What is well known, of course, is that economic growth and per capita income may not be directly correlated with human development indicators. Table 1 presents the human development rankings of the major states as calculated by the Planning Commission, from 1981 to 2001. It is evident that Kerala, which consistently holds the top position in terms of human development indicators, is among the middle-income states. Some of the higher income states are only in the middle ranks of human development.
Table 1 >>

Further, growth trends also do not seem to be necessarily correlated with human development improvement. It is true that Tamil Nadu, which experienced a relatively higher rate of growth, has also shown a substantial improvement in human development ranking. However, other fast growing states such as Karnataka, Gujarat and Andhra Pradesh actually slipped in terms of human development ranking. Meanwhile, Rajasthan, a state with low income and low growth rate, showed continuous improvement in its human development rank.

The question, of course, is what explains such regional (or rather, state-wise) disparities in income and human development, and in particular, what explains the increase in disparity between richer and poorer states in the most recent decade. What was it about the overall growth pattern of the 1990s which, relatively speaking, caused the poorer states to stagnate, while some states, especially in the southern and western regions, seem to have accelerated their growth even in per capita terms? What explains the performance of states like West Bengal and Kerala, which are not generally accepted to be fast growing states? And why do income and human development indicators diverge so much?

Parts of the last question can be answered in terms of the difference between income and consumption, which is indicated in Table 2. This table suggests several features of interest.
Table 2 >>

First, there is a wide divergence between the per capita consumption estimates of the NSS and the per capita SDP data, even at the top of the hierarchy. Thus, Kerala, which is only seventh in ranking in per capita SDP, tops the list in per capita consumption. Maharashtra, which is second in per capita SDP ranking, is fifth in per capita consumption.

Second, the inter-state disparities are less in terms of per capita consumption that emerges in terms of per capita SDP. Thus, the gap between the highest per capita consumption figure (in Kerala) and the lowest (in Orissa) was 1.98 times in 1999–2000, which is lower than the gap of 4.5 times which we observed for per capita SDP in 2000–01.

Clearly, human development indicators (which capture longevity and educational attainment along with income) are more likely to be affected by per capita consumption in a state than by per capita income. Therefore, it is not surprising that we find greater correlation between the consumption and human development rankings, than we do between SDP and human development rankings.

The question remains why some of the high income states exhibit relatively less per capita consumption. This anomaly points to higher savings and investment ratios in such states, but it should be noted that some of these states, such as Maharashtra, have not necessarily been high growth states, especially in the recent times.

Until the 1970s, there was actually a convergence of per capita incomes across states, or at least a decline in the extent of inter-state disparities in this regard. This reflected deliberate government intervention, expressed in various ways. The successive Finance Commissions showed positive discrimination in favour of poorer states in the transfer of tax revenues of the government, and funds also were partly directed with this in mind. Incentives for industrial investment and activity in poorer states and more backward regions were also provided. As these became less significant, the forces making for convergence got weakened, and the greater play allowed to market forces began to strengthen the process of divergence of per capita incomes across states.

In general, the 1990s are likely to have been associated with greater inequality of per capita SDP across states, also because of fiscal patterns across India and within particular states. This was a period of greater centralization of tax revenues, and reduced fiscal transfers from the Central to the State governments. It is important to remember that, unlike the Central government, State governments do face budget constraint, and this affects their ability to spend in important ways. This meant that state governments found they had less resource to undertake important infrastructure and other investment, which in turn had adverse effects on growth and on subsequent economic activity.

While all state governments were adversely affected, and indeed there is now a fiscal crisis in practically every state, some states were worse off than others.  These were the states where previous growth and per capita incomes were low as they were unable to generate more sales tax and other such revenues from economic activity. On the other hand, states where economic activity grew at a faster rate were able to generate more tax revenues and were therefore able to invest in infrastructure, transport, power and so on. This was certainly true in the southern states of Karnataka and Tamil Nadu, where, in the recent decade, there has been substantial expansion of transport infrastructure in particular. By contrast, states such as Bihar, Orissa and Uttar Pradesh found themselves to be so cash-strapped that they could not maintain the existing infrastructure projects, and the providing of basic facilities in per capita terms too showed a further decline. So the fiscal constraint operated to add to the stagnationary tendencies already present in certain states, which meant the widening of the gap between the richer and poorer states over the 1990s.

In this context, the relatively better growth performance of states like West Bengal and Kerala in the 1990s deserves further investigation. Different forces may have been operating in the two states. In West Bengal, while agriculture led the growth of the 1980s, in the 1990s the impulse seems to have come more from the expansion of services and rural industrialization. In Kerala on the other hand, services growth played a significant role, especially driven by the effect of the inflow of remittances from migrant workers from Kerala in the Gulf region.

What all this discussion indicates is that the actual behaviour over time of per capita SDP in the various states, and of per capita consumption, is rather different from that projected by the more stereotypical notions regarding economic differences in different parts of India.