Indian States Performance Analysis – 2004 : Economic Survey

Economic Services Group
National Productivity Council
Lodi Road New Delhi
 

Preface

Despite globalization and liberalization, several recent studies underlined the key role by the states in shaping the environment in which enterprises from both public and private sectors operate. A significant part of the competitive advantage of states is believed to arise from far reaching incentive polices which are designed to attract foreign investment like tax breaks, subsidies etc. This study examined the dynamics of state level competitiveness and ranked all the Indian states based on both hard and soft data variables. Though the states are quite diverse in terms of area, population or resources, they are operating under more or less the same policy environment and hence are endowed with almost equal opportunity to grow and prosper. In this study the ranking of the states has been made based on a vast list of quantitative and qualitative parameters using a well-established methodology developed by Institute for Management Development (IMD) (Switzerland) for the World Competitiveness Yearbook (WCY) for the preparation of which NPC serves as a the Partner Institute from India.

National Productivity Council (NPC) has pioneered experimental studies on competitiveness of Indian states as early as in 1992 when fifteen major Indian states were ranked by it based on their performance in Human Development. NPC followed this study with yet another study on the competitiveness of Indian States based on Infrastructure Development Index.  In its third study, for the first time in India, a state level Competitiveness Index was developed by the NPC covering a total of eleven variables. Later on Business Today, CII, NCAER and India Today examined in some detail issues related to competitiveness of Indian states. Sub-national level competitiveness is a complex phenomenon, the dynamics of which is governed by innumerably a large number of socio-economic, technological and political aspects. It was found almost impossible to track all of them in a single study especially because of the non-availability of reliable indicators in the case of a developing country like India with inadequate data infrastructure. The present study by NPC identified about 95 socio-economic and technological criteria through extensive research and feedback from the business community, government agencies and academia.

This study is an addition to the growing literature on the subject. Though the report ranked the Bigger and Smaller Indian States based on their achievements in the identified competitiveness factors, the effort has been to identify the strengths and weaknesses of each state in order to enable policy formulation towards performance improvement.

We place on record our thanks to former Director General Shri. Brijesh Kumar IAS who was instrumental in initiating this study by NPC and to Smt. Sunila Basant IAS DG NPC under whose able guidance major portion of the work was completed and brought to the present form.

New Delhi                                            Dr. N.K.Nair
27th December 2004                                        Group Head
Economic Services (ES)
 

RESEARCH TEAM
Team Leader
 Dr. N.K.Nair  – Group Head (ES)

Research Co-ordinator
  Dr. K.P.Sunny – Dy.Director  

Team Members
V.Anilkumar – Dy Director
Utpal Chattopadhyay – Dy.Director
 D.Jagannath Rao – Asst. Director  
Rajesh Sund – Asst. Director  
Arundhati Chattopadhyay- Asst.Director

CONTENTS

    PAGE NO.
India in the World Competitiveness Landscape    1
Competitiveness: Role of the States    2
Competitiveness: The Concept    5
State Competitiveness Studies    7
Competitiveness Measurement    9
Standard Value    12
State Rankings    12
Ranking Highlights: Bigger States    13
Ranking Highlights: Smaller States    14
References    16
Figures    17-22
Tables    23-68
Appendices    

List of Figures

Figure    Title    Page No.
Figure 1     Standard Values – Overall Competitiveness, Bigger States    17
Figure 2    Standard Values – Economic Strength: Bigger States    17
Figure 3    Standard Values – Business Efficiency, Bigger States    18
Figure 4    Standard Values – Governance Quality, Bigger States    18
Figure 5    Standard Values – Human Resources : Bigger States    19
Figure 6    Standard Values – Infrastructure, Bigger States    19
Figure 7    Standard Values – Overall Competitiveness Smaller States    20
Figure 8    Standard Values – Economic Strength, Smaller States    20
Figure 9    Standard Values – Business Efficiency, Smaller States    21
Figure 10    Standard Values – Governance Quality Smaller States    21
Figure 11    Standard Values – Human Resources, Smaller States    22
Figure 12    Standard Values – Infrastructure, Smaller States    22

