Decoding state growth: Focus on boosting existing economic centres

Strengthening existing economic centres, rather than building greenfield cities, is key to faster state-level growth

Prime Minister Narendra Modi has given a clarion call for India to achieve developed country status by 2047. While there is near-unanimity that India’s state governments will drive the future reform agenda, the jury is still out on what it takes to accelerate growth. Should states strengthen human or physical capital, or the quality of governance? Should they focus on existing cities or greenfield developments? And should all states pursue the same strategy?

 

An analysis of the gross domestic product (GDP) growth performance of 20 major Indian states over the past 30 years reveals two fundamental axes for accelerated state growth: Strong growth attributes and specialised key economic centres (KECs), or large cities. Nine growth attributes include physical capital, such as road density; social capital, such as gross enrolment in tertiary education; and quality of governance, such as labour market flexibility.

 

KECs are mainly defined as districts comprising million-plus urban agglomerations (UAs) as well as capital cities. These 58 KECs accounted for 30 per cent of India’s GDP in 2000, which increased to about 35 per cent by 2020 — indicating a faster growth trajectory. A few key messages emerge from this growth framework.

 

No one-size-fits-all growth strategy: Growth attributes serve as foundational elements, while KECs act as catalysts. Focusing only on state attributes may miss the binding constraints facing KECs, while singularly focusing on KECs is not desirable, since we find little evidence of isolated pockets of growth pulling up state growth meaningfully in an environment of weak growth attributes. States must determine their strategy based on their performance on these two fundamental axes.

 

For instance, despite having one of the best attributes, Maharashtra had an average growth performance. This is because of the lacklustre annual growth of around 7 per cent of its KECs between 2000 and 2020. This is in stark contrast to states like Gujarat and Uttarakhand, with similar attribute count, but with significantly faster GDP growth, courtesy their double-digit KEC growth.

 

Maharashtra should prioritise improving KEC performance by tackling issues like high land prices and poor transport in Mumbai and Pune. Conversely, Haryana’s fast growth is significantly due to Gurugram’s stellar performance of more than 10 per cent annual growth (2000-2020). Sustaining the state’s growth momentum requires improvements in social and physical capital across the state.

 

States have key role in improving growth axes: Of the nine identified growth attributes, six are in the State List — crime, fiscal deficit, health care, transmission and distribution (T&D) losses, labour reforms, and land policies — and hence, states have complete control over them. Likewise, KECs are large urban centres generally governed by urban local bodies (ULBs). A better-managed urban centre enhances the productivity of its businesses, thereby fostering growth. Since ULBs are accountable to state governments, the latter assume primacy again.

 

Even strong states have catching up to do: China’s growth centres like Shanghai and Beijing grew at more than 10 per cent annually for four decades, compared to our best-performing KECs that grew between 7 and 10 per cent for nearly 20 years. Consequently, Shanghai and Beijing today have a GDP exceeding $500 billion, compared to our biggest KEC, Mumbai, at around $150 billion. Likewise, states like Kerala and Himachal Pradesh (HP), which have the best life expectancy in the country — around 75 years — rank only at the 66th percentile globally.

 

Specialisation is key but cannot be orchestrated: KECs usually outpaced the growth of the rest of their respective states by 1-3 percentage points annually between 2000 and 2020. The primary reason for faster growth is sector specialisation, which yields economies of agglomeration. Specialisation occurs when businesses within a particular sector find it optimal to invest in a specific location (KEC), transforming it into a significant hub for that economic activity.

 

Bengaluru, for example, emerged as a computer services hub due to Karnataka’s inherent strength in having a pool of trained labour. The auto hub in Uttarakhand and the pharmaceutical industry in Himachal Pradesh developed as a result of the special package of industrial incentive announced by the Central government in 2003. KECs specialising in mining are, by definition, driven by natural endowments. Thus, specialisation in a KEC occurs, more often than not, organically, rather than through orchestration.

 

Capital vs labour in growth: There is a strong association between capital-intensive specialisation and growth, while the association with labour-intensive specialisation is weaker. The most recognisable KECs specialising in labour-intensive industries, such as Ludhiana (textile) in Punjab, Coimbatore (textile) in Tamil Nadu, and Agra (leather) in Uttar Pradesh, have not achieved double-digit growth. Conversely, capital-intensive centres such as Udham Singh Nagar (automobile) and Haridwar (machinery) in Uttarakhand, Solan (chemicals and machinery) in HP, and Jamnagar (petroleum) in Gujarat all experienced double-digit growth between 2000 and 2020. The tepid performance of labour-intensive manufacturing poses a constraint for states specialising in it to achieve faster growth. This remains a big policy puzzle. 

 

The risk of diluting growth: KECs are relatively well distributed in India; pursuing a more distributed model may lead to slower growth. Governments in India have consistently aimed to maximise growth while addressing regional inequity. KECs, by definition, are present in all states, compared to countries like China, where the majority of its growth hubs are concentrated in the east. If we pursue the strategy of a significantly more distributed model, it may result in slower growth since it risks diluting the agglomeration benefits by spreading resources thin.

 

The government should prioritise improving existing centres and nurturing the new/emerging ones, rather than creating new greenfield cities from scratch, as they can take a long time to yield results. For example, Gurugram took 15-20 years to become the central business district of North India, despite having favourable conditions such as proximity to the airport, adjacency to Delhi, and availability of land. To maximise growth, while addressing regional inequity, resources should flow towards existing and emerging growth engines.

 

Thus, for India to realise Viksit Bharat @ 2047, state governments must focus on bolstering foundational growth attributes while nurturing their key economic centres.

The authors are, respectively, senior fellow and associate fellow, Centre for Social and Economic Progress . The views are personal