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
states.
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.