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BW Businessworld

When States Race

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India's per capita income just crossed $1,000, which catapults us into a league of countries that will drive the growth and consumption engine of the world. On the flip side, a cause for concern is that India's regions are not growing uniformly and disparities are huge. States such as Goa and Delhi boast per capita income greater than $1,500, equivalent to those of countries such as Bolivia and the Philippines, while other states such as Bihar and Uttar Pradesh have per capita income lower than $400 (equivalent to countries such as Guinea and Zimbabwe). As rich regions get richer, this disparity is widening. And improving competitiveness of states is a way of bridging this gap.

But what constitutes competitiveness? Competitiveness is the productivity (value per unit of input) with which a nation or a region utilises its various resources. Productivity sets and defines a nation or region's standard of living (measured through wages, returns on capital, returns on natural resources, etc.). This leads us to the fundamental question: what defines productivity? Productivity depends on the value of products and services as well as the efficiency with which they are produced. It is not what industries a nation or region competes in that matters for prosperity, but how firms compete in those industries. Productivity in a nation or region is a reflection of what both domestic and foreign firms choose to do in that location; the location of ownership is secondary. The productivity of ‘local' industries is of fundamental importance to competitiveness, not just that of traded industries. Nations and regions compete in offering the most productive environment for business.

Competitiveness is in effect a sum total of how the smallest unit performs, that is, a nation's growth is the sum total of how rural areas, cities and states perform. Each location needs to build its agenda and an idea on which it would thrive, to progress towards better prosperity for its people.

The above idea on competitiveness, which is deeply embedded in theory and borrows from Michael Porter's seminal work The Competitive Advantage of Nations, has an impact on the methodology developed. We have classified the states at different stages looking at the per capita income they have achieved. The underlying principle is that each state has to look at growth by understanding its present state of economic development.

Any economy, national or regional, would typically have an evolutionary cycle wherein we have factor-driven economies (low-income states), investment-driven economies (mid-income) and innovation-driven economies (high-income).

Factor-driven economies focus on low-cost basic factor conditions (low-skilled labour, natural resources, geographic location); investment-driven economies would produce standard products and services of high quality using efficient methods but at lower wages than advanced economies; and innovation-driven economies would focus on innovative products and services at the global technology frontier.

WESTERN STAR: Gujarat's high-growth model sets an example for other states to follow (Mayur Bhatt)

FAST MOVER: First among the lowincome states, Rajasthan is gaining on others (BW pic by Tribhuwan Sharma)

This year's study also follows a new methodology where we have split the states into three categories of high-income (per capita income of over $900), middle-income ($500-900) and low-income (below $500) states. And although the methodology has gone through significant changes in terms of weightages, last year's top two, Delhi and Maharashtra, would have ranked No. 2 and No. 3 this year provided the rankings hadn't been split. Last year's No. 3 Goa, however, has emerged as the best high-income state this year. It also has the highest composite score among all states put together. Income, consumption and demographics have played the most critical role in Goa's ascendance.

On the other hand, Gujarat, which fared as the best middle-income state, has leveraged business incentives, the physical and communication infrastructures as well as its financial condition. And Rajasthan, which topped the rankings among low-income states, has emerged winner on the basis of the highest income and consumption capability. It has also scored the highest in communication infrastructure and human capacity.

The study provides some other gems too. For instance, on human capacity, Assam, Nagaland and Manipur top the list of low-income states with high human capacity. And on financial parameters, Bihar is second only to Madhya Pradesh among the low-income states. The biggest disappointment over the years has been Punjab, which ranks very high on innovation and communications, but has lagged behind in income and consumption, supplier sophistication and administrative parameters. Its management of finances, too, has been a cause of worry for several years now. As much as the nation needs to strive to narrow the gap between the best states and the worst, it must also ensure that the best states of the past do not hurtle towards the flock of the worst.

The author is honorary chairman of Institute for Competitiveness

(This story was published in Businessworld Issue Dated 09-05-2011)