[Reader-list] A Look In The Mirror

[Asit Das]

http://m.outlookindia.com/article.aspx/?289889
 A Look In The Mirror
Two academics hold Gujarat up against other states to see if it grew more
in the Modi decade than in the preceding 20 years

*Gujarat shining?* The state's growth is neither universal nor exceptional
  Magazine | 31 March 2014
Maitreesh Ghatak, Sanchari Roy

The forthcoming election, it seems, will be fought mainly on issues of
governance and economic performance. To the extent there is a focus on the
personalities involved, such as Narendra Modi or Rahul Gandhi or Arvind
Kejriwal or potential 'Third Front' candidates such as Nitish Kumar or
Mamata Banerjee, most of the discussion is about their economic track
record or lack thereof. This is a welcome development. However, in the
grand theatre of Indian politics, facts often take a backseat to slogans,
and opinions get sharply polarised. For example, we either hear that
Gujarat's economic performance has been nothing short of miraculous due to
the magic touch of Modi or that Gujarat's so-called growth story is all
hype and a PR campaign aimed at covering up a dark underbelly of poverty,
inequality and low levels of human development indicators.

<http://cms.outlookindia.com/Uploads/outlookindia/2014/20140324/page_34_1_20140331.jpg>A
lot of this debate reflects disagreements about two sets of issues. First,
there are many dimensions of economic performance--we could look at the
level of per capita income, the growth rate of per capita income, human
development indices (HDI) that put weight on not only income but also on
non-income measures like education and health, the level of inequality,
percentage of people below the poverty line, and many others. Which index
we choose to emphasise reflects either our preferences as to the aspect of
economic performance we value the most, or our views as to which dimension
has to be improved (say, per capita income) for bettering the dimension we
care about (say, poverty alleviation).

Secondly, even if we focus on one particular dimension of economic
performance, how do we attribute changes in this dimension to the role of a
specific leader? For example, how do we isolate the contribution of
Narendra Modi and Nitish Kumar to the growth of Gujarat and Bihar,
respectively, in the 2000s, especially as the country as a whole
experienced a growth spurt in this period?

Therefore, the first issue is how to separate the leader's contribution
from other factors driving his or her state's performance, for example, a
general improvement in the economic environment of the country that
benefits all states. The solution to this problem is to calculate the
difference between the growth rate of the state for the years this leader
was in power and the average growth rate of the rest of the states during
the same period of time. If this difference is positive, then it is safe to
say that the state under this leader grew faster than the rest of the
country.

However, this is not enough. What if the state in question was always
growing faster than the rest of the country? How can we then isolate the
specific role of this leader?

To give an analogy, to show that a company's performance under a new CEO
has improved, it is not sufficient to show that the performance of the firm
has been above average rel-ative to that of other firms after the new CEO
took over, as it is possible that this firm was already ahead of others.
Sim-ilarly, if we find that a firm beat its past record under the new
management, we cannot automatically attribute this to the CEO, as it is
possible that all firms performed better in this period due to positive
changes in the economic environment. To claim that this CEO had a
transformative impact on the firm, we need to show not only that this firm
stayed ahead of other firms after he took over but that its performance
margin relative to other firms improved significantly under him.

Thus, returning to the example of Modi, in order to claim that his
leadership had a significant impact on Gujarat's economic performance, it
is not enough to show that the state did better than the rest of India
after he came to power in 2001. We have to demonstrate that the gap between
Gujarat's performance and that of the rest of India actually increased
under his rule. This is a statistical method called 'differences in
differences'. It is routinely used to evaluate the performance of
organisations under a particular management or the effectiveness of a
particular government policy.

Turning to evidence, we look at the following key indices of economic
performance--level of per capita income, its growth rate, HDI, inequality
and the percentage of population below the poverty line--for the major
Indian states. All through, we have focused on the major 16 states in terms
of population. The larger a state, the harder it is to achieve improvements
in per capita average economic indicators. Therefore, comparing a large
state like Uttar Pradesh and a small one like Nagaland can be misleading;
it is better to compare like with like. However, we have to keep in mind
that even among the major states, turning around a state with a larger
population is a harder task.

We begin by looking at the most obvious economic indicator--*the level of
per capita income*. In terms of average per capita income ranking of states
over the 1980s, '90s and 2000s, the top three states are Haryana, Punjab
and Maharashtra (see *Table 1*). Gujarat's average rank is 4. On the other
hand, Bihar, which has been in the news lately due to its spectacular
turnaround over the recent years under the leadership of Nitish Kumar, has
been consistently at the bottom of this league with a rank of 16, below UP,
which too has remained steady at number 15.

In terms of improving their relative ranking over the three decades, the
top performers among the leading states are Maharashtra, Gujarat, Kerala
and Tamil Nadu. Between the '80s and now, Maharashtra has moved from 3 to
1, Gujarat from 4 to 3, Kerala from 10 to 5 and Tamil Nadu from 7 to 4.
Interestingly, the rise in the ranks of these four has been accompanied by
the relative decline of Punjab, which went from being the very top state in
the '80s and '90s to No. 7 in 2010. This suggests that, as in athletic
races, the relative rank of a state may go up or down either due to a
change in its own performance or due to a change in the rival's performance.

