Social Reforms and Economic development in Souther

Wednesday, July 25, 2012

Issues Relating to Inflation

ISSUES RELATING TO INFLATION

G.THIMMAIAH

MEANING AND NATURE OF INFLATION

1. Inflation is an economic situation characterized by persisting general rise in the prices of goods and services.

2. Inflation may be wholesale price inflation and/or retail price inflation.

3. Inflation may be general rise in the prices of most of the goods and services and/or sectoral inflation like food inflation.

4. Inflation may be structural, that is inherited from past policies of the government which cannot be reduced without reducing growth rate of GDP

5. Inflation may be domestic inflation and/or global inflation.

TYPES OF INFLATION

1. Wholesale inflation which reflects increase in the wholesale prices of commodities.

2. Headline inflation which reflects increase in the prices of all groups of commodities.

3. Core inflation which reflects increase in the prices of non- food (non- energy) manufactured goods.

4. Retail inflation which reflects increase in the prices of commodities at the retail trade level, which is in retail shops.

5. Food inflation reflects increase in the prices of food articles.

RATES OF INFLATION IN INDIA

1. Wholesale inflation rate increased by 7.55% as on May 12, 2012as against 7.23%as April 12, 2012.

2. Retail inflation rate increased by 10.36% as on May 12, 2012.

3. Core inflation has come down to below 5 % in May

4. But Food inflation rate increased by 10.74% as on May 12, 2012. This is actually pushing up whole sale inflation

FOOD INFLATION IN INDIA

· Food inflation rises to 9.13% on June 23, 2011

· Food inflation hits 9.44% on July 14, 2011

· Food inflation rises to 8.04% on August 4, 2011

· Food inflation rises to 10.05% on September 01, 2011

· Food inflation rises by 0.79 % on December 11, 2011

· Food Inflation declines by -0.68 %0n January 12, 2012

· Food inflation increases to 6.12 %on February 12, 2012

· Food inflation increases to 10.11 % on March 12 ,2012

· Food inflation increases to 10.49 % on April 12,2012

· Food inflation increases to 10.74 % on May 12, 2012

Source: Reserve Bank of India

HOW TO MEASURE INFLATION?

1. Price indices are constructed to measure inflation. Prices of sample items of goods are collected and their relative importance is used as weight and an index is prepared.

2. In India Economic Adviser’s index of Wholesale price index is prepared and changes in wholes sale prices are measured every month with 2010-11 as base year. (There is also producers’ price index).

3. Consumer Price Index for Industrial workers is constructed by Indian Labor Bueareau with 2001 as base year.

4. India was also having consumer price index for agricultural laborers and consumer price index for non-manual employees. These have been discontinued.

5. GDP deflator is also used to measure inflation as it is a more representative index. But it is not available for current periods. (GDP at current prices divided by GDP at constant prices).

CAUSES OF INFLATION

1. Mismatch between supply and demand for goods and services at the sectoral and micro level.

2. Aggregate demand exceeding aggregate supply at the macro level.

That is: (consumption+ investment+ government expenditure +exports)

= aggregate demand EXCEEDING (savings+ taxation+ imports) = aggregate supply

This is called demand pull inflation.

3. Costs of inputs, (interest on credit, raw materials, wages, taxes and transport cost), rising faster than productivity. This is called cost-push inflation.

4. Prices of imported inputs like petroleum products may contribute to domestic inflation through rise in energy cost. This is called globally transmitted inflation.

5. Inflation is not merely and always a monetary phenomenon but more complex economic phenomenon.

EFFECTS OF INFLATION

1. Economic effects: a. Price effect. b. Income effect. c. Wealth effect.

· When prices rise, price effect compels consumers to substitute superior goods by lower quality goods. This encourages spurious goods production and piracy.

· When prices rise, people will be left with less income which is income effect. Thus inflation reduces income of poor people which adds to inequality.

· When prices rise lenders lose real value of money and borrowers gain. This process redistributes income lenders to borrowers.

2. Inflation adversely affects growth of GDP through monetary policy, expenditure policy and by creating economic uncertainty. It encourages speculation.

