IndiaSpend Debates: CRISIL: The State of the States Report

Did you know that Punjab is the most prosperous state in India and Madhya Pradesh the least? This is in the context of consumer durables, according to the latest report by ratings agency Crisil titled Prosperity & Equality. Govindraj Ethiraj, Editor, IndiaSpend, spoke to D K Joshi, chief economist, Crisil, about the report and some new indices that form the basis for the report. Here are the edited excerpts:

Govind: Mr. Joshi, thanks for coming back. I have three or four questions - so let me define what they would be, First, why these indices as opposed to any other or rather these benchmarks as opposed to any other? Second, do these benchmarks or parameters really work when it comes to assessing whether states are equal or people in the state are equal and whether there is prosperity? Third is, of course, to understand how these stack up against other parameters of measurement.  Finally, what this means for states in terms of our understanding of states and the economic and social status.

Joshi: Well, there are various ways of looking at states. I mean people have attempted various indices to rank states. So, we thought we’ll look at the census data which was comprehensive in nature. Census is complete enumeration, it is not a sample. It gives you a full picture and we decided to look at two dimensions of consumer durables ownership. So, that’s one way of looking at prosperity whether you have a durable, you own durable goods or not. There are many other ways but we decided to focus on one because data was readily available from the census.

Govind: What’s the extrapolation, in your mind, of owning a durable to the overall prosperity of a family? Joshi: Well, in some sense, it represents discretionary income. I mean, if you have durables, then you have some additional income in your hands. I think that aspect gets captured when you look at durable ownership. The index has two dimensions: one looks at prosperity, the other looks at equality. Within prosperity, we again have two things. I mean, we look at how many households possess those durables goods. We also look at those who are left out. To be prosperous, a state has to have high percentage of ownership of all durable goods, and low percentage of people with no durable goods. So, that’s how we define prosperity.

Govind: So, will you see differences in equality in one state versus the other or could it be districts, for instance, and something more local? Joshi: Well, I think it is beyond that. I think states are an average, and an average always masks. I mean, if I put somebody’s head on fire and I make him stand on ice, the average temperature is good but he is very uncomfortable. So, I think averages mask. You have to look within the states.  For instance, the growth is concentrated in a lot of states. Prosperity is concentrated in the capital city and the rest of the state is completely left out.

Govind: Which is best example or worst example of this? Joshi: The best example of states that are prosperous and equal are Punjab and Kerala. And the worst example is Madhya Pradesh. I think M.P. has extremely concentrated prosperity in Bhopal, and the rest of the state is quite poor on that count. Then there are other states which are prosperous overall but the prosperity has not spread. For instance Maharashtra, I think again it’s concentrated in pockets like Mumbai. I think a very high percentage of people own durable assets and very few people are left out.

Govind: So, let me ask you a little more to get the statistical base right, what are the chances that this data does have or could have people or a lot of people who do not own consumer durables or have not expressed preference for owning consumer durables and yet are prosperous? Joshi: Well, that’s a possibility because there are financial assets, which are not compared here, I think that’s an exclusion we have done. I think there is also, like whether you have a house or not? Some people even define whether you have toilet within the house or not?  I think that’s also a sense of prosperity in some sense. But I think if you look at too many things, it becomes hazy. So, this is just focused on one element. We are not saying this is a comprehensive picture but this is one way of looking at a very comprehensive source of data (from the Census) and then looking at households.

Govind: But do other countries - developed or developing – look at similar indicators? Joshi: Yeah, I think there is something called asset poverty, which people try to measure based on what kind of assets you own. The definition of asset can move from durables to financial assets to other assets but yeah there is a concept of asset poverty. Govind: Let’s come back to the states. You talked about Madhya Pradesh on one end and Punjab on the other end. Now Punjab and Kerala, two states which have high amount of prosperity and equality. Both seems to be driven, Punjab for high minimum support price (MSP) for agriculture and Kerala for remittance, right? So therefore, they do not reflect any sort of strength of the larger economy or the state’s economy.

