How fast are India's states growing, and why?

Three years ago I did the following calculations based on per capita state domestic products:

State	1993-94	2003-04	Growth (percent)	Growth rank
Andhra Pradesh	7416	11756	58.52	5
Bihar	3037	3557	17.12	18
Jharkhand	5897	7732	31.12	13
Goa	16558	30506	84.24	1
Gujarat	9796	16780	71.29	3
Haryana	11079	15752	42.18	9
Karnataka	7838	13141	67.66	4
Kerala	7983	12328	54.43	7
Madhya Pradesh	6584	8284	25.82	16
Chhattisgarh	6539	8383	28.20	14
Maharashtra	12183	16479	35.26	11
Orissa	4896	6487	32.50	12
Punjab	12710	16119	26.82	15
Rajasthan	6182	9685	56.66	6
Tamil Nadu	8955	12976	44.90	8
Uttar Pradesh	5066	5975	17.94	17
Uttaranchal	6896	9471	37.34	10
West Bengal	6756	11612	71.88	2

You can see that over the decade used in the table, the three slowest growing states were poor ones: Madhya Pradesh, Uttar Pradesh, and Bihar. Punjab, a rich state, grew quite slowly too.

There is newer data now, and here is a calculation for a later seven year period. It leaves out Uttarakhand (Uttaranchal) and Goa, since they are quite small.Note that the data for per capita SDP are not comparable across the tables because they use different base years for the constant price index in which they are measured.

	99-00 SDP PC	06-07 SDP PC	Growth	Rank
Andhra Pradesh	15507	22835	58.56	6
Bihar	5786	8167	62.43	3
Chhattisgarh	11629	15660	51.74	8
Gujarat	18864	27027	62.02	4
Haryana	23229	37314	85.75	1
Jharkhand	11549	14252	39.40	13
Karnataka	17502	22952	43.62	11
Kerala	19461	30044	63.67	2
Madhya Pradesh	12384	12881	18.95	16
Maharashtra	23011	30982	50.83	9
Orissa	10567	15528	59.02	5
Punjab	25631	30041	32.58	15
Rajasthan	13619	16460	39.69	12
Tamil Nadu	19432	28320	54.81	7
Uttar Pradesh	9749	11334	33.95	14
West Bengal	15888	21753	48.90	10

Haryana and Kerala do a lot better in this later snapshot. Karnataka does relatively worse. Bihar also does a lot better. Uttar Pradesh, Madhya Pradesh and, yes, Punjab are still growing relatively slowly over these seven years (the periods do overlap).

All kinds of things can affect growth rates, but my guess is that governance matters a lot.

Views from the Left

On NPR today I happened to hear both Arundhati Roy and Joseph Stiglitz (in separate interviews). I've had the impression of Roy as somewhat overwrought in her criticism of globalization and capitalism, and some of her language today was reminiscent of that image. But she also spoke eloquently about human rights, and the need to protect the poor in India. It was clear that she really looks at what is going on and feels for those who are downtrodden. As a human rights activist, she makes a lot of sense, probably not so much as a commentator on economics.

Not that economists always agree. Joe Stiglitz politely criticized US government policy for putting lots of money into the banking system, but not doing enough to boost aggregate demand. I seem to remember a dig at Fed chairman Bernanke. Stiglitz argued that growth was not going to be strong enough to create a significant number of jobs. It makes sense to want to get things moving fast enough so that jobs are created and there is some momentum generated in the economy. I wonder if the federal government has room to spend more, given its large deficit. The high debt overhang means a slow recovery as adjustments are made on that front, and boosting aggregate demand may not do much either. I have a sense that there is also still an excess supply in real estate, at current prices. Seems that the US is in for a painful adjustment period.

Democracy and Capitalism

This post is prompted by the possibility that two former CEOs may be in the running for two of California's most important political posts. Meg Whitman, former CEO of eBay, is planning to run for governor. There will be no incumbent, since Arnold Schwarzenneger cannot run again. Carly Fiorina, former CEO of H-P, is thinking of challenging Barbara Boxer for her US Senate seat.

I began pondering these two candidacies partly because Whitman has apparently not voted for 28 years. Fiorina campaigned on behalf of John McCain and Sarah Palin in last year's presidential race, during which she said or implied that neither candidate would be capable of running a large corporation. Fiorina herself was fired by H-P's board!

I guess there are many examples of business people running for and holding elected office, especially in the US. Michael Bloomberg, mayor of New York, doesn't seem to be doing a bad job. In Europe, it seems to be less common, but there is the prominent example of Silvio Berlusconi in Italy.

I wonder if capitalism and democracy should overlap in this manner. I feel comfortable with someone like Barack Obama, who rose up through the ranks of politics (albeit with stunning speed). One of the things that impressed me in his autobiography was his very insightful descriptions of community organizing. It seemed to me to be good training, even for a national leader. Parliamentary systems in Europe are also conducive to rising through party ranks. many US senators were congressmen and women first, or held state level offices.

