Review: Regional Growth and Disparity in India: a comparison of pre and post-reform periods - B.B. Bhattacharya, S. Sakthivel

Here is a paper by Bhattacharya and Sakthivel on regional divergence between the pre-reform and post-reform period.

http://iegindia.org/workpap/wp244.pdf

The paper, albeit slightly dated, attempts to look at the divergence from several perspectives, among them population, inflation and sectoral composition. For most students of economics, this paper will seem very simplistic in its approach. For example, covergence cannot be measured solely on the basis of variance of state-level growth without accounting for differences in savings rates across states. With that caveat in mind, I have summarised the most important results that this paper presents.

• Convergence: As evidence of divergence, the authors first use the variance of SDP (State Domestic Product) growth rates, which increased from 0.14 in the 1980s to 0.29 in the 1990s; at the same time, variance of per-capita SDP growth rate increased from 0.22 in the 1980s to 0.43 in the 1990s. They also quote Ahluwalia (2000), who pointed out that the Gini coefficient, which remained stable till the mid-1980s, then increased from 0.16 in 1986-87 to 0.23 in 1997-98. Finally, the correlation between average SDP growth rates in the 1980s and 1990s comes out to be 0.5, which is statistically significant at the 5% level of significance.

• Growth and Population: Controlling for the abnormal circumstances in Assam and Orissa, the correlation coefficient between SDP growth and population growth in the 1990s was found to be -0.69, which is significant at the 1% level of significance (and note that SDP growth is not in per-capita terms). However, the result can be interpreted in two ways depending on the direction of causality. If economic growth results in lower population growth, then it is a good thing; because then, all we need to do to control population is to ensure higher economic growth. However, if it is the other way round, i.e. population growth reducing economic growth, then we have a problem at hand, because economic growth cannot take off until population growth is controlled. The authors do not attempt to find out the direction of causality.

• Growth and Inflation: The growth-inflation trade-off is fairly well-known, yet contentious. The authors take a preliminary view on this by finding out the correlation coefficient between SDP growth and inflation rate. They find that such a trade-off did not exist in the 1980s (correlation coefficient of -0.69, significant), however this trade-off began to appear in the 1990s (correlation coefficient of 0.25, not significant). The authors use this data to infer that it was supply-side economics that dominated in the 1980s, but that going ahead, it is likely to be demand that is going to be the major constraint.

Review: India’s Growth in the 2000s: Four Facts – Utsav Kumar, Arvind Subramanian

Here is a paper by Utsav Kumar and Arvind Subramanian (2011) that presents four facts about state-level growth in the 2000s:

http://www.iie.com/publications/wp/wp11-17.pdf

The paper is very simple, seeking only to present and prove the facts, rather than trying to explain the causation. The four stylised facts presented by the author are:

• Growth in the main states, except three, increased in 2001–09 compared to 1993–2001: The three laggard states are identified as  West Bengal, Himachal Pradesh and Rajasthan. This is, however, not as much an indictment of these states as it is reflective of their solid performance in the 1990s. I was surprised to learn that Bengal was among the top performers in the 1990s.

• Despite the strong performance of the hitherto laggard states, we find that divergence in the growth performance across states continues: The authors prove this using a number of models. In essence, they run a regression of the growth rate of the states in different time periods (2001-09, 1970-2009, 1994-2009 etc) versus their initial income level and find that the coefficient of initial income level is positive, i.e. richer states grew faster. What they also find is that divergence has been a constant phenomenon since the 1970s, and that the pace of divergence has only increased in recent years.

• States with the highest growth in the pre-crisis years, 2001–07, suffered the largest deceleration during the crisis years (2008 and 2009): The authors identify Karnataka, Maharashtra and Gujarat as those states whose growth rate decelerated most sharply in the crisis years. These were incidentally also the states that grew the most in the pre-crisis years. The laggard states, notably Assam, Madhya Pradesh and Bihar, were the ones that continued to maintain high growth rates even in the crisis years. The authors then hypothesize that this deceleration was a function of the openness of the state economy. Since no metric for a state's global economic integration exists, the authors use the share of the manufacturing and services sector in the SGDP as a proxy for openness. They find a negative relationship between the change in growth rate and the share of the manufacturing/services sector, thus implying that states that were most open to the global economy also suffered the most.

• For the period 2001–09 we do not find any positive effect of the so-called demographic dividend: To me, this was the most surprising observation. However, a deeper reading made it evident why it was so. 49% of our demographic dividend is supposed to come from the BIMARU states. However, these states were also the poorest performers in the time period that the paper covers. Hence, the clear demographic dividend that was observed in previous years was reversed in the 2000s. This is also a dire warning for India's continued growth - unless the youth in the BIMARU states are either allowed to migrate to other states or employment opportunities are generated for them within their states, India's date with the demographic dividend might never come.