Joshi: Well I think I would say in Punjab; actually in the case of Punjab and both Kerala, I think the agriculture has also been a good force, I mean. Kerala also has services sector, so there are, I think, broad drivers, which benefit everybody. Agriculture, particularly, benefits a large section of people because it is labour-intensive. It employs a lot of people. I think being agriculture dominant, being the bread basket of the nation and high minimum support prices on top of that has helped Punjab. And Punjab is also a remittance economy, we should not forget. I mean, a lot of Punjabis are outside who send remittances. Kerala also has three drivers, I mean, agriculture to some extent, then you have services sector, which is quite good, and then the remittance part. So, if you put all together, you get why the states are prosperous. In both the states you have IT-ITES missing, I mean which is there in states like Karnataka, for instance, where growth has become quite localised.  Or even Haryana to some extent where Gurgaon has come up.

Govind: So it leads to one question about distortion. IT-ITES employs a few million people and yet obviously their consumption or purchasing power is very high. Is that causing the distortion in let’s say Gurgaon and Karnataka? Joshi: I think it is causing distortion in statistics. Haryana as a whole is also prosperous state but I think Gurgaon has become too prosperous because of various factors coming together. IT-ITES is one, real estate prices are jumping up and Gurgaon is developing as a centre for business activity. I think all those things have created a distortion in Gurgaon versus the rest of Haryana, which is not in the case of Punjab.

Govind:  But you are not differentiating between small states and large states? Joshi: No, here we are not. We have taken 16 states which are reasonably large. Gujarat scores high on prosperity but when you look at equality, it’s just on the borderline. Govind: So, in your mind, what’s the ideal blend? Joshi:  This is a relative term, there is no ideal, per say. Ideal would be everybody should have some asset - that’s an ideal.  I mean we won’t reach that. I don’t think that exists anywhere, may be in some pockets. But the thing is how closer you come to ideal? Ideal would be low level of inequality, let’s say, the difference between various districts should be minimal, and all the people should have some asset or the other. I think, the more people own all the assets better it is but fewer people should be deprived of assets.

Govind: So, what is driving this?  Is it political stability, political capability or natural resources? Joshi: I think some states with natural resources, rich states like Chhattisgarh are very low in equality and prosperity. I think, as somebody has said, prosperity of the  state if it has natural resources depends on policies above the ground and not policies below the ground. And I think that’s where the regulatory issues come in.  So, natural resources give you the potential but that potential may not be realised. I think it’s a mix of things.  Look at Bihar, for instance, which has outperformed all the states. I think in the last couple of years, it has grown at close to 12% per year. It is a state which is very poor and now mineral resources are also very fewer after the split. In our prosperity ranking it is also very low. I think it is a state, which has equality among low prosperity. So I think that everybody is equal in low prosperity sort of to say.

Govind Ethiraj: In a state like Bihar... Joshi:  Bihar has grown very fast. Why did that happen? It doesn’t have good infrastructure, it lacks skilled manpower, which other states have. I think because the most binding constraint in that state was law and order and governance. When that part started getting addressed, you saw growth being unlocked. Now, for it to move this growth to higher growth would require unlocking other stuff like infrastructure etc. So, it depends on what is the binding constraint in a given state. As far as political stability is concerned, let me give you an interesting example of West Bengal versus Tamil Nadu. In West Bengal, we had political stability for 20 years but West Bengal scores low in prosperity and low in equality despite that.  And if you look at Tamil Nadu, one Government comes in and it is not sure whether it can win the next time or not. Yet, it has to deliver, people are very demanding. So, even with political instability, they have managed to become one of the high performing, highly industrialised state in India.

Govind: A supplement question to that is that the people of West Bengal have, in the past, elected Governments back to power despite not having grown in the quality and prosperity index, at least in your ranking. Joshi: That’s right. That’s a bit of a surprise to me but eventually I think they did change.  They lived with the same Government for a long time. We know that the opportunities in West Bengal were shaking and people were moving out of West Bengal.

Govind: So, a sort of a second supplement question: if people don’t achieve a certain standard, in let’s say ownership of assets as you defined it, would that be sufficient cause for them to, let’s say, express displeasure when it comes to voting? Joshi: Well I think in the sense that when they start, let’s say... It’s a digitised world today. People are familiar with what’s happening in other states. Benchmarking is very simple. So the sense of deprivation is very forceful so to say. So yeah, asset ownership would be one element of that.

