Policy for Regional Policy for Regional

DevelopmentDevelopment

V. J. RavishankarV. J. Ravishankar

Indian Institute of Public AdministrationIndian Institute of Public Administration

1414thth November, 2005November, 2005

Why is regional equity an issue?Why is regional equity an issue?

““Large regional disparities represent Large regional disparities represent

serious threats as the inability of the state serious threats as the inability of the state

to deal with such inequities creates to deal with such inequities creates

potential for disunity and, in extreme potential for disunity and, in extreme

cases, for disintegrationcases, for disintegration””

–– Raja Shankar and Anwar ShahRaja Shankar and Anwar Shah (2003)(2003)

Table 1: Regional Disparities in Table 1: Regional Disparities in

Selected Countries, 1997Selected Countries, 1997

0.2500.2500.6920.69211.62511.625ChinaChina

0.2800.2800.6250.62521.30721.307RussiaRussia

0.2670.2670.5630.5637.5677.567BrazilBrazil

0.3010.3010.4730.4735.7935.793MexicoMexico

0.2270.2270.3870.3873.8113.811IndiaIndia

0.0670.0670.2010.2011.8381.838CanadaCanada

0.0390.0390.1620.1621.9271.927United StatesUnited States

Wt. Gini Wt. Gini

IndexIndexSimple Simple

C.VC.VMax / Max /

MinMin

Trends in Disparities Trends in Disparities ---- HighlightsHighlights

US has seen declining regional inequality during 1990US has seen declining regional inequality during 1990--9494

CanadaCanada’’s inequality more or less constant during 1994s inequality more or less constant during 1994--9898

India saw rise in inequality during 1980India saw rise in inequality during 1980--96, with dramatic 96, with dramatic

increase in 1992 post liberalizationincrease in 1992 post liberalization

Russia saw dramatic rise in inequality during 1994Russia saw dramatic rise in inequality during 1994--9797

Brazil saw rising inequality in 1980s, slight fall in early 1990Brazil saw rising inequality in 1980s, slight fall in early 1990s s

and a slight rise during 1995and a slight rise during 1995--9797

MexicoMexico’’s regional inequality has remained at around 5 times s regional inequality has remained at around 5 times

that of the United Statesthat of the United States

Divergence among Indian StatesDivergence among Indian States

Researchers have found a persistent divergence Researchers have found a persistent divergence

in perin per--capita income growth rates among two capita income growth rates among two

subsets or clubs of Indian states over the 1965subsets or clubs of Indian states over the 1965--

1997 period 1997 period ---- one at roughly 50% and the other one at roughly 50% and the other

at 125% of the national averageat 125% of the national average

Can India achieve its development goals if the Can India achieve its development goals if the

lagging states are left behindlagging states are left behind??

Divergence and Conditional Divergence and Conditional

ConvergenceConvergence

NirvikarNirvikar Singh and T. N. Singh and T. N. SrinivasanSrinivasan (2002) conclude: (2002) conclude: ““The evidence weakly supports the idea of absolute The evidence weakly supports the idea of absolute divergence divergence …… with the rate increasing in the 1990s. with the rate increasing in the 1990s. The evidence on conditional convergence is less The evidence on conditional convergence is less decisive decisive …… they may be converging to very different they may be converging to very different steady states. The differences in infrastructure and steady states. The differences in infrastructure and institutions that seem to explain interstate differences institutions that seem to explain interstate differences have been persistent have been persistent …… and neither Finance and neither Finance Commission transfers, Planning Commission Commission transfers, Planning Commission transfers, nor centrally sponsored schemes have made transfers, nor centrally sponsored schemes have made a substantial dent in regional inequalities in India.a substantial dent in regional inequalities in India.””

Types of Regional Dev PoliciesTypes of Regional Dev Policies

Central intervention for regional balanceCentral intervention for regional balance

Common market (economic union)Common market (economic union)

Fiscal equalizationFiscal equalization

““Regional development policies have failed in Regional development policies have failed in almost all countries almost all countries …… to reduce regional to reduce regional inequalitiesinequalities”” –– Raja Shankar & Anwar Shah (2003)Raja Shankar & Anwar Shah (2003)

What is to be equalized?What is to be equalized?

