Three development models that can guide Indian state economies 

News: At present, India’s economic policymakers are trying to look after potential stagflation.  

Possible long-term strategies for high, employment-intensive growth

Three broad groups of states are identifiable, each with a distinct development model.  

Bihar model

Coverage:  The model is generally found in a group of the least developed states which includes Uttar Pradesh, Jharkhand, Odisha, Assam and all the north-eastern states, among others.  

Features:  In this model, the states are growing at rates comparable to the national average. They have very low per capita incomes, the share of industry in the state’s gross domestic product (GSDP) is below the national average.  

Further, there is a lack of modern industrial hubs, few existing large industrial units are often state-owned, there is a weak backward or forward linkage with the local economy.  

These states have low levels of human or social development and infrastructure development.  

The workforce depends upon agriculture, the non-agricultural workforce is mainly engaged in low-productivity, and low-wage jobs in thousands of micro, small and medium enterprises (MSMEs). 

Problems 

These states have a large size of government relative to GSDP: 26% compared to the 17% national average.  

Government expenditure is heavily dependent on central transfers rather than the state’s own resources: over 59% as compared to the national average of just over 36%.  

Solution 

Cooperative federalism is important in accelerating inclusive development in these states. 

If the government expenditure is strategically deployed, then it can significantly impact the development trajectory of the state.  

Gujarat model

Coverage: It includes a group of fast-growing state like Gujarat, Haryana and Telangana. 

Features: They have a high per capita income, nearly 6 times that of Bihar. A large share of its workforce is still dependent on agriculture. The share of industry in GSDP is at 44% (way above the national average).  

The state’s growth is driven by traditional industries like agro-processing, modern industries like pharmaceuticals, petrochemicals, IT services and modern financial services.  

In fact, infrastructure is highly developed.  

Problems 

These state’s lag behind the country’s leading states in social development, such as education and health outcomes. This challenges the quality of human resources which determines competitiveness. 

Causes of problem 

The deficit in education and health outcomes is due to the relatively small size of government expenditure (only 11% of GSDP). Further, much of the spending goes to physical infrastructure. 

Tamil Nadu Model

 Coverage: This includes industrialized states/UTs like Tamil Nadu, Delhi, and Maharashtra. Kerala too  

Features: These are prosperous states with high per capita income. These are India’s most industrialized states. In addition, the Industrials sector accounts for over 34% share in GSDP.  

Unlike Gujarat, the share of its workforce in agriculture is not above 30%. There is high social development indicated by high life expectancy. 

The state’s dependence on central transfers is also quite low, in fact lower than Gujarat’s.  

Much of the achievements have been despite Tamil Nadu government’s expenditure well below the national average. 

Solutions 

The Tamil Nadu model of development is thus the most successful model under Indian conditions. 

The states should improve their power situation and leverages on science and technology research institutions to emerge as a knowledge economy hub. 

Way Forward 

The three development models described above spell out a roadmap for long-term development in different states.  

States following the Tamil Nadu model should stay the course and do more of the same.  

States that follow the Gujarat model should course correct, prioritizing education and health services 

States that have followed the Bihar model should switch to the Tamil Nadu model. They need strong central government support to do so.  

Further, the labour migration from Bihar model states to Gujarat model states and especially Tamil Nadu model states will serve as the market-based adjustment within the country. 

Source: The post is based on an article “Three development models that can guide Indian state economies” published in the Live Mint on 20th May 2022.