It’s nigh impossible to opine on India’s macro-economic prospects without succumbing to simplistic stereotyping in a socially diverse one billion-strong economy. We do it anyway - but just a cursory look at Indian states highlights the country’s huge diversity in terms of ethnic make-up, languages, population and institutions.
This heterogenity extends to economic structure and financial depth, as a recent special report by Deutsche Bank on the current economic and fiscal health of India’s states shows.
In short, the analysts find a two-speed India, with the fruits of the country’s recent growth unevenly dispersed. The gap between rich states and poor states is growing. Meanwhile, the idea of conditional convergence – areas with low levels of development ought to growth faster than more advanced areas due to catch-up potential – only really applies to a single state, Bihar in eastern India.
Here are its distressing conclusions:
| - The income gap between the rich and poor states is widening; poor states tend to have more volatile growth - Rich states don’t enrich just a few; instead the fruits of high GDP are reflected in relatively lower poverty in those states - States with higher financial development, more flexible labor markets, improved infrastructure, and a better educated population do a better job in generating income and reducing poverty - Theory suggests that poor states, even if they remain behind, should grow faster than rich states as they begin from a much lower base. Worrisomely, this is not clearly evident among Indian states - The population dynamic of the poor states is of concern, as they would account for most of India’s population increase in the coming years - Poor states have mutually reinforcing problems—poverty, low level of urbanization, poor human development indicators, and high populations |
Inequality and the concentration of wealth – shown through higher levels of income, urbanization and better infrastructure – are all well-known themes in India, both within and between states. But DB has compiled an up-to-date data set for 17 states, representing 90% of the population, to tackle head-on the inequality question.
Some key points:
| The combined GDP of Andhra Pradesh and Maharashtra is bigger than the combined GDP of 10 states at the bottom end of the wealth spectrum. Perhaps even more strikingly, the per capita GDP of Haryana is nearly 5 times more than that of Bihar. Delving more into the details of per capita income, the average income of the top five richest states is about 4 times that of the lowest five. Over the past decade, Haryana’s nominal per capita GDP has tripled, while two of the most populous states in the country (Uttar Pradesh and Madhya Pradesh) have seen incomes barely keeping up with inflation. |
Or in visual form:
Poor states like Uttar Pradesh and Madhya Pradesh, which started the decade with low per capita income, ended with anamic growth rates. This has widened the gap with rich states such as Haryana, Gujarat and Maharashtra, which “entered the past decade with some of the highest per capita income in the country, and they completed the decade with high average growth rates”.
As noted already, the main outlier is Bihar, in the top left. There, lower GDP per capita has been accompanied by higher growth.
Meanwhile, a cursory glance at this table below highlights how India’s most populous states are also the most poorest:
Turning to the question of what could be done to change this, the report looked how much fiscal space Indian states have to power development. Not surprisingly, the answer is relatively little, since public sector deficits at the state level are sizeable – mirroring the fiscal funk at the federal level – representing a third of the national debt stock.
| Only a few states have managed to run primary surpluses on a consistent basis, and the magnitude of deterioration in the last two years has been quite dramatic. ... Debt. The pattern seen in the previous datasets is repeated here. With a few exceptions, states with strong economies have lower fiscal burden. The highest indebted states have the weakest growth indicators (such as West Bengal and Uttar Pradesh). In general, the debt burden of states has been reduced over the past decade, but interestingly, the relative ranking of states has not changed much. |
So it's more or less the same story as with economic performance:
| Strong fiscal performers are clustered around India’s high growth areas. States like Haryana, Karnataka, and Maharashtra have traditionally had strong economic record, and their fiscal scores are no exceptions. Conversely, the laggard states with respect to fiscal performance are laggards in a wide range of economic and social indicators. We find that Jharkhand, Bihar, West Bengal and Uttar Pradesh are some of the states having the worst fiscal dynamic. Given that Bihar, Uttar Pradesh and West Bengal together would account for more than one-third of the rise in India’s population between 2010 and 2025, their poor fiscal ranking is particularly worrisome. |
Still, Indian states generally boast a stronger fiscal position than a decade ago (see table below). And the market impact of state deficits is limited, save for the potential crowding out effect on private sector borrowers.
Indian states are legally barred from overseas bond market issuance and only issue fixed rate domestic bonds. This has insulated state governments from exchange rate risks and interest rate volatility. In addition, governments have eased refinancing risks as state bonds are generally 10 years in tenor, the sweet spot for domestic institutional investors.
But with limited scope to stretch finances further, the broader implications are distressing. Fiscal inequality represents a big hurdle in overcoming inter-state income differentials, meaning that the gap may be more likely to grow than shrink from here.