The battle against Covid-19 took an enormous toll on the Indian economy, unlike anything seen in the country’s recent history. Despite a muted first wave in 2020, the national lockdown caused the Indian economy to contract by 7.3%. On the contrary, the economic impact of the large-scale Covid-19 outbreaks in the Delta variant-led second wave was less severe in 2021. The latest quarterly growth estimates published by the Ministry of Statistics and Programme Implementation suggest that the Indian economy is on the path to rapid recovery in 2022. Looking at the economic data, particularly for consumption and investment, it does seem that the economy is reviving from the aftershocks of the pandemic. However, a key question remains: Are all states witnessing similar paths to recovery?
A recent study conducted by the Asia Competitiveness Institute examines the sub-national recovery during the past two years focusing on two drivers of economic growth—consumption and investment. The study reveals widespread regional differences in India’s recovery post-pandemic. States that performed well during the pandemic are concentrated in the northern, southern, and western regions. However, regional recovery does not guarantee the performance of all states within the region. For example, the western region comprises Gujarat, which rebounded strongly with a surge in FDI flows, while Madhya Pradesh is yet to recover fully.
Investment-led recovery: Since the first wave, the northern region has dominated construction and real estate investments. It received more investment during Covid than in the pre-pandemic period, with Haryana, Delhi, Punjab and Uttar Pradesh bringing in the bulk of the investment. Nitin Gadkari, the Union transport minister, laid the foundation for 11 highway projects in Haryana under the new economic corridor in July 2020 and 16 highway projects in Uttar Pradesh in November 2020. Similarly, for Punjab, the state government approved the construction of 18 road projects comprising 1,000 kilometres of roads in September 2020. In terms of real estate, Birla Estates launched a 47-acre housing project in Gurugram, a major metropolitan city in Haryana. During this period, Ashiana Housing, a realty firm, announced new investments in normal housing and senior living residency projects in the national capital. Delhi witnessed the sharpest recovery in comparison to other states due to the vast inflows of new construction and real estate investments amid the pandemic.
Within southern India, Tamil Nadu and Kerala outperformed their regional peers. Like Delhi, Tamil Nadu also experienced a substantial increase in investment flows to its construction and real estate sector in 2021. The government of Tamil Nadu signed two major deals: building two industrial parks in Chennai and constructing a 20-kilometre six-lane highway from Pondavakkam to Kannigaipair.
Regional disparities: Northeastern states such as Mizoram, Manipur and Nagaland registered a strong recovery in one of the consumption indicators, namely per capita bank credit issuance. This can be attributed to these states being agrarian, and agriculture being designated as a priority sector for lending by the Government of India and the Reserve Bank of India. However, the recovery in one of the consumption indicators was ultimately not enough for them to bounce back fully. These states have not yet returned to the pre-pandemic level of economic activity.
The exceptional cases of Odisha and Jharkhand: The study also finds some outliers in the eastern region. Historically, states in the eastern region performed poorly in terms of their overall competitiveness. However, the post-pandemic economic trends tell a different story. The recovery of Odisha and Jharkhand was comparable to the top-performing states in the western region. Considered the richest in natural resource endowment, both Odisha and Jharkhand attracted significant investments in the metal industry. The governments of both these states have prioritised improving ease of doing business in recent years.
Pre-Covid times, the western region garnered almost 60% of the FDI inflows to India. This is not surprising given that Gujarat, Madhya Pradesh and Maharashtra, the states that attract the highest FDI, belong to the western region. During the second wave, a re-shuffling of the preferred FDI destinations occurred. FDI inflows to the eastern region were commensurate with that of the western India due to the high inflows to Jharkhand and Odisha.
Odisha attracted very high investments in metals, construction materials, chemicals, food, agro-based products, tourism and transport services. The government of Odisha approved five mega steel projects to achieve its goal of producing 100 million tonnes of steel by 2030, which is more than three times its current production capacity of 30 million tonnes. The other projects include three grain-based ethanol plants, a multi-modal logistics park and two five-star hotel projects. Odisha also witnessed high investment flows in the manufacturing sector.
In the case of Jharkhand, the metals and miscellaneous services industries attracted the largest investments. During the launch of the Jharkhand Industry and Investment Promotion Policy 2021 in August, the state government signed memorandums of understanding with Dalmia Cement and Adhunik Power. The Dalmia group pledged to make an investment worth `758 crores in the cement grinding, solar power generation, and municipal waste management sectors. Adhunik power pledged to invest `1,900 crores to develop an industrial park. Tata Steel and Steel Authority of India Limited also stated their intent to invest over the coming years through the expansion of mining projects.
Other eastern states did not witness similar recovery patterns like Jharkhand and Orissa. This suggests that the erstwhile top-competitive states continue to perform well, whereas the bottom-competitive states are still suffering from the adverse impact of the pandemic.
Challenges remain: Although broader vaccination coverage and relaxed covid restrictions have brought the economy back to normalcy, challenges remain. The sub-national recovery trends in investments only capture the formal sector. Small firms in the informal sector were hit hard by the pandemic and uncertainty still exists about their post-pandemic revival. Additionally, external shocks such as the oil price surge with Russia’s invasion of Ukraine are expected to worsen the already rising unemployment and inflation. As states emerge from the pandemic, governments need to focus on reviving private investment (the long-run engine of growth) to create jobs. Such targeted policy efforts can reduce regional disparities and further accelerate India’s recovery in 2022.
Rohanshi Vaid
(Research Assistant at the Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore)
Ammu George
(Research Fellow at the Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore)