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November 20, 2017

EcoView: State of states

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Quo vadis, states?


Macro-economic developments at the national level and central government actions usually take the centre stage.But these days, a lot of action is taking place at the state level as they are getting exposed to competition and now havethe responsibility for some key reforms such as land and labour.


This month’s theme focuses on three key macroeconomic parameters to gauge state-level developments -- growth,inflation and fiscal situation-to highlight the gaps in state level performance.


Speed and quality of growth


The average GDP growth rate for states ranges from 3% in Goa to 10% per year in Gujarat during fiscal 2013 to fiscal2016. Among the 12 states whose data was available for fiscal 2017, seven have grown faster than the national average,with Madhya Pradesh, Andhra Pradesh and Bihar leading the pack.


Poorer states have to grow faster to catch up. The data does not provide any evidence of growth convergence as percapita income growth in poorer states has trailed that in rich states. Among the poorer states, Bihar and Rajasthan lostthe tag of fast-growing between fiscals 2013 and 2016.


The sectoral pattern of growth in states has implications for job creation.


After agriculture, construction and manufacturing are two key labour intensive sectors. Gujarat is the top performer inconstruction and manufacturing growth and among poorer states Bihar and Chhattisgarh have witnessed fastermanufacturing growth. These states, therefore, are likely to have been more successful than others in job creation.


The share of manufacturing in GDP has gone up in Chhattisgarh, Gujarat, Goa and Bihar. Its share in Gujrat’s GDP (at34.4% in fiscal 2016) is approaching that of China. Maharashtra, another highly industrialised state, is lagging here.




The pace of increase in prices varies across states. The good news is that it has fallen across states between fiscals2013 and 2017. In this period, average inflation in Gujarat, Madhya Pradesh and Haryana has been below the nationalaverage of 6.8%. Interestingly, these are states where the average GDP growth was also the highest. So, no growthinflation trade-off here.


Of debt and deficits


The recent worsening in fiscal situation of the states has been a key worry. Here, too, the picture is quite disparateacross states. Chhattisgarh, Telangana, Karnataka, Maharashtra, Odisha and Gujarat stand out with low indebtednessand low deficit indicators.


Tamil Nadu, Andhra Pradesh and Madhya Pradesh also have low indebtedness but their fiscal prudence is threatenedby rising deficits.


Rest of the states have high debt levels and worsening deficit levels. Part of the worsening states fiscal health is due toissuance of UDAY bonds and farm loan waiver by some states.


If the implementation of the Goods & Services Tax leads to a notable pick up in tax revenues, this will offset some of thetransitory stress on state finances. Otherwise, states will resort to cutting their investment spend in their zeal to meetfiscal targets.


Our analysis covers the pre-demonetisation period. Once data becomes available for fiscals 2017 and 2018, it would beinteresting to study the effects of demonetisation and GST on growth at the state level.