List of Tables

Table No.    Title    Page No.
Table 1    Overall Competitiveness Ranking of Indian States    23
Table 2    Factor Competitiveness Ranking of Indian States-Economic Strength     23
Table 3    Factor Competitiveness Ranking of Indian States- Business Efficiency    24
Table 4    Factor Competitiveness Ranking of Indian States-Governance Quality    24
Table 5    Factor Competitiveness Ranking of Indian States-Human Resources    25
Table 6    Factor Competitiveness Ranking of Indian States – Infrastructure    25
Table 7    Criterion wise Ranking of States – Economic Strength     26
Table 8    Criterion wise Ranking of States – Business Efficiency    28
Table 9    Criterion wise Ranking of States – Governance Quality    30
Table 10    Criterion wise Ranking of States – Human Resources    32
Table 11    Criterion wise Ranking of States -Infrastructure     36
Table 12    Strengths & Weaknesses:  Andhra Pradesh    40
Table 13    Strengths & Weaknesses: Arunachal Pradesh    41
Table 14    Strengths & Weaknesses:  Assam    42
Table 15    Strengths & Weaknesses:  Bihar    43
Table 16    Strengths & Weaknesses: Chattisgarh    44
Table 17    Strengths & Weaknesses:  Delhi    45
Table 18    Strengths & Weaknesses:  Goa    46
Table 19    Strengths & Weaknesses:Gujarat    47
Table 20    Strengths & Weaknesses:  Haryana    48
Table 21    Strengths & Weaknesses:  Himachal Pradesh    49
Table 22    Strengths & Weaknesses:  Jammu & Kashmir    50
Table 23    Strengths & Weaknesses:  Jharkhand    51
Table 24    Strengths & Weaknesses:  Karnataka    52
Table 25    Strengths & Weaknesses:  Kerala    53
Table 26    Strengths & Weaknesses:  Maharashtra    54
Table 27    Strengths & Weaknesses:  Manipur    55
Table 28    Strengths & Weaknesses:  Meghalaya    56
Table 29     Strengths & Weaknesses:  Mizoram    57
Table 30    Strengths & Weaknesses:  Madhya Pradesh    58
Table 31     Strengths & Weaknesses:  Nagaland    59
Table 32    Strengths & Weaknesses:  Orissa    60
Table 33    Strengths & Weaknesses:  Punjab    61
Table 34     Strengths & Weaknesses:  Rajasthan    62
Table 35    Strengths & Weaknesses:  Sikkim    63
Table 36    Strengths & Weaknesses:  Tamil Nadu    64
Table 37    Strengths & Weaknesses:  Tripura    65
Table 38     Strengths & Weaknesses:  Uttar Pradesh    66
Table 39    Strengths & Weaknesses:  Uttaranchal    67
Table 40    Strengths & Weaknesses:  West Bengal    68

Competitiveness of Indian States 2004

India in the World Competitiveness Landscape

At the turn of the new century, Indian economy was 10 years into economic reforms during which the traditional “command and control” management of the economy and the “commanding heights” of the public sector were slowly and steadily replaced by market oriented and business friendly economic structures and policies. In the process Indian economy became progressively synchronized with the global market. To its credit India successfully stood the contagion effects of South Asian meltdown of the late 1990s and also the currency crisis that hit many nations later. However, the global economic slowdown reached the Indian shores in 2001.
 
