States are increasingly driving India, politically and economically. To take the most obvious example from politics, Narendra Modi cut his teeth as chief minister for 12 years before taking over as the prime minister. As for economics, states account for over 65% of the government spending now.

On Monday, Crisil released an analysis of the economic development of India’s states over the past decade. While the financial research firm considered only 17 non-special category states, they include those that are the most populous.

A ranking of states

Crisil analysed three economic criteria – growth, inflation and fiscal deficit – to create a ranking of India’s states. Gujarat, Karnataka and West Bengal took the top three spots for 2017-’18, Jharkhand, Uttar Pradesh, Punjab and Kerala ranked the worst.

For the five years from 2012-’13 to 2016-’17, the best performing states were Gujarat, Madhya Pradesh and Karnataka, the worst performing were the same as in 2017-’18.

Of the 17 states analysed, 12 had economic growth higher than the national average in 2017-’18. Bihar, Andhra Pradesh and Gujarat led while Chhattisgarh, Uttar Pradesh, Punjab, Kerala and Jharkhand registered lower growth than the average for India.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

However, when average growth over the previous five years, 2012-’13 to 2016-’17, is taken into account, only eight states beat the national average with Gujarat, Madhya Pradesh and Karnataka leading.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

While most of the states analysed held the same rankings in 2017-’18 as they did for the previous five-year period, Bihar and West Bengal show improvement, moving up the list.

What drove economic growth? In Gujarat and Karnataka, manufacturing did. In Madhya Pradesh, agriculture.

Growing gap between rich and poor states

One side effect of states driving growth is that India’s regions are diverging in prosperity. From 2002-’03 to 2017-’18, states with higher per capita income than the national average moved further up while states with below-average income were pushed further down. In these 16 years, not a single state managed to cross over from being a below-average income state to above-average, or vice versa.

If anything, the divergence has only accelerated over the past five years.

From 2007-’08 to 2012-’13, only four low-income states recorded higher per capita income growth than the Indian average (see top left quadrant of the chart below).

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

In the period from 2012-’13 to 2017-’18, however, only Madhya Pradesh and Odisha among low-income states recorded above-average growth.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

As a result, the gap between poor and rich states has widened into a gulf. Uttar Pradesh’s per capita income fell below the national average by seven times over the period from 2002-’03 to 2017-’18. Tamil Nadu’s, in contrast, increased by around 18 times.

Spectre of jobless growth

Another troubling finding is that while state economies are growing robustly, they are not necessarily creating more jobs, a sign that the benefits of economic growth are going to a small section of the population.

Crisil calculated the gross value added, or GVA, of employment-intensive industries such as construction and manufacturing as well as trade, hospitality, transport and communication services. Only five states – Gujarat, Bihar, Haryana, West Bengal, Uttar Pradesh – clocked growth in these sectors that was higher than the national average. Andhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra recorded high growth relative to the national average but lagged in employment-intensive sectors. This pattern of growth is at least partly responsible for India’s jobs crisis.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

Government spending driving growth

States with high economic growth rates also had high fiscal deficits, which is the gap between revenue and expenditure. “This suggests higher fiscal spends may have driven the growth of these states,” Crisil’s analyses concluded.

In India, however, fiscal deficits are controlled by a central law called the Fiscal Responsibility and Budget Management Act, 2003 which limits them to 3% of the gross state domestic product. That said, in 2017-’18 states such as Gujarat, Karnataka and Bengal have been able to achieve high economic growth rates in spite of keeping their fiscal deficits in check.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

States are now India’s economic engines

As India’s states get stronger compared to the central government, this power shift is getting reflected fiscally. In 2015, the 14th Finance Commission increased transfers to states from 32% to 42% of the divisible pool of taxes collected by the Centre.

As they receive more money, states rather than the Centre are spending on core development, a significant shift from only a decade ago. States’ share of the capital expenditure – on building infrastructure – in the economy has gone up from a third to nearly half between 2009-’10 and 2016-’17.

Note: This does not factor in defence spending by the central government.
Note: This does not factor in defence spending by the central government.

Crisil, however, found that states were often not using this new-found heft to ensure human development.

States such as Haryana, Uttar Pradesh and Bihar had a low focus on health spending relative to their total spending in spite of having poor health indicators. Only Kerala, Gujarat, Maharashtra and West Bengal achieved both good health parameters and a high focus on health spending.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil

It is a similar situation in education. Telangana, Andhra Pradesh, Odisha and Haryana had a low focus on education spending relative to the total spending despite having poor education indicators.

Only Kerala, Chhattisgarh, Maharashtra and West Bengal achieved both a high gross enrolment ratio and a high focus on education spending.

Source: States of Growth 2.0, Crisil
Source: States of Growth 2.0, Crisil