REGIONAL GROWTH AND DISPARITY IN INDIA: A COMPARISON OF PRE AND POST-REFORM DECADES Abstract
Has the regional disparity widened in the post-reform period? This study attempts to probe into this by analysing growth rates of aggregate and sectoral domestic product of major states in the pre (1980s) and post-reform (1990s) decades. Our results indicate that while the growth rate of gross domestic product has improved only marginally in the post-reform decade, the regional disparity in state domestic product has widened much more drastically. Industrial states are now growing much faster than the backward states, and there is no evidence of convergence of growth rates among states. Even more disturbing is that there is now an inverse relationship between population growth and SDP growth. The inverse relationship is stronger for the per capita income growth among states. This has a very serious implication for employment and the political economy of India.
B.B. BHATTACHARYA And S. SAKTHIVEL
INSTITUTE OF ECONOMIC GROWTH UNIVERSITY OF DELHI ENCLAVE NORTH CAMPUS DELHI – 110 007 e-mail: email@example.com; firstname.lastname@example.org
REGIONAL GROWTH AND DISPARITY IN INDIA: A COMPARISON OF PRE AND POST-REFORM DECADES B. B. Bhattacharya and Sakthivel I. Introduction The regional disparity in India is now a matter of serious concern. It is well known that in a large economy, different regions with different resource bases and endowments would have a dissimilar growth path over time. One of the reasons why centralised planning was advocated earlier was that it could restrain the regional disparity. In spite of planning, however, the regional disparity remained a serious problem in India. A new controversy in this respect is whether growth rates and standard of living in different regions would eventually converge or not. The convergence theorem (Barro, 1991) postulates that when the growth rate of an economy accelerates, initially some regions with better resources would grow faster than others. But after sometime, when the law of diminishing marginal returns set in, first growth rates would converge, due to differential marginal productivity of capital (higher in poorer regions and lower in richer regions), and this in turn would bridge the gaps in the levels of income across regions. The empirical evidence on this is however very controversial. It has also been observed that when an economy is liberated, especially after controls on investment are lifted, then regions with better infrastructure would attract more investment, especially foreign capital, through market mechanism, and this in turn would lead to regional inequity, at least in the early phase of reforms. The regional disparity in China after economic reform is a classic example of this. In India, the growth rate of gross domestic product (GDP) accelerated since 1980s. The average annual GDP growth rate in the first three decades (1950s to 1980s) was only 3.6 percent. During the 1980s, the GDP growth rate accelerated to 5.6 percent, and after economic reforms in the 1990s, it has further accelerated to 6.0 percent. The reforms led to a lot of structural changes in the Indian economy, such as, deregulation of investment – both domestic and foreign – and liberalisation of trade, exchange rate, interest rate, capital flows and prices. The post reform period also witnessed a sharp deceleration in public investment due to fiscal constraint. At the aggregate level, the average share of public investment in total investment has declined from 45 percent in the
early-1980s to about one-third in early-2000s. Although, there is very little information on investment at the regional level, the available indicators suggest that more and more investments are now taking place in richer states. The RBI data on capital flows show that four/five developed states have cornered the major chunk of foreign direct investment in India. The poorer states with inadequate infrastructure...
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