The recently released World Competitiveness Yearbook 2004 (WCY) by the International Institute for Management Development (IMD) ranked India 34th among a list of 60 major countries and regions in the world it considered. This is 16 notches up from the 50th rank India achieved in the previous year. As succinctly summarised by WCY (2004) “India has taken off with a GDP growth of 8.1%. —— India thrives on qualified engineers, scientists, low wages, and especially an English-speaking work force. —- the country is becoming a hot spot for the “off shoring” of administrative and back office operations. But India is also developing its competitiveness in software operations, manufacturing, entertainment and financial services. It is estimated that 2 million jobs in financial services will be relocated from industrialized nations to India up to 2008. The main challenge for India will be to maintain a steady and predictable competitive strategy, avoiding the wide fluctuations of the past. If it succeeds, it will emerge as one of the most attractive investment places on the competitiveness landscape”.

Global Competitiveness Report (GCR) 2004 of the World Economic Forum (WEF) ranked India in the 55th position among a larger list of 104 world economies in terms of the Growth Competitiveness Index. This is one step higher than the ranking the country received in the 2003 rankings. India received significantly higher rankings in regard to what GCR termed the Business Confidence Index, 30 from amongst 104 economies. This is up 8 ranks from what India received in the previous year and shows “the benefits of increased company sophistication and strengthened clusters”.

Compared to other large emerging markets, China and India are cited by A T Kearney’s (2004) FDI Confidence Index as the most attractive FDI destinations in the next three years and well into the future, beating markets like Brazil, Mexico and Poland. While China led for manufacturing and assembly, India led for IT, business processing and R&D investments. Investors found India’s highly educated workforce, management talent, rule of law, transparency, cultural affinity, and regulatory environment as more favorable than what China presents. For the first time in the history of the Index, India displaced the U.S. to become the second most attractive FDI location among manufacturing investors. India’s strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and development, and knowledge management activities.   The recent Goldman Sachs (2003) study came out with forecast estimations, which showed that by 2050 India would overtake most of the leading world economies in terms of economic growth and would emerge as the third largest economy in the world behind China and US.

India’s Competitiveness: Role of the States

The story of India’s economic development is being scripted in the state capitals across the country. The failure of one state will undermine the success of the others as it pulls down the country’s average.  While there will always be high and low performing states in India, the country as an integrated whole cannot shine unless the growing gap between the standard of living of the people in different parts is halted. Hence, it becomes pertinent to study the performance of the states in terms of their relative position within the country’s competitiveness landscape. More so because the limiting edge of economic reforms is progressively felt at the level of the states, especially since all factor markets are either in the state list or in the concurrent list of the Constitution and different states have reacted differently to economic reforms.  

The competitiveness performance at sub-national level is predominantly dictated by the quality of governance.  The small northern hill state of Himachal Pradesh revolutionized its education and rural infrastructure in the 90s.  The state’s literacy rate rose 14 percentage points in a matter of a single decade, from 63 percent in 1991 to 77 percent in 2001.  Most of the villages in the state are electrified and about 80 percent of them have access to safe drinking water.  The proportion of people living below the poverty line fell dramatically from 29 percent in 1993-94 to less than 8 percent in 2001. Rajasthan’s big strides in education and agriculture and Madhya Pradesh’s fast progress in primary healthcare are instances of governance that improved the quality of life in those states. In contrast is the case of the most populous state in the country viz. Uttar Pradesh, the per capita income of which, despite being a low at about Rs. 5000 per annum in the early 90s, grew at a snails pace to reach less than Rs. 6000 by the close of the century. In Bihar, which spends only Rs. 60 a year on the healthcare of a person living in the state, 67 percent of the households had access to safe drinking water in 1991. By 2001, only 53 percent of the households enjoyed this amenity. By the beginning of the new millennium an average person in the state was at least four times poorer than his counterpart in Punjab, whose per capita income growth too tottered at less than 2.5 percent a year in the 90s.

