Uneven Growth of Sectoral Composition and Widening Regional Disparities

The convergence theorem states that when growth accelerates, regions that are well-endowed grow faster than the others, but once the law of diminishing returns sets in, growth rates converge due to differential productivity, bridging the gap in income levels. India’s GDP accelerated since the 1980s; the average GDP growth rate in 1950s-1980s period averaged 3.6 percent. The 1980s saw a growth rate of 5.6 percent which shot up to 6 percent in the post-reform period. In the case of India’s economic growth, however, the most defining characteristic is its unevenness in growth – the simultaneous existence of impressive GDP rates and widening inequality across states, which threatens to aggravate poverty and socio-political unrest.

Examining Regional Disparity Across States

Growth Rate of per capita SDP (1980-2000)

Regional disparity in standard of living, as measured by per capita SDP at constant prices, have accentuated in the 1990s. In the 1980s, Assam recorded the lowest per capita SDP growth at 1.7 percent per annum and Tamil Nadu the highest at 4.8 percent. As against these, the all-India growth rate was 3.4 percent. In the 1990s, the disparity has widened from 0.7 for Assam to as high as 6.7 for Goa. In comparison, the all-India rate has improved only marginally: 4.1 percent in the 1990s against 3.4 in the 1980s. While the standard of living improved faster in the 1990s in comparison to the 1980s in most states, the opposite happened in Assam, Bihar, Orissa, Punjab, Rajasthan and U.P. Punjab, which was the richest state in India in the 1980s, performed relatively worse in the 1990s and is no longer the richest state.

The Role of Uneven Growth of Sectoral Composition 

A major cause of uneven growth across the states is the uneven growth in the sectoral composition of the economy. Although India experienced impressive growth rates post-reform, it seems that growth has been mainly driven by the tertiary (services) sector. The boom first took place in the primary (agricultural) sector and next in the secondary (manufacturing) sector, but the economic growth in the last two decades has been fueled by the tertiary sector. Studies indicate that a bulk of the growth has been concentrated in the services sector, although a majority of the workforce remains in the agricultural and manufacturing sectors. What’s worse is that this growth seems to have stemmed from only a few states. Studies reveal that while GDP has grown, the inter-state disparity has drastically widened. Industrial states are growing rapidly, but there is no sign of convergence in growth among the states.

Since the 1960s, India’s growth has been characterized by high-income groups and low-income groups. The growth centers are clustered but not inter-connected, neither geographically nor via linkages, explaining the absence of spill-over effects, uneven distribution of employment and incidence of poverty across the states. For instance, the industrial states Gujarat and Maharashtra in the west mostly export their products. Punjab and Haryana, on the other hand, are primarily agricultural and though contiguous to Gujarat and Maharashtra, do not have any linkages to facilitate any spill-over. Additionally, Gujarat specializes in textiles while Maharashtra in automobiles, and even they do not experience any spill-over since their industries do not mutually benefit or depend on each other.

India’s structural transformation under different regimes led to uneven growth patterns in the sectoral composition, resulting in great variations across economic growth. The 1960s-1980s emphasis on import substitution, i.e., the inward-looking regime saw a drastic decline in agricultural output. Many believe that it is during this period that the non-primary sector took precedence over agriculture. Technological improvements brought along the emergence of the tertiary sector, taking over as the backbone of the economy, contributing around 57 percent.

Except for a few states, the share of the primary sector has dwindled drastically from about one-half in the early 1980s to one-third or one-fourth in 1999-00. In industrial states, such as Gujarat, Maharashtra and Tamil Nadu, the share of the primary sector in SDP has come down to around 15 percent by the end of the 1990s. The drastic reduction in the contribution of the primary sector in Gujarat (by 30 percentage points) during this period is on account of faster growth in secondary and tertiary sectors and negative growth of the primary sector in the 1980s, the only state to have registered so. In Maharashtra and Tamil Nadu, the two other leading industrial states, where the primary sector has also performed quite well, the share of the primary sector in SDP declined more moderately, by about 10 percent each. Goa has the lowest share of the primary sector in SDP at below 10 percent. Even in the poorer states - Bihar, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh – the share of the primary sector has declined significantly over the last two decades. In Bihar, for instance, the share of the primary sector, which was nearly 60 percent in SDP in the early 1980s, has now come down to about 30 percent in the late 1990s. Poor performance of agriculture, rather than rapid growth of non-agriculture, has brought this change. In Punjab, an agriculturally prosperous state, the share of the primary sector has declined marginally due to slower growth of non-agriculture. This is despite a slackening of agricultural growth in Punjab in the 1990s.

The tertiary sector has recorded the fastest growth in most states. In most states, the share of the tertiary sector now exceeds 40 percent of SDP. During the last two decades, the tertiary sector has grown on an average by 8 to 9 percent per annum in many states, notably, Gujarat, Haryana, Kerala, Maharashtra, Tamil Nadu and West Bengal. With the exception of Gujarat, the tertiary sector now accounts for almost half of SDP in all rich states. The tertiary, rather than the secondary, sector has become the engine of growth in most states. This reflects a poor pace of industrialization in India at both aggregate and regional levels.

Overall, as the economy progressed, the share of the primary sector declined, and that of the secondary sector increased. It is only later when the economy attained a fairly high level of development, typically when India became a middle-income country - the tertiary sector overtook the secondary sector. This was the general pattern of development, especially in East Asia. What sets India apart, however, is the absence of a spill-over effect. Needless to say, there is a need to re-examine the nature of planning, fiscal federalism, investment and infrastructure in order to level out imbalances not in only economic growth but also development.

Conclusion

Our analysis of the growth trajectory across states reveals that growth has largely been uneven, and we tie this to the uneven development of the sectoral composition as one of the primary reasons. It is the trajectory of disproportionate economic growth concentrated in the services sector that has exacerbated the case for inequality across the states. As per our analysis, the industrial states have performed better than their agricultural counterparts in the post-reform period. Unfortunately, we fail to see any convergence in the growth rates of the states; there is no spill-over effect, and hence, the poorer states have been left behind.

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