Both policy interventions and market forces now seem to be reinforcing the manufacturing and services ecosystem in the southern and western states.
In 2023-24, the average income of a person residing in Andhra Pradesh was roughly four times that of someone in Bihar. While it is simplistic to assume that future growth rates will be exactly in line with past trends, let’s assume that both states will continue to grow at the same pace they have over the past decade or so. In that case, the gap between an average person’s income in the two states would only rise further — to around four-and-a-half times by the end of this decade. And Andhra has the lowest per capita income among the richer southern states.
Consider an alternate scenario. In the unlikely event that their growth trajectories reverse – Bihar grows at the pace that Andhra Pradesh has, while Andhra chugs along at the pace Bihar has — then even after 15 years of sustaining this growth trajectory, an even more unlikely event, an average person residing in Andhra would still be three times as rich as one in Bihar. The question is: Is even this degree of convergence possible? And if so, what will drive Bihar’s growth? Andhra and Bihar are just examples. One could replace Andhra with the other southern states, and Bihar with some of the northern, central and eastern states, but the question would still remain (Average income has been measured in terms of per capita net state domestic product at current prices).
Both policy interventions and market forces now seem to be reinforcing the manufacturing and services ecosystem in the southern and western states. Also, possibly, the underlying growth structure of the economy has led to this divergence in growth trajectories. Given this, will the chasm between the richer southern and western states and the poorer northern, central and eastern regions — where the bulk of the population resides — only get deeper? Is convergence over the medium term a possibility?
The southern region did benefit from what Paul Krugman calls historical accidents, as well as government policies and market forces. The skill-intensive IT sector emerged and is still largely concentrated in the southern states. These five states also account for 37 per cent of all factories as per the Annual Survey of Industries. Of the top 20 exporting districts in the country, all but two are located in western and southern states. The five southern states also account for 33 per cent of all formal sector employees (those contributing to EPFO). In the early ’90s, these states accounted for less than a quarter of the Indian economy. By 2022-23, their share had risen to roughly a third. Comparisons with the rest of the country would be even starker when adjusted for their population, if we were to ever get the actual population numbers, and not projections. Not only are these states richer, but the people living in these states are more likely to live longer, they are more likely to be better educated, and their children are more likely to have better health.
While wages in UP and Bihar, as well as other parts of the country, may well be lower, they aren’t enough of an incentive for companies to relocate. The advantages that the southern and western regions enjoy, the agglomeration effects that stem from an existing manufacturing and services base, a skilled workforce, financial networks and infrastructure, among others, have only allowed them to leverage their strengths, making them the centre of economic gravity at both the production and consumption ends of the spectrum. And the effects are visible. A significant share of the global capability centres that are being set up are located in the cities of Bengaluru, Hyderabad and Chennai, and in Mumbai and Pune. The new bursts of manufacturing activity, a consequence of policies like the production-linked incentive scheme, are also found to a larger extent in the southern and western states. Take a look at the Apple ecosystem — its contract manufacturers such as Foxconn are largely located in these regions. And of the five semiconductor projects approved by the Centre, four are in Gujarat.
Some cities like Noida and Ghaziabad benefit from their proximity to Delhi. These two cities account for 46 per cent of all formal jobs in Uttar Pradesh (those contributing to EPFO). The steady buildup of infrastructure — highways, airports — may also provide a burst of economic momentum to some parts of the state. But what happens beyond that?
The fallout from a continuing divergence in growth rates across these states will likely be along predictable lines. The impetus to migrate from poor to rich regions will only increase, especially as most of these low-income regions will witness higher population growth and fewer employment opportunities. This, in turn, implies that the pressure on the already creaking infrastructure of the few big cities in the north and the ones in the west and the south will grow further. The influx of migrants is likely to lead to even more vociferous calls for reservation, including in the private sector, from local communities in the richer regions. Similar demands may be made by various caste groups in the lower-income states because of lack of jobs.
Governments, irrespective of their ideological leanings, will respond by placing greater emphasis on populism, opting for more fiscally imprudent transfers to compensate for their inability to generate low-skilled jobs at the scale required, squeezing out allocations for more productive forms of spending. Such a growth trajectory also makes it more likely that the transfer of fiscal resources from the southern states to other parts of the country will continue.
The task of effecting structural transformation is harder than many appreciate. However, while 15 years may not be a long time in a country’s history, it is a long enough period for governments to intervene to address the structural impediments to growth in the lesser developed parts of the country, especially, if the same party is in power, either directly or in alliance, at both the Centre and the state.
ishan.bakshi@expressindia.com