Outcomes? They will never be equalOutcomes? They will never be equal

Opportunity? Yes, a level playing fieldOpportunity? Yes, a level playing field

Capacity? This is the aim of fiscal equalization Capacity? This is the aim of fiscal equalization

(Finance Commission in India)(Finance Commission in India)

Paradigm Shift in IndiaParadigm Shift in India

Old paradigm relied heavily on direct central Old paradigm relied heavily on direct central intervention in the name of equal outcomes, intervention in the name of equal outcomes, curbing opportunities in the processcurbing opportunities in the process

New paradigm is to foster a common market by New paradigm is to foster a common market by reducing barriers to interreducing barriers to inter--state trade and state trade and investment flows, along with more effective investment flows, along with more effective fiscal capacity equalizationfiscal capacity equalization

Growth Strategy Growth Strategy & Regional Equity& Regional Equity

““Most developing countries adopted Most developing countries adopted

Comparative Advantage Defying (CAD) Comparative Advantage Defying (CAD)

strategies, which caused distortions and did not strategies, which caused distortions and did not

bring about convergence bring about convergence …… replacing the old replacing the old

CAD strategy with a new Comparative CAD strategy with a new Comparative

Advantage Following (CAF) strategy is Advantage Following (CAF) strategy is

essentialessential””–– Justin Lin & Mingxing Liu (2004)Justin Lin & Mingxing Liu (2004)

New Environment for Indian StatesNew Environment for Indian States

Two phases of significant changeTwo phases of significant change::

over the 1970s and 1980s over the 1970s and 1980s –– growth of growth of

regional political partiesregional political parties

since 1991 since 1991 –– liberalization of external trade liberalization of external trade

and investment policy by the Government of and investment policy by the Government of

IndiaIndia

States now have a larger role in States now have a larger role in determining their development pathsdetermining their development paths

Poorer states attracted less Poorer states attracted less Investment in the 1990sInvestment in the 1990s

Poor and less developed states lagging behind: Poor and less developed states lagging behind: Bihar, Bihar, JharkhandJharkhand, Madhya Pradesh, , Madhya Pradesh, ChhatisgarhChhatisgarh, ,

Orissa, Rajasthan, Uttar Pradesh (UP)Orissa, Rajasthan, Uttar Pradesh (UP)–– account for 50% of Indiaaccount for 50% of India’’s poor; 23% of investment in 2003; 13% of s poor; 23% of investment in 2003; 13% of

FDI during the 1990s; 25% of AllFDI during the 1990s; 25% of All--India GDP & per capita income; India GDP & per capita income; 54% of the average per capita income of other major states.54% of the average per capita income of other major states.

More developed states racing ahead: More developed states racing ahead: Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Andhra Pradesh, Gujarat, Karnataka, Maharashtra,

Punjab, Tamil Nadu Punjab, Tamil Nadu –– attracted over 66% of the total investment in 2003; 72% of FDI attracted over 66% of the total investment in 2003; 72% of FDI

during the 1990sduring the 1990s

State fiscal management and State fiscal management and

governance do make a differencegovernance do make a difference

Through a 3Through a 3--sector growth model of the Uttar sector growth model of the Uttar

Pradesh economy, Buffie (1998) concluded that Pradesh economy, Buffie (1998) concluded that

statestate--financed infrastructure in power, roads financed infrastructure in power, roads

and irrigation can have a very important and irrigation can have a very important

lockinglocking--in or in or ““crowdingcrowding--inin”” effect on private effect on private

investment in agriculture, industry and servicesinvestment in agriculture, industry and services

State Ranking by State Ranking by

InfrastructureInfrastructure

HighHigh: : GoaGoa, Maharashtra, Punjab, Maharashtra, Punjab

High middle: High middle: GujaratGujarat, , HaryanaHaryana, , KeralaKerala, Tamil , Tamil NaduNadu

Middle:Middle: Andhra Pradesh, KarnatakaAndhra Pradesh, Karnataka

Lower middle: Lower middle: HimachalHimachal Pradesh, Madhya Pradesh, Pradesh, Madhya Pradesh, OrissaOrissa,, Uttar Pradesh, Uttar Pradesh, UttaranchalUttaranchal, West Bengal, West Bengal

Low:Low: ArunachalArunachal Pradesh, Manipur, Pradesh, Manipur, MeghalayaMeghalaya, , JharkhandJharkhand, , MizoramMizoram, , NagalandNagaland, Assam, , Assam, ChhattisgarhChhattisgarh, , SikkimSikkim, , TripuraTripura, J&K, Bihar, Rajasthan, J&K, Bihar, RajasthanSource: Report of the Twelfth Finance Commission, 2005Source: Report of the Twelfth Finance Commission, 2005..

