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Arvind Subramanian: Globalisation and states' growth

Were the most globalised states also the most impacted when the 2008-10 crisis set in?

Arvind Subramanian 

India’s rapid globalisation is one of the clichés of our time. Since the major policy turnaround in 1991, the Indian economy has become increasingly integrated with the global markets through trade and finance channels. India’s trade-to-GDP ratio, a measure of trade openness, increased from 20 per cent in 1993 to 45 per cent in 2007. The ratio of foreign assets and liabilities to GDP, a measure of financial integration with the global economy, increased from 43 per cent in 1993-94 to 85 per cent in 2007-08.

The crisis of 2008-10 highlighted the vulnerability that is the flip side of the dynamism that globalisation has engendered: growth declined in India and capital fled, as in most other countries, albeit to a lesser extent. But the question remained as to which states were more dependent on foreign markets and, therefore, more susceptible to a downturn as conditions abroad faltered?

Based on work with Utsav Kumar, I had, in an earlier column (“Growth in the 2000s: Key facts”, June 22, 2011), shown that average growth across the main states in India slowed down from 5.92 per cent during the pre-crisis years (2001-07) to 5.52 per cent during the crisis years (2008-09). (The average across all the states shows that growth during the pre-crisis and the crisis years was essentially the same.) But the question is, if there was any differential in the growth performance across states during the crisis years, which states took a bigger hit, and why?(Click here for chart)

Chart 1 shows that out of 21 states, nine states (those below the line in the chart) experienced a slowdown during the crisis years compared to the pre-crisis years, eight states recorded higher growth during the crisis years, and the remaining four recorded nearly the same performance in the crisis years as in the pre-crisis period.

Further, we found (Chart 2) that states with the highest growth during the pre-crisis years (measured along the horizontal axis) were the ones that registered greater decline in growth during the crisis years. This negative correlation is illustrated by the downward sloping line.

Our analysis shows, unsurprisingly, that Karnataka, with Bangalore as the globalised IT hub of India, fared the worst with a dramatic growth drop of about 4.4 percentage points during the crisis. Andhra Pradesh and Maharashtra also saw a decline of about two to three percentage points in growth. Gujarat and Tamil Nadu experienced smaller declines.

Could it be the case that states that were the most open or globalised before the crisis were affected the most during the crisis? We cannot easily measure the degree to which each state trades internationally but we can estimate crudely how tradable the economic profile of each state is. Since business services and, especially, manufacturing tend to be highly tradable, we use these – specifically, the share of manufacturing, and the share of manufacturing and business services in total state output – as proxies for the openness of each state (business services include real estate and ownership of dwellings that are not tradable, and hence make a less good proxy for the openness of a state).

We then plot this share against the change in growth during the crisis. These plots are shown in Charts 3A (where the share of manufacturing in output is the proxy for openness of a state) and 3B (where the share of manufacturing and business services combined is the proxy for openness). They show a clear negative correlation. Karnataka, Maharashtra, Tamil Nadu and Gujarat are among the most open states and they experienced the greatest decline in growth. In contrast, Bihar, Jammu and Kashmir, and Assam, which produce relatively few tradable goods, were the most resilient during the crisis. For example, in Bihar the share of manufacturing in output is five per cent (compared to nearly 25 per cent for Gujarat) and Bihar’s growth actually increased by nearly four percentage points during the crisis.

Of course, a multiplicity of factors are likely to be at work, which precludes drawing any clear causal conclusions. But the simple correlations seem to be consistent with globalisation conferring dynamism and stoking growth but at the same time inducing vulnerability.

One possible policy conclusion relates to the findings of Harvard’s Dani Rodrik. He pointed out that more open countries tend to have bigger governments, which can cushion the countries against shocks that create downside risks. Whether or not the central or state governments can act as a shock absorber in India remains an open question. But labour mobility, which appears to be increasing within India, could substitute if the government falters in its stabilisation role.

The author is Senior Fellow, Peterson Institute for International Economics and Centre for Global Development and author of Eclipse: Living in the Shadow of China’s Economic Dominance

First Published: Wed, November 23 2011. 00:00 IST