3. Political effects: civil unrest, revolt, voting out a government and all such consequences will follow.

ISSUES RELATING TO INFLATION (1)

1. Has Globalization transmitted global inflation into India?

2. Global inflation is transmitted through oil prices.

3. It is transmitted through commodity prices

4. It is transmitted through speculative food grains prices.

5. Global capital flows into Indian stock market has pushed up share prices.

6. Does inflation facilitate growth of GDP?

INFLATION IN USA

EUROPEAN INFLATION

INFLATION IN BRIC COUNTRIES (BRIC)

ISSUES RELATING TO INFLATION (2)

1. Can Monetary Policy alone control Inflation?

2. Monetary policy tools include: Interest rate Policy of the Central bank, Cash Reserve Ratio, Open Market Operations, and Directives (moral persuasion).

3. Monetary policy will be able control inflation if inflation is caused by excess money supply. Otherwise it becomes ineffective.

4. Monetary policy also becomes ineffective if fiscal policy measures are not coordinated and supportive to monetary policy.

INFLATION AND MONETARY POLICY IN CANADA

INFLATION AND BANK OF CANADA’S INTEREST RATE

INFLATION AND MONETARY POLICY

MONETARY POLICY IN SELECTED COUNTRIES

ISSUES RELATING TO INFLATION (3)

1. Is the present inflation in India structural?

· To some extent yes, because of persisting fiscal deficit. (That is Government’s net borrowing).

Association between fiscal deficit and inflation

Fiscal Deficit Rate of increase

Year as % of GDP in Wholesale Inflation

2000-01 -9.47 3.5

2001-02 -9.51 3.0

2002-03 -9.94 3.8

2003-04 -9.57 3.6

2004-05 -8.51 8.7

2005-06 -7.24 4.2

2006-07 -6.49 6.4

2007-08 -5.37 5.8

2008-09 -4.09 6.7

2009-10 -8.47 7.5

2010-11 -9.54 10.5

Note: Fiscal Deficit includes that of the Union and of the state Governments.

Source: Reserve Bank of India

ISSUES RELATING TO INFLATION (4)

1. Does inflation facilitate growth of GDP?

· Ben Bernanke summarized the answer

o Slow growth cures inflation

o High growth fuels Inflation.

How?

ASSOCIATION BETWEEN INFLATION AND GROWTH

Recent Trend of Real GDP Growth and Inflation in India

ISSUES RELATING TO INFLATION (5).

What is Threshold Inflation for India?

“High output growth and low inflation are among the most important objectives of macroeconomic policy. But there are perceived trade-offs between lowering inflation and achieving high growth. Empirical evidence emphasizes that the growth-inflation relationship depends on the level of inflation—at some low levels, inflation may be positively correlated with growth, but at higher levels inflation is likely to be harmful to growth. In other words, the relationship between inflation and output growth is nonlinear.”

Source: RBI Working Paper

ISSUES RELATING TO INFLATION (6)

1. Can India follow inflation targeting monetary strategy?

· Inflation targeting means choosing a specific rate of inflation and using monetary policy measures to achieve it. Many countries do it.

· Inflation targeting cannot be done in India because of multiple objectives imposed on RBI.

ISSUE RELATING TO INFLATION (7).

INFLATION TARGETING AND INFLATION INFLEXION

“It must be emphasized here that the concepts of inflation target and threshold are distinct. Inflation targeting is a construct of monetary policy making in which a central bank announces a ‘target’ and then steers its policy tools towards achieving that target. Inflation threshold is a point of inflexion for the growth-inflation trade-off.

Therefore, inflation threshold need not necessarily be the ‘target’ of monetary policy.”

Source: RBI Working Paper.

TREND IN INDIAN GDP GROWTH RATE

ISSUES RELATING TO INFLATION (8).

IS INDIAN ECONOMY ENTERING INTO STAGFLATION?

1. Stagflation is an economic situation in which growth rate of GDP slows down and stagnates side by side general price level goes on increasing. Thus a combination of stagnation of GDP growth rate with rising inflation is ‘Stagflation’.

2. The GDP figures released for the fourth quarter of 2012 and the entire financial year combined with resurgent headline inflation numbers appear to show that the Indian economy is entering into stagflation.

3. Many western countries faced this economic situation in 1980’s and Japan has been facing it for last 15 years.

4. Stagflation increases unemployment, poverty and economic inequality and people become desperate and lose faith in modern capitalism

NO STAGFLATION IN INDIA

1. It is true that the GDP growth rate has been slowing down but not declining as may be observed from the preceding table.

2. It is however true that Indian economy is facing inflation, that is, persisting rise in general prices.

3. In other words, Indian economy is facing inflation but not stagflation.

ISSUES RELATING TO INFLATION (9) .

