Karnataka's next challenge will be to make growth inclusive statewide

Beneath its spectacular growth over the past three decades lies a stark historical imbalance that needs policy intervention

To state that India’s economic performance rests on how its states are doing is to state the obvious. Given its vast diversity, the experiences of individual states — each with a distinct topography, resource base, and institutional framework — offer valuable policy lessons. A country aspiring to achieve developed status by the centenary year of its independence can ill afford to ignore the lessons from the successes and shortcomings of its states. 

From this perspective, Karnataka’s growth trajectory over the past three decades has been impressive. At the same time, given the considerable diversity within the state, its experience raises important questions about achieving greater regional balance and ensuring the sustainability of its growth. 

Karnataka’s macroeconomic indicators have been nothing short of spectacular over the last three decades. From being a state with a below-average per capita income, it rapidly transitioned — led by the modern services sector — to rank fourth in terms of per capita gross state domestic product (GSDP) by 2023-24. The only states ahead of it are the two smaller states, Sikkim and Goa, and the newly formed state of Telangana. 

Its per capita net state domestic product (NSDP) at ₹3,39,813 is 1.8 times the average per capita net national income.  Led by the modern services sector, the state recorded the highest annual growth in GSDP at constant prices among the states over the last three decades, at 6.4 per cent. Karnataka is the hub of technology and innovation; it has the largest pool of technical and scientific manpower and the most prolific startup ecosystems. 

In 2023, Karnataka’s 45 unicorns, out of a total of 112 in the country, accounted for 44.6 per cent of their combined valuation. The state hosts over 875 global capability centres (GCCs). It is the country’s largest destination for foreign investment and a leader in services exports. Its capital, Bengaluru, has the highest concentration of information technology (IT) and IT-enabled Services (ITeS) enterprises and is widely known as India’s Silicon Valley. 

Despite these, the state has a lot of catching up to do in achieving human well-being. Its rank in the headcount measure of poverty is 12, its rank in underweight children below 5 years is 22, in stunted children is 21, in anaemic pregnant women is 13, in the dropout ratio at the secondary level is 20, in enrolment at the higher secondary level is 17, and in the literacy rate for persons above 15 years is 17. Thus, income growth has not translated into human wellbeing, and this calls for policy attention. 

The source of imbalance partly lies in the pattern of growth itself. First, the spectacular growth of the economy has been driven predominantly by the services sector. In 2023-24, the sector’s share in total GSDP, at 65 per cent, was the highest among the states. In contrast, the share of the primary sector was 11.7 per cent, and that of agriculture was just 8.7 per cent, though it supports 46 per cent of the population. The share of manufacturing was low, at 20 per cent, in 2023-24. The concentration of income generation in the modern services sector has resulted in a skewed distribution of incomes. 

Equally disturbing is the regional concentration of incomes. Apart from Bengaluru Urban and Bengaluru Rural, per capita income is higher than the state’s average only in the two coastal districts of Dakshina Kannada and Udupi, the plantation district of Chikkamagaluru, and Shivamogga, adjacent to the Western Ghats. Over 54 per cent of the state’s income is generated in these districts, while the remaining 46 per cent is spread over the other 26 districts. Even the districts in the Bengaluru-Mysuru belt, with large investments in agriculture and irrigation, and practising water-intensive, unsustainable agriculture, generate incomes well below the state average. 

Thus, Karnataka is a state of contrasts. The seeds of imbalance were sown when the state was reconstituted in 1956, joining the Kannada speaking parts of the erstwhile Bombay-Karnataka and Hyderabad-Karnataka regions, the district of South Kanara on the West Coast, the mineral-rich district of Bellary ceded from the Madras Presidency, the directly governed British province of Coorg, and the region under Mysore royalty. 

There were vast variations between these regions not only in infrastructure and the level of development but also in the nature of institutions and the structure of incentives. The regions under the Mysore royalty had good infrastructure, irrigation, and educational institutions. The erstwhile Hyderabad-Karnataka and Bombay-Karnataka regions, on the other hand, had huge infrastructure, knowledge, and governance deficits. 

An even more inhibiting feature was the feudal and exploitative Jagirdari system in these regions. Added to these was the neglect of the education and health care systems by successive governments. As the more influential and well-to-do sections have exited public education in favour of private schooling and health care, there has been little advocacy for improving public education and health care, and these sectors have suffered gross neglect. The only way to break the shackles of these institutional problems is to strengthen social sector interventions. 

In contrast to the above, fascinating development experience of the erstwhile South Kanara district on the West Coast (which was later bifurcated into Dakshin Kannada and Udupi) was predominantly private-sector led due to people’s own initiative and enterprise.  There was hardly any governmental presence before the state reorganisation. Madras, the capital city of the district, was 700 kilometres away. 

Initially, the relatively high Brahmin population (according to the 1901 Census, the Brahmin population in the district was 9.2 per cent) and their culinary skills led to large-scale migration to all parts of the country to start “Udupi” hotels (Chinmay Tumbe, India Moving: A History of Migration, Penguin Random House, 2018). Later, the place became a cradle of banking, and there were as many as 29 banks and financial companies in the early 20th century. Two major banks, Canara Bank and Corporation Bank, were started in 1906, and another two  —  Syndicate Bank and Vijaya Bank — were started in 1925, much before the Reserve Bank of India was established. As they had to carry on their business without the presence of large commercial or industrial establishments, innovative methods of financial inclusion became an integral part of the development of the financial sector (Amol Agarwal, History of Private Banking in South Kanara District 1906-69, Manipal Universal Press, 2023). 

Thus, the critical features of Karnataka’s development experience, though fascinating in some ways, underscore the need to restore balance and ensure sustainability. Policy interventions to improve education, skill development, and health care are pivotal. Most of the low-income regions in the northern part of the state have a rich history and heritage, and a focus on quality tourism can bring greater dividends. Improving infrastructure and connectivity could be a good start. 

The writer is former director, National Institute of Public Finance and Policy. The views are personal