Chapter-i introduction

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Figure 6.1a Regional Inequality in India in 1980s.(Coefficient of Variation)

Figure- 6.1b Regional Inequality in India in 1990s.(Coefficient of Variation)

Figure- 6.1c Regional Inequality in India in 2000s (Coefficient of Variation)

The figure 6.1a, 6.1b and 6.1c shows the population weighted coefficient of variation for the three decades. It becomes clear from this figure that regional disparity remained largely unchanged during the 1980s but showed a distinctly a rising trend during the 1990s and 2000s. Since the trends remained largely unchanged during the 1980s the centripetal and the centrifugal forces balanced each other during this period. While the agglomeration economies provided the centripetal force, the centrifugal forces worked probably generated by the government’s efforts to achieve a spatially balanced growth by channelling development towards backward areas however in the 1990s and 2000s the rise in regional inequality clearly supports the hypothesis from Paluzie (2001) which predicts increasing regional disparity following reforms. This implies that the centripetal forces became stronger than the centrifugal forces during this period. This may have happened because the reforms weakened the centrifugal forces and strengthened the centripetal forces in the post reform period. It appears from the figures that (Figure 6.1a.1b and 1c) this pattern of changes in the services sector inequality seems to be in line with the changes in aggregate inequality.

In the pre reform period, the government’s policies targeted to check regional divergence worked through multiple channels. One channel worked through the public sector, where sizeable parts of the public investment were made in relatively backward areas. The other channel worked through the private sector, which was encouraged through the use of fiscal incentives and industrial licensing to invest in these areas. In the other words the state played a crucial role in bringing down inequality in the services sector during this period. In the post reform period services sector shows the divergence due to a number of reasons:-

Generally the rate of investment is regarded as one of the most important factors explaining growth in any economy, and it is therefore appropriate to consider whether inter-state differences in growth are associated with differences in the rate of investment in individual states. It is very likely that in practice this led to a reallocation of investment in favour of states perceived as having better infrastructure facilities, better labour skills and work culture and a more investor friendly environment. This could lead to a substantial increase in investment in the better performing states and a consequent increase in their growth rate, with a corresponding reduction in investment in less well endowed or well governed states and a deceleration in their growth. The quality of infrastructure is also regarded as an essential determinant of growth in the states such as electric power, road and rail transportation, ports and airports and telecommunications. Good infrastructure not only increases the productivity of existing resources going into production and therefore helps growth, but also helps to attract more investment which can be expected to increase growth further.

There could be several reasons for increasing regional inequality in India. One explanation could be that India is in early stage of development and therefore is on the wrong side of the “Inverted U” pattern of regional inequalities (Williamson, 1965). Another reason could be the relatively high barriers to interstate trade in India. A third reason could be the perverse nature of the central government’s regional development policies and the inter-governmental transfer system.

Accelerated private investments also generate their multiplier effects on social development. Better quality educational and health facilities have been financed by the private sector which reduced the pressure on public facilities. More than 70 percent of the engineering graduates are coming out from the colleges of just four states viz.’ Andhra Pradesh, Karnataka, Maharastra and Tamil Nadu. The IT boom in these states can be explained, to a large extend by the explosion of engineering education in these states.

There has been a consistent rise in service exports, especially of software and computer related services since 1990s. Increase in service exports has been due to advancement in technology and trade liberalization. Since these facilities were mostly available in the relatively developed states in the western and the southern part of the country, this preference increased the regional inequality between these states and the poorer ones. Share of exports in the services sector rose from about 3.2 percent in 1990-91 to about 15.1 percent in the 2008-09 (Source: RBI Handbook of statistics). A major development in India's export scenario in recent decades has been a fast growth in export of services even during the period of crises in the global economy.

The allocation of plan funds across the states has been made in accordance with the level of income of the states, that is the poorer states have been receiving proportionately larger amount of development funds relative to their richer counterparts, Such type of positive discrimination rising regional disparity may be the outcome of lower efficiency with which public capital is utilised and also of infrastructural disparity across the states.

The industrial licensing system was dismantled as a part of the reforms, which also determined the location of investment gave the private sector the freedom to choose its location and minimise the transportation cost to large domestic market. The result was a shift of their production base to the metropolitan areas of the richer states, which covered most of the large domestic markets in the country. The manufacturing exports sector needed to minimise transportation costs to international markets and hence preferred to locate it near the coastal areas that had good infra structure. Since these facilities were mostly available in the relatively developed states in the western and the southern parts of the country this preference increased the regional inequality between these states and the poorer ones.

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