RUPEE DEPRECIATION AND INFLATION IN INDIA

1. External value of rupee is determined by the Reserve Bank of India in a fixed exchange rate regime. Periodically it is changed in response to the changes in the current account balance of the foreign trade.

2. But the external value of the rupee was allowed to float in the market from March 1993 under the Liberalized Exchange Rate Management System and now it is determined by the supply and demand in India for US dollar which is the international reserve currency.

3. In recent months, external value of the rupee started depreciating because of several reasons. One reason is the increase in the current account deficit of the country which reached 3.6 per cent of the GDP. Second reason is decline in our exports on account of economic slowdown in European countries and the USA and increase in imports mainly because of the increase in the price of crude oil in the Middle East countries. Third reason is that the External Commercial Loans, (ECBs), borrowed by Indian Corporate entities have become due now for repayment which has increased demand for dollar. On top of all these reasons, the FDI and FII inflows started declining because of certain tax provisions, (Retrospective Assessment and GAAR), announced in the Union budget for 2012-13 to plug the tax evasion. The cumulative effect of all these factors resulted in the rupee value depreciating to as low as Rs.57.35 per US dollar in the month of June this year.

DOES RUPEE DEPRECIATION LEAD TO INFLATION?

1. When rupee depreciates, we have to pay more rupees for getting one dollar. This would mean we have to pay more for imports particularly for crude oil imports. Education and foreign travel cost more. Even though international prices of commodities have declined, rupee depreciation has offset that benefit. Thus rupee depreciation has led to import cost-push inflation

2. But when rupee deprecates, it is like devaluation in a fixed exchange rate regime and should encourage our exports. But this is not happening because of the decline in demand for our exports because of the economic slowdown in European countries and in the USA. Slow growth of exports combined with high level of imports has resulted in current account deficit to increase to 3.6 per cent of GDP.

3. In the context of slowdown in FDI and FII inflows, India is not able to finance the increased current account deficit.

4. All these factors lead to further depreciation of Indian rupee which will push up both import cost push and export demand pull inflation.

5. Thus Rupee depreciation in external value will lead and has led to increase in inflation.

ISSUES RELATING TO INFLATION (10).

DOES INFLATION LEAD TO DEPRECIATION OF RUPEE?

1. When inflation persists or increases, our exports become costly and the demand for our exports will go down. This will reduce our foreign exchange earnings.

2. In order offset the effect of inflation on our exports, we have to reduce the value of our rupee. This is devaluation under fixed exchange regime.

3. But since we have floating exchange regime, rupee automatically depreciates when our exports do not grow sufficient enough to finance our imports.

4. So inflation becomes a double edged sword. It makes rupee to depreciate and rupee depreciation also leads to inflation.

IS INDIA GOING FOR ANOTHER ECONOMIC CRISIS?

Thank You

Thursday, July 19, 2012

SOCIAL REFORMS AND ECONOMIC DEVELOPMENT IN SOUTHERN STATES

SOCIAL REFORMS AND ECONOMIC DEVELOPMENT IN

SOUTHERN STATES

G.Thimmaiah

1. Introduction.

Economists have tried to identify factors which have been responsible for the differences in the growth performance of major states in the Indian Union. Some have identified investment climate, some others have identified quality of governance, infrastructure and availability of human capital as major factors which attract investment and ultimately result in varying rates of growth of GSDP. (Paul and Sridhar, 2009). Some of the recent studies, (Ahluwalia, 2000), have compared the growth performance of major states before and after the introduction of economic liberalization and economic reforms and have attributed economic reforms as contributory factor for impressive growth rates of

GSDP of major states. But no attempt has been made to study and understand the impact of social reforms at least in southern states, where they have operated for almost a century, on the growth performance of southern states. I have made an attempt here to understand the mechanism of operation of social reforms and their impact on the economic development of southern states. In order to understand the impact of social reforms on economic development of southern states, we have to understand the nature of social reforms which operated in those states.

Nature of Social Reforms.

Generally speaking, social reforms encompass a whole gamut of societal as well as governmental actions initiated for reducing and, in the long run, removing the social inequalities originating from social institutions like religion, caste, and gender. Social reforms also encompass policies and programmes initiated by both social groups,(like religious organizations, caste associations), and governments, ( both national and state), to reduce and minimize the negative impact of social institutions and to use reformed and modernized social institutions to promote transformed social identity, political participation and economic prosperity of all social groups. Social reforms influence economic development by facilitating creation of required capacities among the masses to participate in social, political and economic activities of a society in a region/country. The processes through which social reforms impact economic development are many and complex. An attempt is made here to explain some of these processes.

