Covid-19 pandemic: Growth lessons for states from Gujarat, Karnataka

Published: May 6, 2020 3:45:40 AM

The pandemic and its economic consequences have given every state economy the unprecedented opportunity to take bold decisions and accelerate decadal growth.

State governments, today, have a significant role in driving economic growth. (Representative image)

By TV Mohandas Pai & Nisha Holla

The Covid-19 pandemic is realigning the global world order. Amid oil prices falling to historic lows and world economies looking to diversify manufacturing interests away from China-centric dependence, generational opportunities are now open and India’s for the taking. Seizing them will not only help realign to the $5tn target but also enable India to get a firm hold on a top-five ranking in industrial and high value-add output.

State governments, today, have a significant role in driving economic growth. Aggregate state expenditures are increasing compared to the Centre, as analysed previously. As the Covid-pandemic ends and states plan to restart their economies, they must consider the following factors:

i) High value-add to the state economy comes from services sectors like IT and financial services, and high-value-added manufacturing like hardware chip systems design, pharmaceutical manufacturing, automobile engineering, electronics manufacturing, and others.

ii) Harnessing high value-add growth requires a skilled workforce for which states must focus on human capital development.

iii) The low-skilled or unskilled population is most effectively employed in labour-intensive manufacturing like garments, automobile and electronics assembly, and others. These industries can drive per-capita income, economic growth, and volume-export capabilities of the state.

As states explore post-Covid opportunities for growth, Karnataka and Gujarat provide excellent models in driving economic growth via services and industry sectors, respectively. A well-designed combination of the two states’ strategies will be ideal for every state to grow their economy.

Karnataka and Gujarat present a study in contrast. They have almost identical gross state domestic product (GSDP) and growth rates:
i) Karnataka is at Rs 17 lakh crore GSDP, with a 3-year CAGR of 12%, per-capita income at Rs 2.53 lakh and an estimated population of 6.24 crore.
ii) Gujarat is at Rs 16.7 lakh crore GSDP, growing at 13% CAGR with per-capita income at Rs 2.51 lakh and an estimated population of 6.22 crore.

Both economies grew by harnessing economic liberalisation trends post-1991 and are steadily contributing 8.5% each to India’s national GDP. Their journeys, however, could not be more different. While Gujarat focused on industrial development and manufacturing, Karnataka’s IT industry started driving the state’s growth which blossomed into a burgeoning tech ecosystem making Bengaluru a global technological player today.

Services and technology paradigms: Karnataka’s economy is dominated by its services sector, contributing 71% to Gross Value Added (GVA) in FY20. Karnataka has built a strong base to capture high value-add trends in IT/ITeS, biotechnology, financial services, and future growth trends in robotics, 3D printing, chip design and other areas. Karnataka’s government must not miss this opportunity to invest heavily in capturing these trends and partnering with the substantial corporate and start-up base to accelerate growth in these areas.

In contrast, Gujarat’s economy GVA derives only 37% from services. It is the only large economy with low dependence on services and technology. When automation, mechanisation, and other technological factors kick in, its industry base alone cannot sustain economic growth. Gujarat’s government has to invest in technology and high value-add areas to complement its vast industry base, so the economy is ready to harness technological trends when accelerated growth opportunities present themselves.

Industry and manufacturing: The two states share the exact opposite dependence on industry compared to services. Karnataka’s industry sector contribution to GVA is a dismal 22% in FY20—lowest of India’s large state economies. Successive governments have failed to invest in manufacturing and provide tax incentives to private citizens to set up factories. Without this, the large unskilled and low-skilled population in North Karnataka, in particular, have not been able to access quality mass employment opportunities. The Karnataka government must invest in labour-intensive manufacturing like garments, electronics assembly, and others, particularly in North Karnataka. This move will complement its massive services sector and enable more balanced economic growth. Karnataka can also emerge as a global volume-exports player with the right policies, and capture market share from manufacturing moving away from China.

Gujarat, on the other hand, has driven economic growth admirably with its industry sector, which contributes 53% of GVA. It is the only large state economy with a 50%+ GVA dependence on industry. Gujarat is poised to capture market share from companies moving away from China. Investing in technology will enable Gujarat to utilise its strong manufacturing base to upgrade to high-value manufacturing and drive profits up, thus, unlocking accelerated and more balanced economic growth.

Urbanisation and infrastructure development: Systematic urbanisation is crucial to economic growth. India’s urbanisation in 2011 was 31%, estimated at 34% today by the World Bank. Both, Karnataka at 39% and Gujarat at 43%, are above the India-average. Its industrial economy drives Gujarat’s higher urbanisation, whereas Karnataka’s economy is mostly centred around Bengaluru and a few other urban areas. Both states must invest in infrastructure development to facilitate stable economic growth throughout the state instead of the concentration of economic activity in two-three big cities.

Developing census towns around the state into urban nodal centres with high-speed infrastructure connectivity, industrial clusters and facilities will have massive feed-forward effects. The construction projects alone will provide mass employment in the state, which is required post-Covid to recharge the economic growth. Developing backward regions with industrial bases will provide mass employment, and enable those populations to contribute to the economic growth, thereby driving up per-capita incomes, tax collections, industrial output, and export capabilities.

Human capital development: Karnataka and Gujarat both register some of the highest per-capita incomes and economic growth rates in the country.

Despite this, both states have inadequately focused on human capital development. Higher education data indicates Gujarat’s gross enrolment ratio (GER) is 20.4, lower than the India-average of 26.3. Karnataka’s is 28.8—the only southern state with GER below 32. Of the 20 lakh IT employees in the state, half have immigrated from other states. Low focus on human capital has placed Karnataka’s natives in an unfortunate position of being unable to compete for these jobs.

Both governments must focus on human capital development as a means to build their populations into highly skilled and productive workforces to steer their states into a technology-first future and accelerate economic growth.

Both, Karnataka and Gujarat, have taken unique and highly productive routes to economic supremacy in India. Both states must study the other, and implement complementary strategies for faster and more balanced growth. Both offer effective models that other state governments can utilise to design their strategies.

The Covid-19 pandemic, and the resulting global economic crisis have given every state economy the unprecedented opportunity to take bold decisions and accelerate decadal growth. Capitalising on high value-add sectors like manufacturing and services is key to providing citizens with the opportunity for personal growth. State governments must drive this by making the right investments and policy decisions. Failing to take advantage of these once-in-a-lifetime opportunities cannot be an option for any state, large or small.

Pai is chairman, Aarin Capital Partners, & Holla is technology fellow, C-CAMP. Views are personal

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