counsellor, NCAER. These are his personal views