Operating Processes of Social Reforms.

Social reforms minimize the social barriers and inequalities between different sections of the society. Social reforms broaden the social, political and economic horizon of hitherto suppressed people, (scheduled caste and scheduled tribe people), neglected social groups, (traditional artisan caste people), and even inactive sections of society like the dominant caste groups who consider modern education meant for government jobs as unnecessary in the context of their wealth. Social reforms create a sense of self-confidence and self-esteem among hitherto suppressed and neglected sections of the society. Social reforms awaken hitherto socially and politically suppressed and neglected social groups and activate and push them into productive action. Social reforms compel the hither to suppressed/neglected and even inactive sections of the society to accept modern education and absorb other modern ways of acquiring capacity to participate in broader social, political and economic activities. Through these processes, social reforms ultimately create a broad based demographic, educational, economic and technological resources in a region/country. Such broadened demographic, educational, economic and technological base creates ‘the law of large numbers’ which enables a society to throw up large number of skilled persons, innovators, risk-takers, and entrepreneurs apart from the usual political leaders, administrators, doctors and engineers. All of them in turn contribute in the long run to faster economic development with given investment, infrastructure and government policies. This is how social reforms impact economic development.

The role of social movements as a precursor to the growth of education and the spread of entrepreneurship is borne out at the level of regions too (see Damodaran (2008)). Like TN, Kerala also had seen strong social movements early in the 20^th century that promoted greater awareness and interest in education among the lower castes that had not received such opportunities in the past. Andhra Pradesh and Karnataka that were part of the erstwhile Madras Presidency had also witnessed a similar awakening and networking among their lower caste groups. The “social capital” created through this process in the region may have laid the foundation for more widespread education through institutions established by communities and caste groups. The explosion of technical education in the south in the 1990s could also be traced to this phenomenon. There was hardly any comparable development of educational institutions through non-governmental initiatives in the northern states.

Social Reforms in Southern States:

Social reforms in south India originated in movements against caste hierarchy. Though such movements were inspired by the Pan Indian Bhakti movement after the spread of Islam in India, in south India the British rule brought in western education and created large number of remunerative jobs in the British administrative set-up.. The Brahmins took advantage of these benefits of British rule and dominated the British administration at all levels. This dominance became an eyesore for the non-Brahmin communities. The demand for more specific reforms became vocal after the first Census Report of 1881 was published. It revealed the dominance of Brahmin community in modern education and government jobs. This lead to protests from economically and socially dominant communities in the southern part of India which demanded for a fair share in government jobs. Thus began the anti-Brahmin movement. However, the seeds of social reforms were sown by the Census of 1901 and 1911 which revealed caste-wise education status and employment in administrative set-up of former Madras Presidency. Realizing the educational backwardness of people of non-Brahmin castes, individual caste associations were formed to help their caste people to acquire modern education. This was a positive response from neglected and inactive social groups to Brahmin dominance. They started their own schools and demanded reservations for jobs in government administrative set-up. The Madras Dravidian Association (1912) played prominent role in these movements. These efforts spread to former Mysore and Travancore states. Backward class movement became a major political plank in south India. The governments of former Madras Presidency, former Princely states of Mysore and Travancore opened government schools for teaching subjects of western education. Later when the non-Brahmin movement got transformed into backward class movement, they introduced reservations for modern educated non-Brahmin caste candidates.( See Thimmaiah,1998).

Lasting social reforms were made possible by the Dravidian Movement which was started by Periyar Ramaswamy Naykar after Independence. This movement combined anti-Brahmin movement and backward class movement and on top of these it preached self-respect for suppressed/neglected sections of the Tamil society. Though Periyar did not join electoral politics, he supported those political parties which accepted his ideas of social reforms. The earlier anti-Brahmin movement lost its relevance after the death of Periyar. But the backward class movement got further impetus all over south India. Periyar movement and the backward class movement changed the entire political scene of south India. The earlier suppressed/neglected caste groups acquired political power through electoral process. They used their newly acquired political power to start their own educational institutions and helped their caste people to acquire modern education at affordable cost. This spread education widely among hitherto neglected sections of the society in southern states. From mid-1970s politically and economically influential persons from non-Brahmin castes/communities started their own professional colleges like Medical colleges, Engineering colleges, Pharmacy colleges, Nursing colleges and Dental colleges and in the mid-nineties they also started Business Management schools.