Govind: Yeah, it will be one obviously Joshi: Which shows your discretionary power, so states would feel left out I mean. Govind:  What are the other insights when it comes to growth? And we have talked about the Punjab, Kerala, which is a combination of two or three factors, which are somewhat unique. Joshi: Yeah I think every state would have its own different model I mean so to say if I look at for instance, Bihar. We talked about Bihar but another aspect which we haven’t touched is governance. I mean people often say that you need to have better governance for improving the growth prospects of a state. Bihar has demonstrated a low,

it is stacked at the lower end of the   spectrum as far as the governance ranking is concerned but it did try to improve.  Let me bring in a bit of global example here. There is no clear-cut relationship between governance and high growth. I mean there are countries which have grown with low governance standards. I mean, China is one example, Korea when it started growing. But both these states are very...

Govind: Why would you say China is low on governance? Joshi: Because, if you look at governance and corruption ranking, it scores quite low. It’s better than India but it scores quite low. South Korea also was very low and still is not; I mean it’s a part of OECD but still scores low as far as governance is concerned though it is improving.  I think the point is you require good governance for sustained high growth. And beyond a point, it becomes critical to address that issue. In the initial phase, some count tires have managed to grow with poor governance also and I gave you the two examples of China and South Korea but these countries had very strong development agenda. And Government was also pushing that development agenda.

Govind: And if you were to transfer that example to understanding states of India? I mean, the face off or trade off between governance and growth? Joshi: Well, you have too many conclusions coming out. I think that two indices were done last year. One was by NIPFP, the governance index that puts Punjab at the top of the governance standards. Now there is another index, which I think is the...

Govind: The Raghuram Rajan index? Joshi:  The Raghuram Rajan Index and the Bibek Debroy and Laveesh Bhandari did a freedom index, which puts Gujarat at the top. Now, in the first index, Gujarat is at the 12^th position. If you look at the growth rates, Punjab’s growth rate is much lower than Gujarat. What I am trying to say is that there is no one-on-one correspondence, and and you need to look at other reasons also.

Govind: But is that like a synthesis, now that your report is out, if you want to sit and put your reports here and these three or four reports around the table what’s the ...are there... what are the meeting points on it and how would you rank? Joshi: I would say Tamil Nadu is a winner no matter which report you look at. I think Tamil Nadu stands as a good example of a state that has done reasonably well on all the fronts. And then Punjab, Haryana, Gujarat. I think they stack up among the top states. And bottom states are very clearly defined, I mean some might rank Bihar as the lowest, others might put Madhya Pradesh at the lowest but the bottom five includes West Bengal, it includes

Bihar. Govind:In all ranking? Joshi: In all ranking Govind: I mean that’s also insightful. I mean so there’s agreement on the bottom. There is some disagreement between top and the middle. Joshi:  I think there is always a conflict in the middle. But I think the bottom is very clear and the top is also clear. So, we are clear on which states have lost out. Govind: And policy makers should focus on that. Last question - how does all this stack up against the whole concept of India?

Joshi: What it tells you is that you can’t look at it as India... there are many plots and sub-plots within India. The moment you start looking at states, you have different plots and sub-plots emerging. So, it’s a very complex country. I think it has about 1600 dialects, I think 22 or 23 official languages, of very complex nature. So, one will have to get more focused on what is happening in a particular state. Then, on what is happening at the national level, which is also critical because even with the same shock of Lehman crisis, even with the same macro-economic policy, same monetary policy, some states have been able to break out

and others have gone down. So, this means there is internal development at the state level which can offset the head winds from the national level policies to some extent. And that’s a very important finding to me. Govind: Right, and if all this is a pre-condition for the future, I mean future in terms of growth and prosperity, what would you say, or which are the states you feel are well positioned?

Joshi: I would say that from states, coastal, I think, always have an advantage. I think so, people always used to talk about Kanpur line, below that...  I mean you know that Govind: East of Kanpur? Joshi: East of Kanpur, where the prosperity is going to, is... I think that is broadly true. But I think what is also true is that states like Bihar could get to the high growth path. Let me give you an example of South Korea. In the 1960s, people thought South Korea had no potential. It was the third poorest country in the Asian region but they managed to wriggle out of that, and they are a part of OECD today. So, I think, initial conditions don’t necessarily...so your history is not destiny. Let me put it this way. States can break out. You have to very carefully watch for policies they are following, and whether they are addressing the most binding constraints. Govind: Right Mr.Joshi, thank you very much. And when are you going to do a follow-up to this? Joshi: Well, I think, this can only be followed up when the next Census comes because Census is I full enumeration. It’s not like NSSO, which is like a sample of one lakh households. So, this is more stable data in that sense. Govind: Thank you so much and look forward to speaking you again.