Rajan panel proposals not a cure for disparity among states

October 3, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The report of a committee headed by Raghuram Rajan on backward states has drawn attention to development disparities among states in India. Not that these were not known or assessed before. The report offers an index for identification of states according to the degree of backwardness and their share of financial assistance from the central government.

The committee’s recommendations, even if efficiently implemented, are not likely to show results soon. The per capita income in Bihar, for example, is a fourth of the per capita income of Goa and half that of Gujarat. But it is encouraging that GDP growth in backward states has recently accelerated and, to some extent, reduced the income gap. It took place because state governments realized that growth counts politically, not because of any additional assistance from the central government.

Present-day disparities are rooted in history. Maharashtra, Tamil Nadu, West Bengal and Gujarat developed earlier and far more than other states. This is because they had the advantage of access to ports that were excellent outlets for trade. Exports of jute from Calcutta (now Kolkata) and cotton from Bombay (now Mumbai) helped the states to industrialize with mills springing up all around. To an extent, the central government also used industrial policy before 1991 to disperse industrial locations but then it hardly worked because the locations has to be commercially viable.

When it comes to industrialization, it is taken for granted that the government is committed to it. Gujarat can be a hub for manufacturing automobiles because that’s the target the government has set for itself. But commitment by itself is not enough. It must translate into creating the necessary infrastructure like provision of electricity, water or land. West Bengal lost its advantage because of labour problems, something that may happen to Haryana as well.

Surely, growth does not follow from industry alone. Agriculture can be a fountain of progress too, as was witnessed in Haryana and Punjab after the Green Revolution. But it is not traditional agriculture that can transform Bihar and Uttar Pradesh. Agriculture has to be organized like a business in order to make the best use of limited land and abundant labour. The best option is corporatization with farmers as shareholders. Professional management will enable diversification of production, adoption of new technologies and improvement in productivity to service domestic and export markets.

The increase in assistance from the centre to backward states, whatever the political compulsions, will not by itself make any dramatic changes to development. For Bihar, the primary motivator for adopting the new index — additional assistance less than 0.5 percent of GDP — is too small to make much difference to growth. Most likely, even that assistance will be diverted to non-productive uses. For further acceleration of growth, these states will have to devise their own strategies to utilize their resources, with the best commercial practices, to their economic advantage.

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