Regional Disparities

1
Regional Disparities Indian Experience

• Colonial Period
• Few pockets of growth around port towns emerged
  while vast hinterland remained untouched (
  Dadabhai Naoroji, 1901 Poverty and unBritish Rule
  in India )
• Emergence of port cities like madras, Calcutta,
  Bombay, as centers of primary goods exports and
  finished goods imports
• Railway and Roadways to collect primary goods
  from the hinterlands to the port cities, from
  where they were shipped.
• Thus the regional imbalances existed and grew as
  part of the colonial production and trade
  practices.
• The metropolitan port city was the hub from where
  goods were exported. There was satellite towns
  around the metropolitan cities which acted as
  feeder cities for the region.

2
Regional Disparities Indian Experience

• 1950s to 1980s
• Trend 1 Overall patterns
• There has been very negligible change in the
  relative position of the various states

Aside1 Measuring Rank Correlation
di the difference between each rank of
corresponding values of x and y, and n the
number of pairs of values.
  Per capita income      
  Year 1   year2  
States Per capita income Rank Per capita income Rank
a 500 1 700 3
b 400 2 800 2
c 300 3 900 1
3
Regional Disparities Indian Experience
Rank Correlation matrix
  1950-51 1955-56 1960-61 1970-71 1974-75
1950-51 1        
1955-56 0.96 1      
1960-61 0.9 0.95 1    
1970-71 0.78 0.7 0.81 1  
1974-75 0.75 0.71 0.82 0.93 1
KRG Nair,1980
Trend 2 There was narrowing down of regional
disparities in per capita income till mid
sixties, however there is a rising trend from mid
sixties till 80s. (Ashok Mathur, 1983 and KRG
Nair,1980). The measure used here is per capita
NSDP. Thus there is an u shaped CV curve, unlike
the expected inverted U shaped curve, as
hypothesized in theory.
4
Regional Disparities Indian Experience
Spatial Variability of Inter-state Per capita SDP
Weighted Coefficient of Variation
CV at 60-01 prices Source CV at 70-71 prices
1950-51 26.7 NCAER
1955-56 23.5 NCAER
1960-61 24.2 NCAER
1964-65 19.6 CSO
1965-66 24.6 SSB
1970-71 24.7 SSB
1975-76 27.2 SSB 28.23
1980-81 30.2 SSB 31.35
Source Mathur (1994)
5
Regional Disparities Indian Experience
6
Regional Disparities Indian Experience
Aside 3 Convergence/divergence test (sigma
convergence) The s-convergence hypothesis if
the dispersion is decreasing over a period of
time across the states then it can be inferred
that regional disparities is declining but if the
dispersion is increasing over a period of time
across the states then there is widening
inter-regional disparities. CV a bt
--------(linear) CV a bt ct2------
(quadratic ) A significant and positive b
connotes widening disparity A significant and
negative b connotes reducing disparity A
significant and positive b and a significant and
negative c denotes initial increasing disparity
and later decreasing disparity
7
Regional Disparities Indian Experience

• Sigma convergence regression
• CV 22.25 0.50t 0.02t2
• (1.58) (0.23) (0.0075)
• R2 0.70
• This confirmed the argument that there was
  initially some narrowing down in the regional
  disparity, however, it started widening later on.
  
• Trend 3 Over all trends
• Spells of comparatively slow growth in national
  income is associated with w decline or
  comparatively small increase in disparity (CV),
  while periods of fast growth are accompanied by
  an increase in it.

8
Regional Disparities Indian Experience
Change in CV of per capita income and national
income growth rate
  Average annual growth rate Absolute change in CV over past five years
1950-55 3.8 -3.2
1955-60 4.4 0.7
1960-65 2.74 -4.1
1965-70 5.32 6.9
1970-75 3 3.8
Mathur (1983)
9
Regional Disparities Indian Experience

• Change in CV of per capita income and national
  growth rate

• One of the important reasons for this trend of
  rising regional disparity along with rising
  average national income growth in the mid sixties
  is the coming of regionally concentrated green
  revolution. To look into the trend closely let us
  look at the sectoral patterns in regional
  disparity during this period.

