Backward states growing fast, proving good economics can be good politics

The fall in India’s GDP growth to just 6.5% in 2011-12 has caused much moaning and groaning, along with a search for silver linings.

The silver linings most often highlighted are falling oil prices – which will reduce both the fiscal and current account deficits – the sharp contraction in gold imports since January and the likely boost to exports from rupee depreciation.

Yet, the biggest silver lining lies elsewhere: in the continuing fast growth of India’s backward states.

The accompanying table shows that while national GDP has fallen sharply from 8.4% in 2009-10 and 2010-11 to 6.5% in 2011-12, it has fallen less sharply in many backward states, which have often bettered the national average.

Many large, poor states that once pulled down the national average are now pulling it up. That is a revolutionary change. The central government may suffer from policy paralysis, but not all state governments do.

The best performers include not only rich, advanced states like Gujarat, Maharashtra and Tamil Nadu but many backward ones too. Moreover, the backward ones are still so far behind the prosperous ones that they have immense potential for catching up, without requiring any fancy policy changes.

Some caveats are in order. First, the data for 2011-12 are only estimates, and may be revised down a bit (as has already happened to the national GDP estimate). Second, state data are not of the same quality as central data. Nevertheless, state trends have been strong for several years, adding to their credibility.

The two giant poor states are Uttar Pradesh and Bihar, which between them account for 300 million people, or a quarter of India’s entire population. The performance of Bihar continues to be mind-boggling, vastly exceeding the national average for three years running.

In 2009-10, despite a major drought, Bihar grew by 10.4%, following up with 14.8% and 13.1% in the next two years. Sonia Gandhi and Manmohan Singh may look panicky and ineffective in New Delhi, but Nitish Kumar looks assured and fully in charge in Bihar. That is an excellent sign.

The record of UP is nowhere near as good. Yet, its performance has improved a lot in recent years, and is now only slightly below the national average. This is a sea change from the old days when Uttar Pradesh grew at half the national rate.

The third-biggest poor state, Madhya Pradesh, was sluggish in most of the last decade, but has accelerated recently. It almost matched or exceeded the national average in 2009-10 (10.5%) and 2010-11 (8.2%). Its growth data for last year is not yet available. Rajasthan, next in size, achieved 5.5% and 10.9% in the two earlier years, with data not available for last year.

Next in size comes Orissa, which has done very well under Naveen Patnaik. It outpaced the national average in the last two years – with 8.6% and 7.2% growth respectively. The Congress often looks defensive and spineless when challenged politically in New Delhi, whereas Patnaik has just quashed a rebellion in Orissa with an iron fist. He has sacked over 20 ministers – some very powerful – for corruption in the last decade. If only New Delhi could do the same!

Chhattisgarh remains a star performer under Raman Singh. A bad drought dragged its GDP growth down to 3.35% in 2009-10 but it bounced back with 11.6% and 10.8% in the next two years. Remember, this state suffers most of all from Maoist insurrection. Yet, it now has a reputation for not just growth but also public distribution and public health systems that work.

The performance of Bihar, Orissa and Chhattisgarh has been amazing for a decade. This can’t be said of Jharkhand, the most corrupt and badly-run of the backward states. Naturally, its GDP growth has been below the national average.

Uttarakhand, smallest of the backward states, is a superstar, averaging almost double-digit growth for a decade. But this owed a lot to excise-duty exemption for new industries set up there, and this benefit is now ending. The state’s growth has slowed, yet its 8.8% in 2011-12 was far above the national average.

All analysts believe that paralysis in decision-making has held up several projects for mining coal and iron ore. Most of the minerals are in the backward states. Of these, Chhattisgarh, Orissa and Madhya Pradesh have continued to grow fast, showing that progress is possible despite difficulties in land acquisition and environmental clearance. Jharkhand remains in the dumps. Andhra Pradesh has slowed, partly because of a weak state government.

The performance of fast-growing backward states has implications beyond their borders. For decades, politicians have been cynical about economic development. Laloo Yadav famously said that political success depended on caste and religion, not development. He won three elections in a row and almost won a fourth, lending credibility to the thesis that GDP growth was electorally irrelevant.

That thesis is now discredited, thanks to Nitish Kumar, Naveen Patnaik and Raman Singh. They have won repeated elections by delivering fast economic growth. That is a great lesson for all other states and the greatest silver lining in the dark clouds that swirl over India today.

What do you think?