Lessons from the southern surge
IT was in the 1990s that the trend of new industrial projects moving southwards gained ground. Hyundai and Ford set up factories in Tamil Nadu soon after the liberalised regime for foreign direct investment was rolled out. This territory was far away from the large passenger car markets of the National Capital Region. But global car companies were prepared to incur high freight costs rather than set up plants in northern states.
Some states used the 1991 reforms and liberalisation policies as a springboard to attract both domestic & foreign investment.
This was followed by the information technology revolution, which centred around the capitals of Karnataka and then undivided Andhra Pradesh. Bengaluru and Hyderabad became the preferred locations for Big Tech to set up huge campuses. Even fledgling Indian IT companies like Infosys and Wipro established their bases in these states. The result was an influx of software professionals to these IT hubs and the creation of what is now considered India’s Silicon Valley in Bengaluru.
By now, it is accepted wisdom that southern states are the natural home of hi-tech industries and that overall growth is also better in this region than in the more densely populated northern and eastern states like Uttar Pradesh, Bihar, Punjab and West Bengal. The fact that states like UP accounted for a big chunk of the country’s GDP in the 1960s has been forgotten over the years. It has taken a working paper by the Prime Minister’s Economic Advisory Council on states’ relative development to highlight the fact that these regions lost their pre-eminence over the past six decades.
The study has focused on the relative performance of states from 1960-61 to 2023-24. It has used two indicators — the share of India’s GDP and relative per capita income. This has shown wide variations in development indicators over this period.
For instance, in the northern region, the paper has highlighted the divergent growth paths of Punjab and Haryana. The former’s share of the GDP rose to reach 4.3 per cent in the 1960s, apparently due to the Green Revolution. It declined to only 2.4 per cent in 2023-24. Haryana’s share now exceeds that of Punjab, and the per capita income has reached 176.8 per cent of the national average in 2023-24 compared to the larger state’s 106.7 per cent. The study raises the question of whether the focus on agriculture hindered the transition to industrialisation for Punjab. But the same phenomenon could have occurred in Haryana, which was also part of the Green Revolution. Clearly, aggressive policies to attract investments that led to the creation of the corporate hub in Gurugram have made a difference.
As for the western region, primarily Maharashtra and Gujarat, it saw consistent growth even prior to 1991, according to the paper. One of the historical factors in the case of Maharashtra is the fact that it developed around Mumbai, which was a key colonial outpost and emerged as the country’s financial capital. Favourable commercial policies continued after Independence, ensuring that the west coast became an industrial hub with many of the so-called Bombay Club industrial houses located there. The discovery of oil in the Bombay High offshore region in the 1970s fuelled the establishment of refineries and ancillary industries. Gujarat, too, benefited from being close to offshore gas fields that led to the proliferation of small and medium industries using the fuel as feedstock. State government policies were also consistently industry-friendly, whether it was the Congress or the BJP in power.
In contrast, West Bengal, with similar advantages of being a major commercial hub in colonial times, has exhibited a sharp deterioration in economic performance. The paper finds that it held the third largest share of the national GDP at 10.5 per cent in 1960-61 but now accounts for only 5.6 per cent. The relative per capita income has fallen from 127.5 per cent to 83.7 per cent.
The reasons for the decline have to be found in policies of various state governments over six decades. This includes the Left Front, which was in power for 34 years of the period under review. Though the front has been lauded for carrying out land reforms, it cannot escape blame for the slow pace of growth. The Trinamool Congress took charge in 2011, but it has not been able to reverse the declining trend.
Regarding Uttar Pradesh, the paper describes it as being the largest economic powerhouse in 1960-61 with a 14.4 per cent share in the country’s GDP. The decline began even after Uttarakhand was carved out of UP, and the share is now only 8.4 per cent. Similarly, Bihar presents a dismal picture, with the relative per capita income dropping from 70.3 per cent in 1960-61 (when it was undivided) to 33 per cent. For both UP and Bihar, it cannot be denied that the decline in relative economic performance has to be laid at the door of successive governments.
On the other hand, the southern states, which did not show exceptional performance prior to 1990-91, surged ahead later. Governments of these states tailored their incentives for fresh investments to make productive use of liberalised economic policies. As a result, by 2023-24, Karnataka, Andhra Pradesh, Telangana, Kerala and Tamil Nadu together accounted for about 30 per cent of India’s GDP. In addition, the per capita income of all southern states became higher than the national average after 1991.
This data shows that some states used the 1991 reforms and liberalisation policies as a springboard to attract both domestic and foreign investment. Others failed to take advantage of the opening up of the economy. The result has been the creation of vast regional disparities, with western and southern states racing towards affluence while central and eastern states still have large swathes mired in poverty. It is not too late, however, for laggard states to learn lessons in effective governance. The study is a timely reminder for them to recognise that the focus must be on economic development rather than political brinkmanship. “It’s the economy, stupid,” an American catchphrase, fits perfectly here.