In contrast, when Arnold Schwarzenegger (an actor, but in a way also an entrepreneur) ran for governor of California, he had no political experience at all. He did not have a good grasp of policy issues when he took office, didn't have any networks of relationships to get things done, and didn't seem to be able to work with the legislature, even his own party. CEOs may have more relevant experience than actors, but imperial CEOs (quite common in the US) may also lack skills for political compromise. Business experience provides a sense of how to manage resources, but not necessarily of the kinds of problems faced by citizens, or of social goals.

It may be that Silicon Valley is different, and produces business leaders who can also provide broader social leadership, but I remain to be convinced.

Where does Ronald Reagan fit into these musings? I think he's overrated as a politician. He certainly had vision and charisma, but he also followed policies that have had negative long run consequences.

Maybe there is no simple or straightforward answer to the question of whether successful business people make good political leaders. Maybe it all depends on the person and the situation. I wonder if there is any empirical work on this aspect of democracy and capitalism?

Doing business in Punjab

Came across a story titled Punjab plans to revitalise biz, investment spirit
It talks about various things the state government and others are doing to promote the entrepreneurial spirit and create an ecosystem favorable to business and investment. I really hope that happens, though I am a bit skeptical of the government's capacity to deliver.

Anyway, what I want to focus on is the World Bank's ranking of Indian cities, mentioned in the article. According to that ranking, Ludhiana is the best of 17 Indian cities for ease of doing business.

Here is the ranking:

Ludhiana	1
Hyderabad	2
Bhubaneshwar	3
Gurgaon	4
Ahmedabad	5
New Delhi	6
Jaipur	7
Guwahati	8
Ranchi	9
Mumbai	10
Indore	11
Noida	12
Bengaluru	13
Patna	14
Chennai	15
Kochi	16
Kolkata	17

Some of the positions are plausible, others less so. Without going into the ranking methodology too much, I checked where Ludhiana stands on various subcategories:
Ease of starting a business 7
Ease of dealing with construction permits 7
Ease of registering property 11
Ease of paying taxes 1
Ease of trading across borders 12
Ease of enforcing contracts 4
Ease of closing a business 2

Looking at these ranks, I am not sure that Ludhiana necessarily deserves to be ranked 1st (which means that the overall index has some problems).

Regulating riskiness

Here is a quote from a Reuter's story:

"Plans to improve banking regulation focus too much on bonus curbs and capital buffers, ignoring the need to divorce risky investment banking from the 'very safe and boring' business of commercial banking, an OECD official said.

"The OECD's Adrian Blundell-Wignall told Reuters that riskier banking businesses should pay the higher cost of capital for their activities, and not make inflated profits subsidised by cheaper funding from more conventional operations."

This is basically back to Glass-Steagall, it seems. But the world has changed. I don't see how you can really separate the two, unless you really place restrictions on a whole host of actions by commercial banks. In this last crisis, many of the problems were associated with securitization which moves assets off the books. Would this official ban securitization too? Essentially, modern financial instruments make the distinction between commercial and investment banking fuzzy, if not obsolete. So I think he's getting things very wrong.

He's right that focusing on capital buffers and compensation caps isn't enough to fix the problem. He's also right that the problem is contagion risk (of course it is!). But trying to control corporate structure -- which he claims is the issue here -- is not what it's about, except to the extent that corporate structure includes leverage. But leverage is where capital buffers come in. This guy is talking about restricting a firm's product line. but why do that? Why should a firm be forced to offer only certain types of financial products?

The real issue, to my mind, is making the markets for financial products more competitive and that means transparency and disclosure, as well as rules for a level playing field -- all of those have been missing from many derivative markets. My prescription is getting market institutions right, rather than putting controls that may increase inefficiency and anyway be circumvented.

G-20 and rebalancing

The latest summit has an incredibly ambitious agenda. Reallocating voting rights in the IMF is small potatoes compared to the US "Framework for Sustainable and Balanced Growth." This involves the US saving more and cutting its budget deficit, Europe doing more to boost business investment, and China relying less on exports and more on domestic demand for growth.

I really don't understand the logic of this sort of coordination. Did the global imbalances contribute to the financial crisis and the resulting deep recession? Only in a second order manner, and not as an inevitable consequence. My colleague Mike Dooley argued that it was a natural process. China is using export led growth because consumers in the US and Europe are richer -- what better way to grow faster than making things that relatively rich people want (even if they are middle class by home standards)? The Japanese did it too. The US went after them too, back in the 1980s. Now they are not villains any more (even though they are running up current account surpluses still). Mike Dooley explained the process as one of the Chinese lending the US money to buy their goods -- a standard technique for boosting sales. Car companies in the US also made a lot of money for a while through financing their cars. Mike also reckoned that the US was the natural place for money to flow into, and through, because of the sophistication and safety of its system of financial intermediation.

That's where it went wrong -- the US financial system was not all it was hyped up to be. Poor regulatory enforcement and poor institutions undermined the good parts of the system. Essentially, foreigners were supposed to be parking money in the US for safety, but Wall Street found a way to effectively steal some of that money. It may also be that, like democracy, Wall Street is terrible, but still much better than the alternatives. In any case, none of this has much to do with global coordination.