India has states like Maharashtra, Gujarat and Karnataka, which have grown as fast as Asia’s tiger economies during the past 10 years. It also has Bihar, with a population size of Germany’s and a living standard at par with Burundi’s.  The divisions among the states are widening because in the 1990s the guiding principle for resource sharing has shifted from entitlement to competition. Competition among the states is likely to increase regional disparities in future. In 1991, Bihar’s per capita income was 4 times lower than Goa’s.  By 2002, the difference had grown more than 8 times. This however does not imply that inter-state disparities in performance are wholly a post-economic reform phenomenon.

Why do liberalization and competition increase inequality?  Because competition gives participants a chance to perform to their potential, even as it allows non-performers to drift. Private investment has shied away from the poorly governed states and has flowed almost entirely to better-managed richer states.  Not all mechanisms of transferring funds from the rich (often also the better performing) to the poor (often also the non-performing) have been given up.  

The Planning Commission and the Finance Commission still redistribute resources from the rich to the poor even now. Such redistribution has, however, shrunk a bit and private investment is free to go where it wants to.  

While inequalities magnified, inter-state competition seemed to have been intensified in the nineties.  Andhra Pradesh and Karnataka had been successfully hot selling themselves as alternatives and even better investment destinations than the established investment centres such as Gujarat, Maharashtra, and Tamil Nadu.  To a lesser extent, Rajasthan, Madhya Pradesh, Himachal Pradesh and lately Chattisgarh have been competing for increased shares in the investment pie with varying degree of success.

Following economic reforms the states are now empowered with increased autonomy in many key areas such as infrastructure. Slowly but surely there is increasing realization among the states that they can shape their own destiny. This prompted the governments at the sub-national level to initiate measures to attract more financial resources into the states including foreign direct investments (FDIs). During the nineties some of the states emerged as the most happening places in India. Thus competition is a double-edged weapon.  It can increase or decrease the inequalities in economic growth. Not all poor states are necessarily non-performers and competition allows the laggards the chance to catch up with the rich and thus bridge the inequality gap.

Several recent studies underlined the key role by the states in shaping the environment in which enterprises from both public and private sectors operate, despite globalization and liberalization. A significant part of the competitive advantage of states is believed to arise from far reaching incentive polices which are designed to attract foreign investment like tax breaks, subsidies etc.

In the ongoing war in the market place economies should not, and indeed they did not, rely solely on products and services. They also competed with brains. The ability of a state to develop an excellent education system and to improve the knowledge of the labour force through training is vital to competitiveness. In addition to being competitive (temporarily) because of cheap labour, they aim to develop their competitiveness level so that it is based (permanently) on an educated workforce. Knowledge is perhaps the most crucial of the competitiveness criteria. As states move up the economic scale, the more they thrive on knowledge of the workforce higher will be their ability to compete in the fiercely competed world markets. How that knowledge is acquired and managed is almost entirely the state’s responsibility.

From the mid-1990s there has been coalition governments at the Centre with regional political outfits partnering the political power. This rendered the states to have larger say in the decisions of the Centre than was the case earlier. In an era of coalition governments, state Chief Ministers, at least some of them, became politically more powerful than they were before. With changes in the political scenario role of the states thus took a new dimension.

In this study National Productivity Council examined the dynamics of state level competitiveness and ranks all the Indian sates based on both hard and soft data variables. Even though the sates are quite diverse in terms of either area, population or resources they are operating under more or less the same policy environment and hence were endowed with almost equal opportunity to grow and prosper. In this study the ranking of the states has been made against a select list of quantitative and qualitative parameters using a well-established methodology developed by International Institute for Management Development (IMD) (Switzerland) for the World Competitiveness Yearbook (WCY) for the preparation of which NPC serves as a the Partner Institute from India.

Competitiveness: The Concept

The word competitiveness ordinarily means ‘ability to compete’. In economic terms it could be expressed at different levels such as the nation, industry and the company.  In conventional economic theory a nations’ growth prospects are governed by the principle of comparative advantage, derived from the factor endowments. The notion of national competitive advantage differs from the conventional comparative advantage in that, where as the latter is nature dictated and therefore unalterable, the former is policy driven, flexible and hence accommodates choices.

