When states prosper, so does the Union

While parsing through growth projections, we need to look closer at a number of underlying factors. One of them is the heterogeneous growth among our states.
When states prosper, so does the Union
(Express illustration | Sourav Roy)

Year 2024 is important for India—the country is headed for general elections. In the course of 2024-29, the term of the new government, India will cross the GDP threshold of $5 trillion and become the third largest economy in the world. Indeed, India will approach a GDP of $7 trillion. This year, being roughly half-way between 2000 and 2047, is a convenient point to take stock about the future trajectory.

By the time the new government’s term ends, the world will also be approaching the deadline for the Sustainable Development Goals or SDGs. Most countries have slipped from those targets, though India has slipped less than others. Growth is correlated with improvements in social sector indicators. In the medium term, what growth trajectory is India on? a) 5.5-6 percent; b) 6.5-7 percent; or c) 7.5-8 percent. The differences between a, b and c blow up exponentially.

Any projection requires a set of assumptions—real growth rate, inflation, rate of population growth, total factor productivity increases and the rupee-dollar exchange rate. For instance, before Covid, the Economic Survey for 2018-19 stated, “Given the 4 per cent inflation, as the Monetary Policy Framework specified by the government for the Reserve Bank of India, this requires a real annual GDP growth of 8 per cent.”

A more recent report by SBI Research states, “The path taken since 2014 reveals that India is likely to get the tag of the 3rd largest economy in 2027 (or 2027-28)…. At this rate, India is likely to add $0.75 trillion every 2 years, implying that India is all set to touch $20 trillion by 2047, at least on current numbers. Behind this surge, India needs to grow at a CAGR of 8.4 percent till 2027 (in dollar terms). This translates into 11.0-11.5 percent nominal GDP growth per annum (in rupee terms), which is eminently achievable with a 6.5-7 percent growth rate.”

This doesn’t state the per capita income in 2047 directly. But with a projected population of 1.7 billion in 2047, one can deduce that the per capita income would be short of $12,000.

In contrast, there is a study done by Ernst and Young in March 2023, which states: “In the most preferred scenario, India is likely to cross the critical thresholds of $5, $10 and $20 trillion in market exchange rate terms in 2027-28, 2035-36 and 2044-45, respectively…. India’s per capita income in market exchange rate terms is expected to cross $13,000 by 2044-45, putting it in the ranks of developed economies... As per the most preferred scenario, India’s real GDP is projected to grow in the 6-6.4 percent range over the period 2022-23 to 2047-48, although with a moderating decadal growth profile... The projected GDP in $ trillion terms shows an average annual growth of close to 8.4 percent over the forecast period (2022-23 to 2047-48).”

When thinking about such projections, it is important to bear in mind an obvious point. These terminal goals are in current US dollars, not constant US dollars. In constant US dollars, a goal may seem impossible. In current US dollars, it is achievable.

In principle, differences in projections can arise from different assumptions about the inflation rate, which is unlikely since the RBI has a tolerance band of 4-6 per cent. They can arise from differing exchange rate assumptions, factoring in total productivity changes.

They can arise from differing assumptions about population growth. But more often than not, they arise from different projections about the real rate of growth. A difference between 6 percent and 6.5 percent may seem to be that of a mere half a percentage point, but that difference blows up over time. As an economy grows, the rate of growth slows over time.

India’s growth is an aggregate of growth delivered by its states. The combined state GDP or GSDP roughly accounts for 97 percent of India’s GDP. No reliable estimates exist for a state’s income, as opposed to GSDP. This can make a difference in states with substantial net out-migration. GSDP growth rates can be volatile. Over time, they need to be smoothened out and the results are function of the time period.

Consider real GSDP growth rates for 2012-2022, where aggregate growth for India was 6 percent. The states fall in neat buckets: 10 percent plus: Mizoram; 8 percent plus: Gujarat; 7 percent plus: Tripura, Karnataka; 6 percent plus: Haryana, Madhya Pradesh, Telangana, Odisha, Andhra Pradesh, Sikkim, Assam, Andaman & Nicobar, Arunachal, Tamil Nadu; 5 percent plus: Delhi, Himachal, Chhattisgarh, Rajasthan, Puducherry, Uttarakhand, Uttar Pradesh, Jharkhand, Bihar, Chandigarh, Punjab; 4 percent plus: Jammu & Kashmir, Manipur, Maharashtra, Kerala, West Bengal, Nagaland; 3 percent plus: Goa; and 2 percent plus: Meghalaya.

Hence, to move from one growth trajectory to another, the performance of many states will have to improve. This is in terms of growth rates. Since states vary in size, all states are not equally important in contributing to India’s GDP. In descending order of importance, the major ones are Maharashtra, Tamil Nadu, Uttar Pradesh, Karnataka and Gujarat. These five states account for 47 per cent of India’s GDP. Mizoram, growing at 10 per cent plus, has a relatively low impact, compared to West Bengal growing at 4 per cent plus.

Heterogeneity among states comes across in a host of other indicators. First, in achieving the SDGs, there is a difference between Kerala and Himachal at the top, and Jharkhand and Bihar at the bottom. Second, states differ in multi-dimensional poverty and the extent to which there has been a decline. Third, the commerce ministry has a LEADS report that measures logistics ease across states. Fourth, the department for promotion of industry and internal trade gauges states on their business reform action plans. Fifth, the NITI Aayog has an export preparedness index for states. Most exports originate in Gujarat, Maharashtra, Tamil Nadu, Karnataka and UP. In rankings, the coastal states of Tamil Nadu, Maharashtra, Karnataka and Gujarat do well. But among the larger states, Jharkhand, Bihar and Chhattisgarh lag behind.

It only goes on to underline that India is a Union of states. When they prosper, the nation does.

(Views are personal)

Bibek Debroy

Chairman, Economic Advisory Council to Prime Minister

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