Differences in Business ClimateDifferences in Business Climate

Time to start a business is longer in poorer states Time to start a business is longer in poorer states –– 79 days 79 days

in Orissa compared to 57 in Karnataka and Punjabin Orissa compared to 57 in Karnataka and Punjab

Time and cost to register a property are much higher in Time and cost to register a property are much higher in

IndiaIndia’’s poorer states s poorer states

It takes longer to enforce a contract It takes longer to enforce a contract –– 1165 days in Uttar 1165 days in Uttar

Pradesh versus 425 in MaharashtraPradesh versus 425 in Maharashtra

It takes 15 years to close a business in Uttar Pradesh; it It takes 15 years to close a business in Uttar Pradesh; it

takes 8 years in Karnatakatakes 8 years in Karnataka

( ( Doing Business Doing Business –– India Regional Profile, World Bank, 2004India Regional Profile, World Bank, 2004 ))

Laggards need to leap forwardLaggards need to leap forward

““While all Indian states need to focus While all Indian states need to focus on improving their investment on improving their investment climate, efforts in the lagging states climate, efforts in the lagging states will need to be twice as intensive as will need to be twice as intensive as the better statesthe better states””-- Development Policy Review, The World Bank Development Policy Review, The World Bank

(forthcoming)(forthcoming)

Infant Mortality Rates, 1980Infant Mortality Rates, 1980--2000200019801980 19901990 20002000 2015 (target)2015 (target)

KeralaKerala 3737 1717 1414 66

West Bengal West Bengal 9191 6363 5151 2121

Karnataka Karnataka 6969 7070 5757 2323

Bihar Bihar 118118 7575 6262 2525

Rajasthan Rajasthan 108108 8585 7979 2828

Uttar Pradesh Uttar Pradesh 150150 9999 8383 3333

Madhya Pradesh Madhya Pradesh 142142 111111 8888 3737

Orissa Orissa 135135 122122 9696 4141

All IndiaAll India 110110 8080 6868 2727

Sources: Sources: 1980 and 1990 Sample Registration System;1980 and 1990 Sample Registration System;

2000 National Family Health Survey2000 National Family Health Survey

Developmental Role of State Developmental Role of State

GovernmentsGovernments

Accountable Government Accountable Government

& Empowered Citizens& Empowered CitizensMechanisms for civil Mechanisms for civil

society interface & society interface &

oversightoversight

Private Capital Investment Private Capital Investment

& Employment Growth& Employment GrowthInvestment Policy & Investment Policy &

Regulatory RegimeRegulatory Regime

Public Investment in Public Investment in

Quality Infrastructure & Quality Infrastructure &

Human CapitalHuman Capital

Fiscal Policy, Public Sector Fiscal Policy, Public Sector

Mgt & Service DeliveryMgt & Service Delivery

OutcomeOutcomeInstrumentInstrument

Role of Central PolicyRole of Central Policy

Fiscal Capacity Equalization Fiscal Capacity Equalization (Twelfth Finance Commission)(Twelfth Finance Commission)

Fostering a common Indian marketFostering a common Indian market

Addressing particular disadvantages Addressing particular disadvantages (Finance Commission, Planning Commission, (Finance Commission, Planning Commission,

Line Ministries, External Donors)Line Ministries, External Donors)

Partial Fiscal EqualizationPartial Fiscal Equalization

Per capita revenues (normalized to Punjab=1), 2000/01

00.10.20.30.40.50.60.70.80.9

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Own revenues Transfers

Further Steps to Level the FieldFurther Steps to Level the Field

Phase out Central Sales TaxPhase out Central Sales Tax

Rationalize and restructure public food Rationalize and restructure public food

procurement procurement

Improve rural credit accessImprove rural credit access

To sum up To sum up ……lesson for lesson for

Government of IndiaGovernment of India

““Countries experiencing convergence have had a Countries experiencing convergence have had a handshands--off approach to regional development off approach to regional development policies and instead focused on policies to policies and instead focused on policies to promote a common economic union promote a common economic union …… and and ensuring minimum standards of basic services ensuring minimum standards of basic services across the countryacross the country””

---- Shankar & Shah (2003)Shankar & Shah (2003)

To sum up To sum up ……lessons for lessons for

State GovernmentsState Governments

Need to evolve a state specific development strategy Need to evolve a state specific development strategy

based on onebased on one’’s comparative advantages and specific s comparative advantages and specific

binding constraints binding constraints –– notnot the old planning paradigm the old planning paradigm

of spreading resources too thinly of spreading resources too thinly

All states need to strengthenAll states need to strengthen

–– Fiscal policy, public administration and service deliveryFiscal policy, public administration and service delivery

–– Investment policy & regulatory regimeInvestment policy & regulatory regime

–– Role of civil societyRole of civil society

Laggards need a great leap forwardLaggards need a great leap forward