10
Regional Disparities Indian Experience
Primary Sector Displayed a marked narrowing down
tendency in regional disparity till the early
sixties. Thereafter regional disparities in this
sector started increasing at a fast pace, though
with some arrest at the first half of seventies.
- Earlier to the green revolution, extension of
cultivation was one of the policy prescriptions.
By early sixties almost entire cultivable land
brought under cultivation. Hence the decline in
regional disparity till mid sixties. Thereafter
the green revolution concentrated in a few state
such as Punjab, Haryana, and the western parts of
UP which led to very high increase in yield and
productivity in the region while the remaining
part of the country was left out .In the
seventies the green revolution experiment was
extended to states like Bengal, Bihar, Andhra
Pradesh, which meant that the regional disparity
in terms of agricultural yield and productivity
declined.  
11
Regional Disparities Indian Experience
Secondary Sector 1950s saw a period of rising
regional disparities, but thereafter this sector
showed a declining trend in disparities.
Regional balance was one of the goals of the
five-year plans. The MRTP Act, Industrial
licensing Act and the FERA acts made clear
regulations for location of industries. This
meant that the industries were established in a
regionally dispersed manner with sufficient
attention to the backward regions. All this led
to the declines in regional disparity in the
secondary sector.
12
Regional Disparities Indian Experience
Tertiary sector follows the pattern of the
primary sector and not that of the secondary
sector. Though in developed economies tertiary
sector closely follows and grows with
interlinkages with the manufacturing sector, in
India, the growth of tertiary sector is more
closely linked with that of the primary sector.
13
Regional Disparities Indian Experience
Trend 5 Widening regional disparity without any
reduction during the period 1980 to 2001.During
the eighties the CV increased by 3.96 points,
during the nineties CV increased by 3.37
points  
14
Regional Disparities Indian Experience
-States above national average per capita income
during 1980-81 to 82-83 Punjab, Haryana,
Maharashtra, Guj, JK, Himachal, Kerala, Tamil
Nadu   -States below national average per capita
income during 1980-81 to 82-83 Karnataka,
Andhra, Assam, West Bengal, Rajasthan, Orissa,
UP, MP, Bihar.     -After dividing the states
into developed and less developed states (on the
basis of national average of the per capita
income) we find that though in the pre
liberalization phase both the groups had
increasing disparities, after liberalization both
these groups show different patterns. Among the
developed states the regional disparity has been
declining in nineties, while in the developing
states the regional disparities started widening
at a much greater pace. -Developed states,
which have good infrastructure, financial
resources, and entrepreneurial dynamism found the
liberalization favorable to growth, but for
developing economies it meant less support form
the government and falling back in growth
performance.  
15
Regional Disparities Indian Experience
This is similar to the observation made by Paul
bairoch( 1981) that among the developed economies
the disparity seems to reduce, while the
disparity between the developed and the
developing economies continue to widen
unabated.    
16
Regional Disparities Indian Experience
Primary sector compared to the eighties there
is some decline in disparities in the nineties.
Secondary Sector continuous increase in
regional disparity through out the eighties and
nineties, but the period of full fledged
liberalization (nineties) saw a much larger
increase in disparities (6.93) than during the
period of creeping liberalization (
2.69)   Tertiary Sector During the eighties
there was a slight decline in disparities (-0.56)
but in the nineties there was substantial
increase in disparities (5.66)   The maximum
regional disparities are found within the
secondary sector. Growth in the manufacturing
sector is clustered around better off regions
since capital formation is a cumulative process
and the regions that already have a greater
capital stock will have greater returns.
17
Regional Disparities Indian Experience
18
Regional Disparities Indian Experience
Primary sector shows a declining trend in
disparities during the nineties mainly due to the
spread of the non-farm activities within the
primary sector ( forestry, fishing, mining and
quarrying)   In all other non-agricultural
segments of productive activity shows some
declining trend in the eighties but a rising
regional disparity in the nineties. This points
to the retrogressive effects of the process of
liberalization as far as the regional industrial
and service sector disparities go.  
Inter State Variations in Growth and Beta
Convergence

