Jeffrey D. Sachs, Nirupam Bajpai and Ananthi Ramiah

CID Working Paper No. 88 March 2002

India accounts for a meager 2.4 percent of the world surface area yet it sustains a whooping 16.7 percent of the world population, a little over 1 billion people residing in 29 states and 6 union territories. The variation across these states and territories is enormous in regard to physical geography, culture, and economic conditions. Some states have achieved rapid economic growth in recent years, while others have languished. The goal of this paper is to try to make some sense of the differential economic performance of India’s states, especially under the forces of globalization in the 1990s. The paper may most profitably be read as a companion to the paper by Demurger, Woo, et. al. (2001), on regional differences in China’s economic performance.

To address the question of regional performance, we narrow our focus to the 14 most populous states, which excludes the Himalayan states, the Northeastern states, and the 6 union territories. The included states have a combined population of 897 million, accounting for approximately 90% of India’s population, and 2.7 million sq kms, accounting for 83% of India’s total land area. These states are listed in Table 1, and shown in Figure 1. The variation in economic performance is large. The per capita state product varies from the poorest state, Bihar, at 1010 rupees per month and population of 82 million, to the richest, Maharashtra, at 4853 rupees per month and population of 96 million. Growth performance has been equally varied, with the slowest growth in state per capita income in Bihar, at -0.2 percent per year during 1992-98, compared with the fastest growth in Gujarat, at 7.8 percent per year (Table 4).

The differential performance across states has begun to raise important policy questions within India. To what extent are the differences a manifestation of global economic forces acting upon India, especially during a period of economic liberalization, and to what extent do they reflect differences in economic policies at the state and union level? Will market reforms tend to make the rich states richer in relative terms, with the poor states lagging ever farther behind, or will market reforms lead to economic convergence across states? Specifically, are the poorest states (especially the so-called BIMARU states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) condemned to fall further behind the front runners, at least in relative terms?

In the case of China, Demurger et. al. found that the underlying drivers of economic growth, and hence the tendencies towards convergence or divergence, differed markedly across sub-periods, especially as a result of major shifts in the economic policy regime. During the first phase of China’s market reforms, for example, during 1978-84, the dismantling of the communes and the partial liberalization of food production gave a great boost to major food producing regions. By the late 1980s, however, international trade had become the major driver of economic growth, and as a result the coastal regions spurted ahead of the interior provinces, a pattern which obtains till now.

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