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LATEST NEWS UPDATES | The growth redux by Arjun Sengupta

The growth redux by Arjun Sengupta

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published Published on Jan 12, 2010   modified Modified on Jan 12, 2010

The New Year began with very good news about the Indian economy. During the last five years, 2004 to 2009, India’s most backward states have shown remarkable growth. Bihar, which grew at 4.5 per cent a year between 2001 and 2005, showed a growth rate of 11.3 per cent between 2005 and 2009. Similarly, Odisha increased its growth performance from 4.94 to 8.74 per cent between these two periods; Jharkhand from 1.88 to 8.45 per cent and Uttar Pradesh from 3.34 to 6.29 per cent. If these figures are even approximately correct, they indicate the beginning of a major transformation of the Indian economy. The high growth performances of India in the last 20 years have been largely concentrated in the relatively richer states, bypassing the laggards which remained poor and underdeveloped. If they now register high growth, it will be a sure sign not only of the sustainability of our economic growth but also of steady reduction of poverty, because most of the poor live in these states.

It is tempting to dismiss these numbers as statistical aberrations, especially because the state’s gross domestic product (GDP) figures are provided by the state statistical organisations, although the Central Statistical Organisation (CSO) checks and monitors them. However, I am not inclined to dismiss them, because our statistical system is very robust and has been built over the years by highly competent experts. There may be glitches here and there but the average of five years may not be subject to any large error. We should rather try to find explanations for these changes and analyse the evidence systematically, with different indicators, private and public investments, plan expenditures, physical performance of infrastructure and further research. In case of Bihar, it is difficult to explain that agriculture grew at 7.9 per cent between 2005 and 2009 compared to 5.9 per cent of the previous five years. Both of these numbers are quite high, especially since we do not have much evidence of increase in agricultural investments or irrigation potential. There is also a substantial increase in services from 5.4 to 10.7 per cent a year during these two periods with trade, hotels and restaurants as well as communications expanding at more than 17 per cent. The Bihar economy must have become much more interconnected although we do not have very reliable figures for rural roads or transport other than railways.

The most astounding growth was in the area of industry which increased from 0.57 per cent in 2001 to 2005 to 22.37 per cent in 2005 to 2009. The major source of such industrial growth was construction which grew at 38.1 per cent during the last five years. These numbers may have been somewhat exaggerated, because product-flows approach of estimating construction is much less reliable for the states than for the country as a whole. Nevertheless, it is clear that construction is the leading sector in Bihar.

Construction activities generate substantial employment, especially of the unorganised workers. As the workers employed in this activity spend their incomes, the multiplier effect on domestic demand pushes the growth even further.

In India, construction has been the major source of growth in states which have been otherwise industrially backward. In Odisha, construction grew at 13.81 per cent in 2005 to 2009 compared to minus 1.7 per cent in 2001 to 2005. In Jharkhand, it was 11.87 per cent compared to 6.54 per cent in the previous five years and even in Uttar Pradesh, which has not performed that well overall, construction grew at 20.75 per cent in 2005 to 2009 compared to 6.8 per cent in 2001 to 2005. So the figures for construction in Bihar may seem to be excessive, but are not implausible and definitely not unwelcome.

The high growth of trade and communication in Bihar may have been linked to high growth of construction, of agriculture and associated activities and improved connectivity through rural roads. Such connectivity has also been a result of expanding communications, especially of IT and telephony. As there has not been commensurate increase in transport income, expanding trade must have been supported by alternative means of movement of goods.

My colleague from the Planning Commission and famous economist S.R. Hashim tells me that in the villages around his native place bordering Uttar Pradesh and Bihar, a new means of transport has emerged displaying the innovativeness of the Indian low-income business class. Many small shops have come up there selling soaps, detergents et cetera that are used by the villagers to wash their clothing at home instead of giving them to dhobis. As a result these dhobis have lost their business and the donkeys they used to move their clothes from village to village are now used to move tradable products from one village to another, in areas where there is no proper road connectivity. The donkeys can go to the interiors to facilitate trading activities and when the volume of business increases they are replaced by mules — with additional capacity for expanding trade, incomes of producers rise and demand for other products increase to spread the growth in larger areas.

It seems there have been other collateral developments in many Bihar villages. Even though the National Rural Employment Guarantee Scheme has not been very successful there, trade and other industrial activities, including agricultural growth, have pushed up wages. As incomes increased, people spent more on education and sent their children to private schools. According to Dr Hashim, there is an impressive increase in girls going to schools, moving from one village to another. The public health system has not improved very much but village shops increasingly trade in common and well-known drugs for diarrhoea, fever etc. These anecdotal evidences only confirm spreading development in Bihar even if we lack substantial hard evidence.

All economists should feel quite excited at these new developments. If there is enough expansion in public expenditure to create rural infrastructure — roads, markets, schools and health centres together with expanding irrigation and private investment in agriculture — this growth experience of Bihar can be replicated in other backward states.

Dr Arjun Sengupta is a Member of Parliament and former Economic Adviser to Prime Minister Indira Gandhi

The Asian Age, 12 January, 2010, http://www.asianage.com/presentation/leftnavigation/opinion/opinion/the-growth-redux.aspx
 

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