The race to $1trillion economy among states: Who gets there first?

As India goes through a phase of sustained economic recovery post Covid-19 pandemic, a number of states have set themselves ambitious targets for their gross state domestic product (GSDP) to hit $1 trillion.

Such an instance of competitive federalism was encouraged by Prime Minister Narendra Modi himself in 2018 when he inaugurated an investor summit in Uttar Pradesh.

“Can Maharashtra and Uttar Pradesh compete with each other to become a trillion-dollar economy? Will the UP government compete with other states? The more there is competition among states, the more there will be investment,” the prime minister had said.

Since then, there have been proclamations by many states that they are on course to achieve $1 trillion in GSDP, some by 2027 or 2030, and some without a specified end-date. Some like Uttar Pradesh, even hired consultant to help them reach those targets.

All of this ties up neatly with Modi’s own promise of India growing to a $5 trillion economy, which was postponed by two years because of the Covid-19 pandemic. It is now expected that India could reach this milestone by 2027 or 2028, provided there are no more black swan events.

Technically, all India would need to reach $5 trillion is for one economic powerhouse state to be a $1 trillion economy, the six-seven largest states by GSDP to reach near $4 trillion combined, and other states contributing more than $1 trillion.

Which states are the best placed?

 

Clearly the bigger the state’s economy, the better placed it is to reach that proverbial milestone. As the chart above shows, the two states closest to reaching $1 trillion are clearly the two biggest economies, Maharashtra and Tamil Nadu.

“These are the states which have the potential to bring about the high levels of investment, which will bring about an acceleration in GSDP,” said Madan Sabnavis, Chief Economist with Bank of Baroda.

Among the states who have set themselves a $1 trillion GSDP target, there are two kinds. States like Maharashtra, Tamil Nadu, Karnataka etc who have a relatively larger manufacturing base, and states like Uttar Pradesh and Odisha, which have a greater share of rural economy, and Odisha’s case, natural resources also come into play.

“There is a chance that some of the states can achieve $1 trillion by 2030. Many states are working on economic expansion roadmaps seriously, by bringing in consultants and strategists,” said NR Bhanumurthy, Vice-Chancellor of Dr B.R Ambedkar School of Economics University, Bengaluru.

However, as the chart below shows, at current growth rates, it will take more than a decade even for the biggest state to reach the $1 trillion mark.

Expanding pace of growth is key for states

“Most of the states are trying their best to attract foreign investment and expanding industrial and manufacturing base,” Bhanumurthy said.

Even for states without a strong manufacturing base, like Uttar Pradesh, the focus is on expanding public infrastructure investment, which in turn will lead to private and foreign investment coming in. “It all comes down to the ability to attract investment and economic governance.”

“For the economies to grow two things have to improve. One is consumption and the other is investment. The states need to see consumption increasing and investment picking up. In India both these engines are not running in fourth gear, they are running in second gear,” Sabnavis said.

Economists say that for all the states concerned, the template is set. Raise public investment to create jobs, which in turn will lead to higher consumption, and will enable foreign and private investment to come in as well. Some states do need to improve their industrial base, while others need to continue attracting investment the way they have been. However, all of them need to speed up their annual economic growth rates.

They will need to grow at faster pace.