Aside 4 Beta Convergence Neo classical theory
states that the growth rate of rich regions would
be stable, while growth rate of poor region
would be much faster, which would lead to
convergence in regional disparity in the long
run. To test this hypothesis Grr a
bYr Where Y is the log of SDP per capita of the
region r at the beginning of the growth
period. Grr is the growth rate during the given
period for the region r.   If b is negative and
significant then it signifies that there is
convergence, if b is positive and significant
there is divergence.
19
Regional Disparities Indian Experience
-As per the beta convergence analysis the study
concluded that there was no definite trend to
support the convergence hypothesis in the
eighties. However there was clearly a case of
divergence in per capita income growth in the
nineties.    
20
Regional Disparities Indian Experience

• Regional pattern of employment and wages

21
Regional Disparities Indian Experience
Regional patterns in Employment   -        -
Decline in employment generation across all
states. The growth rate declined from 2.72
percent during 1983 to 93-94 to 1.02 percent
during 93-94 to 99-00 , signifying a low growth
rate during the liberalization era. -        
-All states recorded a decline in employment
growth during the period 1993-94 to
1999-00. -         -The CV of growth rate
increased from 0.19 to 0.84 during the same
period, implying that the fall in employment
growth had been more severe in certain regions in
comparison to other regions. The measure using
CDS (current daily status) shows that Kerala,
W.Bengal, Himachal Pradesh and Andhra Pradesh had
experienced decline of more than 2 percent units,
while other states fell by nearly 1 percent unit.