Thus, to obtain a fuller picture of the economic performance of these
states, we also need to consider their relative growth performances. The
relative ranking at a given point of time as in Table 1 gives only a
snapshot of where states stand in terms of economic performance. But as we
know from athletic races, unless that point happens to be the finishing
line, it is the rate at which an athlete is accelerating that determi-nes
the final outcome. While there is no final finishing line in the race of
economic development, the current growth performance of a state can give an
indication of its potential position in the future. Is the rise in rankings
of states like Maharashtra and Gujarat also matched by a faster growth rate
on their part? Also, are there states that are lower down in the ranking
but are growing faster than average and so can hope to improve their
ranking in the future?

Table 2 documents the annual average growth rates of states which have
performed better than national average (leaders) in each of the three
decades. Only three states have had above average growth performance in all
three decades: Gujarat, Tamil Nadu and Maharashtra. They were joined by
Andhra Pradesh, Bihar, Haryana and Kerala in the 2000s.

Interestingly, the growth rate of Punjab, initially one of the top-ranked
states in terms of per capita income level, has been below the national
average in the last two decades. Thus it is not surprising that it is
slipping down in rank below other faster-growing states. Bihar, on the
other hand, is poised to rise up the ranks with a higher than average
growth rate of per capita income in the 2000s. In a way, Bihar's story is
the opposite of Punjab's: while it is still at the bottom of the chart in
terms of the level of per capita income, it can expect to improve its rank
if it maintains its recent high growth rate.

Now we come to one of the key questions. *Which are the states that
improved their performance in the 2000s both with respect to their past
performance in the earlier two decades, and with respect to the performance
of other states in the 2000s?* Table 3 graphically plots the average annual
growth rates of five states against the national average over time. This
graph shows an interesting trend: while Gujarat, Tamil Nadu and Maharashtra
have been going neck and neck (and Haryana, which is not shown in the
figure), and as already mentioned, have consistently performed above the
national average, none of them has experienced a huge acceleration in
growth rate in the 2000s. In contrast, Bihar, which was consistently doing
worse than the national average through the '80s and '90s, shot up above
the national average in the 2000s, converging to rates achieved by
established leaders like Gujarat, Maharashtra and Tamil Nadu.

<http://resize.outlookindia.com/Uploads/outlookindia/2014/20140324/page_35_20140331.jpg>To
sum up, we see that Maharashtra, Haryana, Punjab, Gujarat and Tamil Nadu
have been among the richest states in the last three decades. In the 2000s,
the big news was Punjab dropping from the top 5 and Kerala breaking into
this select group. Among the rest, Maharashtra ended as the topper in the
latter half of the 2000s, and Gujarat at a very respectable number 3, after
Haryana. In terms of growth performance, Gujarat, Tamil Nadu and
Maharashtra were the toppers over the last three decades but in the 2000s,
three other states raised their game to join the list of fastest-growing
states: Bihar, Haryana and Andhra Pradesh. However, if any state could
claim that its performance relative to the rest of India actually improved
in the 2000s, that state is Bihar.

Therefore, if awards must be given, Bihar deserves the prize for the most
dramatic turnaround in the 2000s. Gujarat gets credit for having steadily
been on top of the league in terms of both the level of per capita income
and its growth rate, but has to share the honours with Maharashtra and
Haryana in that category. However, there is no evidence of any significant
growth acceleration in Gujarat in the 2000s.

One could argue that it is easier to turn around a state that was at the
bottom of the league like Bihar than to maintain, or to marginally improve,
the performance of a state already at the top of the league, like
Maharashtra, Haryana or Gujarat. After all, there is greater scope for
improvement in the former case. Conversely, one could also argue that it is
more challen-ging to turn around a backward state, because if it were easy,
someone would have done it already. This is reinforced by the argument that
Bihar is the third largest state, whereas Guj-arat's rank is 10th in terms
of population, and it is difficult to achieve sharp improvements in a
larger than a smaller state.

Be that as it may, many would argue that per capita income and its
growth--the indices we have considered so far--are only partial measures of
economic development. Among other things, these indices ignore aspects of
development that are not captured in income, for example, life expectancy
or education. Nor do these take into account income inequality or the
extent of poverty. Therefore, we now turn our attention to the performance
of the states in terms of the Human Development Index (HDI), level of
inequality and the percentage of people below the poverty line.

<http://cms.outlookindia.com/Uploads/outlookindia/2014/20140324/page_36_20140331.jpg>Table
4 highlights HDI scores of the seven states with HDI scores above the
national average over the last three decades. These are Kerala, Punjab,
Maharashtra, Haryana, Tamil Nadu, Gujarat and Karnataka. Table 5, on the
other hand, plots the performance of some selected states with respect to
the all-India average in terms of HDI. As we would expect, Kerala's
performance is literally off the charts. Maha-rashtra, Tamil Nadu and
Gujarat,  on the other hand, appear to have been going head to head. Their
trends tell an interesting story. While Gujarat's HDI performance was above
the national average in the '80s and '90s, it decelerated in the 2000s and
came down to the national average. In contrast, Tamil Nadu and Maharashtra,
which started off at a similar level of HDI as Gujarat in the '80s, have
continued to perform better than the national average in the 2000s. Bihar,
on the other hand, has consistently been below the national average, but it
has made significant improvements over the last decade and shows signs of
catching up to the national average.