Competitiveness is one of the most powerful concepts in modern economic thinking and encompasses the economic consequences of non-economic aspects such as education, science, political stability or even culture and value systems. The present study looks at the relationship between the macro environment and wealth creation process by enterprises and individuals.  In a market economy, individual firms and industries play the critical role in building and sustaining national competitiveness. A nation’s competitiveness depends on the capacity of its organizations to innovate and upgrade. At micro levels, competitiveness is defined as the capacity to grow through market success or share, and improved profits based on its perceived superiority over the competitors, which depend on the macroeconomic environment in which firms operate and compete with each other.

World Economic Forum (WEF), which has been ranking the leading world nations on a number of competitiveness criteria, defines Growth Competitiveness Index (GCI) as “the ability of a country to achieve sustained high rates of growth in GDP per capita” (GCR 2003). The Business Confidence Index (BCI), on the other hand, evaluates the underlying microeconomic conditions that define the current sustainable level of productivity in each country. The two specific areas evaluated by the BCI are “the sophistication of the what the GCR called the operating practices and strategies of companies and the quality of the microeconomic business environment in which a nations companies compete”. In their World Competitiveness Yearbook the Institute For Management Development (IMD) defines competitiveness as “the ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people”.  

While competitiveness of the nations is well understood now, the same is still fuzzy at the sub-national level. This is because competition among the states, which are part of the same nation, is limited in nature and magnitude, when compared to competition across the countries. States have to work under the socio-economic policies framed at the national level. This leaves a relatively small area of maneuverability on the part of individual states. This does not undermine the importance of competitiveness at the sub-national level. In the coming years more of economic functions may be entrusted to the state governments in India. Competition among regions/states is here to stay. State-level competitiveness ought to be understood within the context of national competitiveness, because a state is a miniature version of the country. Therefore, definitions applied for measuring the country’s competitiveness can be adopted for the states as well.

Among the available definitions of national competitiveness, the one used by the IMD in its annual World Competitiveness Yearbook (WCY) appears to be broader in terms of application.  The definition brings forth the role of the state in enhancing (or maintaining) competitiveness of the region. The state should provide the enabling environment to organizations within its borders and at the same time ensure prosperity to the people. This definition (of competitiveness) fits well within the functional autonomy enjoyed by the Indian states in the federal framework of the country.

However, while operationalising the above definition, certain modifications are required. This is necessary because some of the traditional national competitiveness parameters (e.g. exchange rate, foreign trade policy, monetary policy) operate uniformly across the country and therefore they become irrelevant for interstate comparisons. Moreover, for some variables state level data may not be available. Such variables need to be dropped or their proxies to be identified.

IMD’s methodology is known for its simplicity and the direct approach while dealing with a large number (over 300) of diverse indicators. The fundamental principle, which underlies the distinction between notions of national competitiveness and enterprise competitiveness, focuses on where the creation of economic value takes place. A nation’s environment hinders or supports the wealth creation process through its policies. The present report Competitiveness of Indian States 2004 (CIS 2004) extends this principle to the states in India. The competitiveness of economies and the competitiveness of firms are interdependent concepts. The CIS 2004 focuses on the first. It measures and compares how states are doing in providing an environment that sustains the domestic and global competitiveness of the firms operating within their borders.

Wealth is the outcome of readily available natural resources (e.g. Jharkhand) or accumulated capital and knowledge (e.g. Delhi). Economic power arises from a combination of wealth and the size. Uttar Pradesh is economically a powerful state in

the country but not necessarily competitive. A state’s competitiveness cannot be reduced merely to its gross value of production or its productivity measured per person or per unit of capital. This is because firms must cope with the political, cultural, and educational dimensions of the geo-political entity. Therefore, it is in providing firms with an environment that has the most efficient structure, institutions and policies that states should compete with each other.