22
Regional Disparities Indian Experience
23
Regional Disparities Indian Experience
-         Wage differential is measured as the
ratio of mean wage of richest quintile (Q5) upon
poorest bottom quintile (Q1).Higher the ratio,
higher the wage differential in favor of the
richest quintile group.   -         The relevant
group for discussion among the rural areas is the
casual wage earnings. There is not much gap
between the Q5 and Q1 in 1983. Moreover the gap
is declining over the years till 1993-94 but
after 1993-94 the ratio increases to 1.57 ,
implying rising wage differentials across
quintiles in India     -         This rise in
wage disparity is uniformly felt across most
states.  
24
Regional Disparities Indian Experience
25
Regional Disparities Indian Experience
-         The data shows that the interpersonal
wage disparities in urban areas than in rural
areas in both salaried and causal
workers. -         The wage disparity between
the poorest group and the richest quintile is the
highest in the urban salaried class. During the
period 1983 to 1993-94 there was some decline in
the ratio from 2.49 to 2.25 , but this ratio
increased vastly during the period 1993-94 to
1999-2000, to 3.79. -         The sharp rise in
wage differences is especially visible in the
states of AP, Bihar, Delhi, Gujarat, MP, TN.    
In conclusion- There is not much interstate
variations in the trends in wage differentials
across regions during the neo liberal period.
There is widening interquintile wage rates across
most states in both rural and urban areas, among
both salaried and casual wage class.  
26
Regional Disparities Indian Experience
Comparing Regional Patterns of Employment and
Income
The ranking of the states according to the level
of their respective shares in employment reveal
that the pattern of ranking has been largely
unchanged during the entire period.
27
Regional Disparities Indian Experience
28
Regional Disparities Indian Experience
However, the rank correlation matrix expressed
for the income share in states shows a different
pattern from the ranking of the employment
shares.
In the case of services sector the rank
correlation between 1983 and 1993-94 was positive
but not significant (r 0.6321). Similarly the
correlates between 1983 and 1999-00 is low and
not significant (r 0.5786). The rank correlates
between 1993-94 and 1999-00, however turned out
to be highly significant and positive (0.8929).
This demonstrates that during the period 1983 to
1993-94 there has been a shift in the ordering of
the states in terms of their share in service
sector NSDP. However, this shift is noticeable
only in case of service sector.
29
Regional Disparities Indian Experience
30
Regional Disparities Indian Experience
-                     Most states had a
deceleration in the employment growth rates in
service sector along with acceleration in the
income growth rates. -                     In
Kerala and Tamil Nadu there was a simultaneous
acceleration of growth rate in both employment
and income, while U.P., Andhra Pradesh and
Maharashtra experienced deceleration.
-                     All the rest of the states
had a deceleration in employment growth
accompanied by acceleration in income growth
rate, suggesting labour saving growth within the
sector. This tends to corroborate with the
argument of jobless growth within the sector.
-                     Interestingly we find
that all poor states, in terms of per capita
income, lies south of the 45o tangent line
between the negative side of the x-axis and the
positive side of the y- axis, the exceptions
being Maharashtra and Haryana. -                 
    All the richer states in terms of per capita
income lie above the 45 degree tangent.
31
Regional Disparities Indian Experience
-It essentially connotes that the poorer states
have experienced a greater deceleration in the
employment growth rates in the Service sector
compared to their corresponding acceleration in
income growth rates during the two periods, while
the richer states have experienced a greater
acceleration in income growth rates during the
two periods compared to that of the deceleration
in their corresponding employment growth rates.
Thus there seems to be some widening regional
divergence in the growth pattern in the Service
sector within the economy Implications -Given
that the poorer states have a higher population
growth rate than the richer states, the greater
deceleration in employment growth rate than
acceleration of income growth rate in service
sector of poorer states there could be a widening
of disparity in percapita income growth rate
between the poorer states and the richer states,
on condition that the growth in other sectors are
constant.
32
Regional Disparities Indian Experience
Regional patterns in consumption
-                     the degree of regional
consumption disparities are lower than the
corresponding per capita income disparities. This
is due to the Keynesian consumption function,
wherein marginal propensity to consume is a
positive but less than one, declining function of
income. -                     Interstate
consumption disparity is higher in the rural
areas than in the urban. -                    
There has been a continuous rise in regional
disparity in the rural segment in consumption
across states. In the urban segment the rise had
been limited during the liberalization period.
But in total there has been a rise in the
interstate consumption disparity.  
-                      
33
Regional Disparities Indian Experience
Infrastructure
Hirschman (1973) Myrdal (1964)- crucial role of
infrastructure in regional development.
Infrastructure of various types- Physical
(transportation, irrigation, consumption of
electricity, telephone) Social ( related to
human development and quality of life, such as
literacy rate, infant mortality rate, type of
house, ), Financial (bank deposits, tax revenue
etc ) Functions of Infrastructure Direct
Production and consumption - investment to build
infrastructure is very large, which leads to
increased production and consumption in the
economy Transformative role of infrastructure- as
an intermediate and also it permits and invites
Directly Productive Activities (DPA) to come in.
(Hirschman) Creation of employment through
large flow of expenditure
34
Regional Disparities Indian Experience
Infrastructure, Income growth and regional
disparity   -         Unequal distribution of
basic infrastructure facilities across regions in
an LDC may be so pervasive so as to nullify the
operation of the law of diminishing returns in
the neoclassical sense (Kaldor, 1972)   -        
Economies of agglomeration create a backwash
effect against the waning regions   -        
Widening regional disparities in India since 70s
  -         Variations in the core
infrastructure endowments across largely explain
persisting regional income inequalities.    
35
Regional Disparities Indian Experience
Transportation -                     The density
of National Highway per 1000 sq km has increased
from 10 km to 18 km during the period 1990-91 to
2000-03. However there was no change during the
period first period. -                     Also,
the degree of regional disparity has reduced over
the years from 1.21 to1.16 to 0.81 -              
       While in case of railway route length the
rise in density had been very marginal. In fact
it is almost stagnant. And the CV had also been
constant across the time period.
Both these comes from the central list, hence
depends on the states relation with the centre
in acquiring larger investment in their state.
Communication -                     Regional
variation in Teledensity has widened
-                     Electrification and
drinking water availability regional variations
have declined.  
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Regional Disparities Indian Experience
37
Regional Disparities Indian Experience
38
Regional Disparities Indian Experience
39
Regional Disparities Indian Experience
40
Regional Disparities Indian Experience
infrastructure Development Index PIDI- Transport
facitlities (raiel and road route per sq. km of
area) - GIA/GCA - per capita
consumption of electricity - telephone
mainlines per 10000 population SICI Literacy
rate - infant mortality rate -
proportion of people living in pucca houses FICI
credit deposit ratio - tax revenue as
proportion of NSDP
41
Regional Disparities Indian Experience
-                     Largest regional variation
in human development and quality of life related
social index -                     Regional
variation in both physical and social index had
been substantially high in the year 1971-72, but
is declining over the years, but there is no
definite trend regarding the financial
infrastructure. -                     PIDI
Punjab, Haryana, Maharashtra, Gujarat occupy top
position in the index in all years while Assam,
Bihar, Orissa, MP, and UP occupied the lower
positions -                     SIDI- Kerala
along with the high profile PIDI states are in
the top position, lower states are the same as
PIDI
42
Regional Disparities Indian Experience
-        - OLS regression of state Per capita
income with the 3 infrastructure index shows that
PIDI and SIDI explain a very high proportion of
the per capita income in all the four years.
-       -  Lagged regressions with per capita
income of 1999-2000, regressed to PIDI, SIDI and
FIDI of 71-72, showed that per capita income in
1999-2000 was explained to a large extent by the
infrastructure availability in 1971-72. This
meant that the effect of infrastructure in
creating long term regional disparities in
considerable. Therefore it is to be strongly
suspected that the current experience of widening
regional disparities is a product of the
regionally variant infrastructure investment in
the 70s.
43
Regional Disparities Indian Experience

