Wednesday, February 08, 2017

If India is one country why are some states lagging behind?

While states in the US are remarkably similar in earnings for citizens there is enormous divergence in earnings of people in different states in India, write Praveen Chakravarty and Vivek Dahejia. They took the 12 largest states in India which together account for 85% of India's population and 80% of the country's GDP and compared per capita incomes over the last 3 decades. They found that rich states have raced ahead while poorer states have stagnated. "The average Tamilian today earns four times more than the average Bihari. Just tree decades ago, the average person in the then richest state, Maharashtra, earned less than twice the average person in the then poorest large state Bihar. In another decade from now, it is likely that the per capita income of the richest state will be more than four times the per capita income of the poorest state" they write. What explains this disparity between citizens of rich and poor states in India? According to economic theory people will migrate from poor areas to rich ones in hope of higher incomes. It maybe difficult for a Hindi speaking Bihari to move to Tamil Nadu, because of language problem, but the Economic Survey 2016-17 shows that migration between states is robust. Investment should be attracted to poor areas where land and labor are cheap but lack of trained manpower would be a steep hurdle. The pictures of cheating in exams in Bihar were a serious setback. A 17 year old girl who came first in her group was found to know nothing. How was it her fault if her father paid examiners to mark her papers? Bihar has the highest fertility rate, highest maternal mortality rate and the lowest literacy rate in the country. UP is not far behind. Naturally, rates of serious crimes, such as murder and rape, is among the highest in Bihar. Who will want to invest in a state where employees, or their families, could be kidnapped for ransom? Conviction rate for serious crimes is 77.8% in Kerala,while it is a miserable 10% in Bihar. West Bengal is not far behind with 11%. Historian Ramachandra Guha wrote that attitudes among people in UP, compared to those in Bangalore, were different because the state is negligent in providing essential services. Thus, the 3 most lucrative industries in Kanpur are producing bottled water, providing security guards and installing generator sets, all being services which should be provided by the state. The divergence in per capita incomes between states really took off in 1992 after the economy was liberalized. Before that investment was driven by the government which sought to equalize all states but after liberalization private enterprise boomed and they went where they could find trained manpower and had a big market. So what happens when the Goods and Services Tax equalizes indirect taxes across all states of India? Will the richer states race away much faster? We shall see in a few years. 

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