Global coordination of some aspects of financial regulation makes sense, to prevent a race to the bottom, but different growth rates, levels of development, and domestic political compulsions are always going to lead to some imbalances. Households and firms sometimes go heavily into debt, at other times they save -- intertemporal exchange is a fact of life in market economies. The point is to make sure that equilibrating mechanisms such as exchange rates and interest rates do their job.

I don't think trigger mechanisms and punishments are a workable mechanism for a grand global coordination of macroeconomic policies. It's hard enough to keep the world trading system in order. Interestingly, the US seems to be one of the keenest for extending trade system rules and penalties to labor standards, environmental standards and the like.

The ostensible worry is about growth, and certainly crises cost a big chunk of output. But I think some careful, limited rethinking and redesign of financial regulations (and modernization of archaic, anti-competitive Wall Street institutions) should be enough. If the US really wants growth, it should be pushing technology transfer and innovation into the developing world as rapidly as possible. With that will come institutional innovations in developing countries. Domestic demand will take care of itself. Innovation is the lever of riches, and that's where the US could do so much more. The US should be sending dozens of Norman Borlaugs out into the developing world to deal with deficits in energy production, sanitation, health, education and a host of other constraints on growth.

The developing countries in the G-20 should rebalance the global agenda away from the US's short-term preoccupations, and towards what matters for global growth and well-being.

Inflation and the Right Policy Response for India

Sep 7, RBI governor D. Subbarao:
“We believe that inflation is becoming a concern sooner than we’d expected earlier and we have to balance the need for growth and price stability,” Subbarao said in an interview. “Inflation is a more urgent concern than in the other parts of the world. We know that there is risk to premature withdrawal or exit from the expansionary policy and there is a risk to delaying it too much... Our current monetary and fiscal stance is not the steady state. We have to unwind.”

Sep 15, RBI governor D. Subbarao:
“The question of exit will be asked much sooner than (in) other countries. We have to take a call on supporting the recovery and stemming inflationary pressure,”
“We will not exit until we are sure that recovery is secure,”

Sep 19, Finance Minister Pranab Mukherjee:
"To prevent the adverse impact of the rising prices of essential commodities, we are encouraging imports where there is short supply,"
"These measures we are taking, but at this point of time, I cannot accept the dear money policy or credit curbing because that will have an adverse impact on overall growth."

I think that the FM is on the right track. One shouldn't conflate two different phenomena -- a rise in the aggregate price level and a rise in the price of some category (no matter how important). Food and fuel prices are volatile, which is why other central banks use a core inflation measure. But food price inflation in India really hurts the poor, so it is a political hot potato. Increasing food availability is the right short term response.

There is also scope for reforming the agricultural sector to allow freer flows of food items within the country, better management of government stocks, and development of better measures of inflation for guiding monetary policy. The growth concern also matters for climbing out of the fiscal policy hole -- growth is how India did it earlier this decade.

Health Care Reform -- India and the United States

Just starting a new project on public private partnerships in health in India. This is a huge topic, so trying to figure out what to focus on is important and difficult. Reminds me of the travails of health care reform in the US. Thinking about the National Rural Health Mission in India, I wonder if it doesn't share some of the problems of the current US reform effort -- trying to do too many things at once. In the Indian case, it seems that targeting maternal and early child health has the virtue of focus, simplicity and high social payoffs. Focusing on specific health issues and population segments like this may be the way to go forward. One other thing that strikes me about health care is its complexity. It covers so many different types of services, that lumping everything together makes it hard to say precisely what changes are needed. Providing good antenatal and postnatal care for mothers and babies is very different from treating chronic and lifestyle conditions such as diabetes and cardiovascular disease.

One difference between India and the US is the prevalence of health insurance in the latter. Both countries probably need to expand coverage, and make the system more cost effective, but the starting point is very different. In this context, it was interesting to hear Warren Buffet say that a lot of the debate in the US was really about reforming health insurance, rather than health care. Of course the two are connected, since the insurance system affects care choices. But more conceptual clarity in addressing separately the care process and the payment system might help.

Outlays to Outcomes in India

The issue of effectiveness of government spending in India has been discussed for a while. I just saw a great evaluation study, by Kaveri Gill, of the National Rural Health Mission. It promises even more analysis with additional micro-data. This is a wonderful step forward. This and other Planning Commission studies can be accessed here.

India's Finance Ministry proposes new regulatory framework

The proposed Financial Stability and Development Authority, chaired by the Finance Minister, would supposedly allow greater regulatory coordination across existing regulators such as the RBI and SEBI. But would it reduce their independence? Already, the RBI is not as independent of the Ministry as academic orthodoxy would suggest is optimal.

YV Reddy comments on the RBI's role and the global financial reform agenda

This is a lengthy interview, also in The Mint -- good to read alongside Rakesh Mohan's comments

Rakesh Mohan on the RBI and the global crisis

Rakesh Mohan defends the RBI's policy moves and the response to the global crisis in particular in an interview with The Mint

India's New Chief Economic Adviser

Kaushik Basu has been chosen as Chief Economic Adviser in the Finance Ministry. A very exciting appointment that bodes well for India. Here is a story on the appointment.

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