• Investment
• Private investment
• -                     Competition among states
  for attracting investment, both private and
  foreign by offering various tax concessions and
  other special facilities to new investors on a
  competitive basis.
• -                     As a percentage share, the
  forward states that include AP, Gujarat, Haryana,
  Karnataka, Kerala, Maharashtra, Punjab, TN,
  accounted for 66 percent of the investment
  proposals received by the states during 1991 to
  1998, while the backward states like Assam,Bihar,
  MP, Orissa, Rajasthan, UP, West Bengal accounted
  for the rest.
• -                     Again, the cumulative share
  of financial assistance disbursed by All India
  Financial institutions (like IDBI, IFCI, ICICI,
  UTI, LIC, GIC, IRBI and SIDBI) more than 64
  percent were concentrated in the forward states,
  the rest in the backward states.
• -                     Financial assistance
  disbursed by State Financial Corporation again
  gave more than 67 percent to the forward states,
  the rest to the backward states.
• Share of bank credit shows a 64.5 percent share
  to the forward states, and the rest to the
  backward states.

44
Regional Disparities Indian Experience
45
Regional Disparities Indian Experience
-                   -  Foreign investment is also
highly regionally concentrated. Maharashtra alone
accounts for more than 17 Percent of the total
FDI approvals during 1991-2002.
-                  -   The forward states
including Delhi accounted for more than 60
percent of the total FDI during 1991-02. Between
91-97 the share was only 50.82 , but during
98-02 the share increased to more than 70
percent. -
Incl In conclusion- investment and regional
disparities-                     Since
investment is one of the crucial determinants of
growth in an economy the widening regional
disparities in both domestic and foreign private
investment would only widen the regional
disparities in growth. -                    
Attracting private investment to a region depends
on many factors that include infrastructure (both
physical and social), past growth performance,
market size, abundant supply of factors of
production, functioning of political and legal
institutions, state incentives, social climate,
etc.
46
Regional Disparities Indian Experience
Human development (Dholakia, 2003) -              
       HDI in the 15 major states shows a clear
declining trend in regional disparity during
1981-91 and 1991-01. However when the number of
states is increased to 26, the statistical
significance of the results decline sharply.
-                     Regional inequality in
Inflation and Inequality adjusted Per capita
consumption expenditure declined sharply during
1983-93-94, but remained the same during 1993-00.
47
Regional Disparities Indian Experience
48
Regional Disparities Indian Experience
49
Regional Disparities Indian Experience
50
Regional Disparities Indian Experience
-                     Thus the trends largely
tell the story of regional convergence in human
and social development during the 80s. The 90s
also have a similar story to tell except that the
disparity in poverty increased significantly
during the decade. -                     This
trend is in variance with the trend in per capita
income. Regional disparity in Per capita income
is widening since the 80s as per many studies,
which is opposite to the HDI movement.     What
is the relation between human development and
economic development in a regional perspective?