Growth, poverty and employment in Indian states

Ila Patnaik

Financial Express, May 9, 2006

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 3 groups - the rich states, the middle-income

states and the poor states. Punjab, Maharashtra, Haryana, Gujarat,

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, U.P and Bihar are among the set of poor


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 last 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

polices 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 in the state. 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 percent more effective in reducing

poverty than poorer states for each percentage point of growth.

In the period 1977 to 2001 for which the analysis has been conducted,

some states have the best performance in both indicators. Andhra

Pradesh, Gujarat and Tamil Nadu have high poverty elasticity and

witnessed high growth. This is why they were effective at reducing

poverty more than any of the others. Interestingly, Karnataka and

Maharashtra, even though they witnessed high growth in the period,

were not as effective at reducing poverty because of their very low

poverty elasticities. Bihar, UP, and MP had both low growth and low

poverty elasticities giving them among the poorest outcomes in terms

of poverty reduction.

Purfield's evidence on organised sector employment shows that while

employment has risen across all states in the past three decades, the

pace of job creation in middle- and high-income states far outstripped

that of poorer states. While 40 percent of the population lives in the

poorest and most populous states, only one-quarter of organised sector

employment is found there.

There is an alternative to making a state richer: this is to allow the

state to wallow in poverty, and rely on migration to get people

out. Net outward migration is highest from the northern

and central states of Bihar, Uttar Pradesh, and Punjab. The prime

destinations for migration are Delhi, Maharashtra and Gujarat.

Migration is a powerful tool for equalising incomes within the

country. If enough people leave (say) West Bengal, then wages in West

Bengal will go up owing to a shortage of labour. In addition, the flow

of remittances by the migrants will improve consumption in West

Bengal. Such migration flows reduce inequalities.

While these arguments in favour of the benefits of migration within

the country are solid, the empirical fact is that the existing level

of labor mobility in India across state borders is very low and does

little to reduce disparities. Only 6 percent of migration in rural

areas and 20 percent of migration in urban areas occurred across state

boundaries. In other words, there is no option but to first and

foremost focus on growth, through which the problems of poverty and

employment will be addressed.

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