Skewed theory

Liberalisation has not created inequality between states

Liberalisation is widely interpreted as raising living standards of more and more people who take advantage of the opportunities that globalisation offers, and as entrepreneurial energies are unleashed.

But another aspect of liberalisation is supposed to be greater inequality between regions, as cities and states that can take advantage of the changing scenario forge ahead, while those that cannot compete in the new regime lag behind.

In India, this trend is supposed to have resulted in a skewed development, where coastal states and the more dynamic and entrepreneurial business-friendly states are successful in attracting investment, while states that lack a large market or communication or have governance problems fall behind.

The trend seems to be mere common sense "" after all, surely states such as Andhra Pradesh (AP) or Karnataka or even Tamil Nadu will do far better than Bihar and Uttar Pradesh (UP), now that the old "socialist" ideas of balanced regional development no longer apply?

Recent reports have suggested that the southern states, with their higher level of education and better infrastructure are doing far better in services, which is emerging as the fastest growing segment in the economy.

In this environment, the share of net domestic product originating from states such as AP and Karnataka should rise, while those of states such as Bihar and UP should fall.

To test that hypothesis, we studied the net state domestic products (SDP) of the larger states as a percentage of the total of all net SDPs for two years "" 1993-94, when liberalisation was just beginning, and for 2000-01, to gauge which states gained the most and which lost out. The data has been culled from the Economic Survey.

The results of the study are surprising. A look at the table shows that the biggest improvement in market share of net state domestic product has come from West Bengal, whose share in the sum total of net state domestic products rose from 7.7 per cent in 1993-94 to 8.8 per cent in 2000-01, an improvement of 110 basis points in market share.

Far behind, at second place were Delhi and Karnataka. While Delhi's share in the sum total of net state domestic product increased from 3 per cent in 1993-94 to 3.6 per cent in 2000-01, a rise of 60 basis points, Karnataka's market share rose from 5.9 per cent to 6.5 per cent over the same period.

Also, yet another leftist run state, Kerala, was next on the list, its share moving up from 3.8 per cent in 1993-94 to 4.3 per cent in 2000-01. Business friendly Tamil Nadu increased its share from 8.2 per cent to 8.5 per cent, while AP saw its share rise from 8.3 per cent to 8.5 per cent.

Guess which state was the biggest loser in the liberalisation process? Not Bihar or UP, but Madhya Pradesh, whose share fell 100 basis points from 5.4 per cent to 4.4 per cent. Again surprisingly, next on the list of losers was Maharashtra, which saw its share fall from 16.3 per cent to 15.6 per cent.

Other losers were Bihar, whose share fell from 3.3 per cent to 2.9 per cent, Gujarat, whose share fell from 6.8 per cent to 6.4 per cent, Orissa, falling from 2.5 per cent to 2.1 per cent, Assam, with its share decreasing from 2.2 per cent to 1.8 per cent, and UP, with its share down from 11.3 per cent to 10.9 per cent. Punjab's share was down 10 basis points.

It's also not true that liberalisation has been bad for small and remote states. In the north-east, for instance, Sikkim, Tripura, Manipur and Meghalaya have improved their market shares, although Assam and Arunachal Pradesh have lost out. In other areas, Pondicherry, Chandigarh, Goa and Himachal Pradesh have all done well, while Jammu & Kashmir lost some share.

What could be the reason for the surprising results? One of them could be that 2000-01 was not a good year for industry, and the performance of the more industrialised states may, therefore, have been depressed. It was also a year when some parts of the country saw a drought, which affected some states.

And finally, a state such as West Bengal had already lost plenty of market share in earlier years, and some recovery may have taken place, while conversely, a state such as Maharashtra, which did very well doing earlier periods, may be facing some difficulties. But the results do not show any rise in inequality between states after liberalisation.