Thus, the HDI rankings of states present a different story than their
rankings of per capita income levels or growth rates, with one exception.
The only state that is in the top 3 in all the rankings so far is
Maharashtra. Otherwise, the top prize for HDI goes to Kerala, and "the most
improved in the 2000s" prize goes to Bihar.

Next, we look at a few states' ranking in terms of *level of
inequality*(see *Table
6*) based on consumption expenditure. Assam and Bihar have consistently had
the lowest levels of inequality according to this index. However, the state
that really stands out, both in terms of relative ranking and absolute
decline in inequality, is Rajasthan. Between the early '80s and late 2000s,
Rajasthan's relative ranking improved from 15th to third, while its
inequality measure fell by 14 per cent, the largest decline for any state.
On the contrary, states that are leaders on the growth dimension are found
to perform worse on inequality. For example, it's evident from Table 7 that
while inequality in Gujarat was lower than the national average in the '80s
and '90s, it actually rose to levels above the national average in the
2000s. Maharashtra, Tamil Nadu and Kerala, too, have consistently recorded
higher levels of inequality than the rest of India, with Kerala showing a
sharp spike in the 2000s.

Lastly, we consider the *percentage of population below the poverty
line*(see *Table
8*). We find that Himachal Pradesh, Punjab, Kerala, Gujarat, Haryana,
Andhra Pradesh and Karnataka have consistently had lower levels of poverty
than the all-India average. Gujarat's performance in poverty reduction over
the years has been similar to that of Andhra Pradesh and Kerala. However,
if we look at improvements in performance over the last decade, then Tamil
Nadu is one of the top performers. Starting from a level of poverty that
was higher than the national average in 1983, it ended up at a much lower
level, similar to those of Gujarat, AP and Kerala, in 2009 (see *Table 9*).
Bihar, although well above the national average in terms of poverty levels
all through the three decades, has shown a sharp improvement over the last
decade.

Is there, then, a clear answer to the question we had started with: did
Gujarat truly outshine other
<http://cms.outlookindia.com/Uploads/outlookindia/2014/20140324/page_38_20140331.jpg>states
in the 2000s in terms of economic development? If we simply look at the
figures, four facts will jump out: first, Bihar has improved the most in
the 2000s, even though it has been at the bottom of the list for all
indicators and still has a fair distance to go before it can go above the
national average; second, Kerala has far outpaced other states in terms of
HDI all through; third, Rajasthan was the star performer in terms of
reducing inequality; and fourth, Maharashtra and Gujarat have consis-tently
been top performers in terms of per capita income and its growth, with
Haryana and Tamil Nadu deserving mention too. All these achievements are
noteworthy but it is hard to single out any state as the top performer in
the 2000s.

To the extent this assessment goes against the view held by many people
independent of their political leanings that Gujarat has done spectacularly
well under Mr Modi, the explanation lies in our 'differences in
differences' app-roach.

In particular, this is what we tried to figure out: did a state that has
for a long time been one of the most developed states in terms of per
capita income, and was already improving at a rate higher than the rest of
the country, accelerate further and significantly increase its growth
margin under Modi's stewardship? Our analysis shows that this did not
happen. Both Maharashtra and Gujarat improved upon an already impressive
growth trajectory in the 2000s, but the margin of improvement was too small
to be statistically meaningful. So while Gujarat's overall record is
undoubtedly very good all through the last three decades, its performance
in the 2000s does not seem to justify the wild euphoria and exuberant
optimism about Modi's economic leadership.

Of course, it is possible that there are trends that this evidence cannot
capture. Maybe with a longer time horizon, the effects of some of Modi's
policies will show up in the evidence, although given that he is now in his
fourth consecutive term of power, this argument is not very strong. It is
also possible that if Modi comes to power at the Centre, he may well
achieve a turnaround of the Indian economy due to his governance style. All
that is possible in theory, but the existing evidence is insufficient to
support these views.

As John Maynard Keynes had famously said in the context of stockmarket
bubbles, often our decisions to do something, the full consequences of
which will be drawn out over many days to come, can only be "taken as the
result of animal spirits"--a spontaneous urge to action rather than inaction
or rational calculation. In politics, too, maybe it is animal spirits that
rule, not rational calculations based on statistical evidence. However,
while election campaigns are run on slogans and sentiments, good governance
depends on facts and figures. Bubbles eventually burst, waves of euphoria
recede. At some point, the numbers need to add up.
------------------------------

*By Maitreesh Ghatak and Sanchari Roy*

*(Maitreesh Ghatak is Professor of Economics at the London School of
Economics; Sanchari Roy is a research associate at the Department of
Economics, University of Warwick, UK.)*