States must jointly envision their future

They must take a leadership role and work with each other as well as the Centre

Published: 24th Dec 2016   2:00 am Updated: 23rd Dec 2016   9:49 pm

India is a country of epic proportions and almost the size of a continent. The whole of Europe has lesser number of inhabitants than India but is thrice in land mass area. Within India, there is tremendous diversity in terms of prosperity and size of economies and number of people residing in the economies.

India today is a conglomeration of 29 different States and 7 union territories that have their own set of unique realities. These States are varied in terms of their factor endowments (land, labour and capital) as well as their demand conditions (people buying varied goods and services). The key to growth in an emerging economy like India is how the institutions, government, companies as well as citizens play a proactive role in building a competitive economy.

State Competitiveness is a term used to define the ability of a sub-national region to compete with other regions in a country based on created prosperity. This is in stark contrast to the inherited prosperity, which is dependent on past advantages. A document of the Institute for Competitiveness titled ‘India State Competitiveness Report 2016’ (ICR 2016) studies the number and diversity of resources; the means of production as well as the number and level of consumers that help a State become competitive in India and aggregates into a State Competitiveness Index.

States vary in their relative sizes, growth rates and GDP, as well as their demographics. Perhaps, it is wise to no longer call India the lumbering Indian elephant but rather animals of different size and nature that are moving ahead differently.

The ICR 2016 measures and ranks States in India on various competitiveness dimensions that can be seen as the basis of competitive advantage and long-run economic growth. These are the Demand Conditions, Factor Conditions, Context for Strategy and Supporting and Related Industries. Indian States fare poorly when compared with their counterparts abroad but a comparison in India reveals an interesting story.

States within India are not at the same stage of development. Thus, they are categorised on the basis of a ‘stage of development’, which helps compare States within a category to another within a similar category. There are seven categories of States on the Competitiveness Index. These categories include City States, Innovation Driven States, Transition Economies, Investment Driven Economies, Evolving/Changeover Economies, Factor Driven Economies and Northeastern Economies. In each of these categories, distinct States emerge as best performers.

Delhi is the best performer in the city States category outclassing Goa this year. Similarly, in the innovation-driven economies, Tamil Nadu emerges as the top performer outperforming Maharashtra and Gujarat this year. In the transition economies, Karnataka retains the top slot followed by Andhra Pradesh. In the investment-driven economies, Rajasthan is the top performer.

In the evolving/changeover category, Madhya Pradesh emerges as the best performing State. In the factor-driven economies, Uttar Pradesh emerges as the top State owing to its massive human capital and better demand conditions. The northeastern States is a diverse grouping in economic development terms but Sikkim as a state performs well owing to its better factor conditions, sanitation facilities and other institutional support.

Three distinct insights emerge from the report

First, States that tend to perform well on competitiveness are also locations that are good at attracting FDI. This does not showcase causation but the fact that FDI inflows and State Competitiveness scores seem correlated. Similarly, urbanisation rates are also seen to be correlated to GSDP per capita of States. This is possibly due to agglomeration effects of cities.

Second, the report showcases some important sectors and locations that have been conducive to the development of sectors. There is a distinct correlation between innovation at the State level and competitiveness at a State level. These States also tend to perform well on industrial development. Sectors like automobile, pharmaceutical and IT are globally competitive in India and States, which tend to foster these like Tamil Nadu, Maharashtra, Gujarat and Karnataka (specifically for IT) perform well on competitiveness ranking of states.

Third, considerable progress is being made in healthcare, education, infrastructure and energy but much more needs to be done both from the Centre and the States in India. For example, even if the Centre is going ahead with electrification of villages the States have to ensure that electricity is provided as generation and transmission is with the Union government while distribution is a State responsibility.

Similarly, another major challenge before the policymakers is maintaining credit flow and liquidity (especially amidst demonetisation now) while maintaining or reducing the gross non-performing assets (GNPAs), which have seen a steady increase over the years due to stricter RBI guidelines. This can be done only with the active support of the banking system, much of which is decentralised.

Over the next few years, States in India must take a leadership role and work with each other as well as the Centre and the broader world to ensure that critical legislations like the GST get implemented. Policymakers at all levels and corporates operational in the Indian States must envision their future collectively to truly make States attain their potential and enhance prosperity for all Indians.

(The author is chair, Institute for Competitiveness, India & Editor of Thinkers. The article is co-authored with Sankalp Sharma, senior researcher at the institute. The views expressed are personal)