These privately owned professional colleges served the purpose of helping those students who could not compete to gain admission purely on merit and they also enabled them to mobilize enormous funds from donations/capitation fees. These professional colleges helped all sections of the society to acquire professional education at affordable cost and at the same time enabled the owners to mobilize capital from the aspiring students in the form of capitation fee/ donation. They invested that capital in construction, transport, trade and hotel industry which have expanded rapidly and thereby raising the share of GSDP from service sector in the southern states. When at the national level ‘license and permit raj’ was operating for starting big manufacturing industries, at the state level the resurgent backward caste groups were able to start professional educational institutions with ease which offered professional courses and used the mobilized funds for investment in service sector enterprise activities. Thus non-Brahmin private entrepreneurs emerged slowly in southern states that were also encouraged by the state level political leaders through mutual-benefit arrangements. The impact of this socio-political process on the economic performance of southern states has been acknowledged by Samuel Paul and Kala Seetharam Sridhar in their recent comparative study of growth performance of Uttar Pradesh and Tamil Nadu. They have observed that:

“There is historical evidence to support the thesis that education in TN had benefited from the helping hand of the British colonial government in the 19^th century. TN led the country in the reservation policy in education that others emulated in later periods. More importantly, the social movements that dominated TN politics and public discourse in the early part of the 20^th century created a much greater awareness among the lower castes that constituted the majority of the population about their rights and the need for collective action to claim their entitlements. Scholars who have documented social movements across India have pointed out that similar movements did not occur in UP or other northern states.[1] In both regions, there were movements that protested caste abuses and brahminical dominance. But the distinguishing feature of the TN social movements was their focus on gaining access to education and economic opportunities such as jobs in government. These movements not only created greater awareness among the backward classes about the need for collective struggles to achieve their ends, but also increased their sense of solidarity and mutual trust among the members, and helped them create vast new networks to mobilize resources and launch collective political and social action to achieve common ends. It was thus that large numbers of schools, colleges, and in recent years engineering colleges were set up by caste and community supported leaders and groups. A similar trend has been noted in the industry sector of TN where again, impressive numbers of small and medium enterprises have been set up by entrepreneurs, who took advantage of their caste and community networks. The governments in power facilitated this process, resulting in a groundswell of private sector development. Among the political leaders who promoted this process were K. Kamaraj, R. Venkataraman, Annadorai and C. Subramaniam. Developments of this kind do not seem to have occurred in UP. The importance of these historical factors, especially social movements, in laying the foundation for strengthening both the demand and supply sides of development in TN cannot be overemphasized”. (p. )

They have further observed that:

“The role of social movements as a precursor to the growth of education and the spread of entrepreneurship is borne out at the level of regions too (see Damodaran (2008)). Like TN, Kerala also had seen strong social movements early in the 20^th century that promoted greater awareness and interest in education among the lower castes that had not received such opportunities in the past. Andhra Pradesh and Karnataka that were part of the erstwhile Madras Presidency had also witnessed a similar awakening and networking among their lower caste groups. The “social capital” created through this process in the region may have laid the foundation for more widespread education through institutions established by communities and

caste groups. The explosion of technical education in the south in the 1990s could also be traced to this phenomenon. There was hardly any comparable development of educational institutions through non-governmental initiatives in the northern states”.( p. )

Impact of Social Reforms on Economic Performance of Southern States

Attractive invest opportunities and conducive investment climate might have contributed for the faster growth of GSDP of southern states after economic reforms. But these are of recent origin. Much debated quality of governance is an unstable factor in these states. Though infrastructure facilities do matter in attracting private investment, they have not been uniformly favorable in all these southern states. But still their growth rates have been consistently higher than national average and compared to many other major states. What explains this difference? The difference can be explained by the expansion of education across all sections of the society which created broader human capital base. Again, socially broad based private sector used professional education institutions to mobilize capital for investment in service sector activities. Socially broad based private sector in southern states used the benefits of liberalization and economic reforms for expanding the service sector enterprise activities enormously. This

expansion of service sector increased the share of GSDP/NSDP from service sector in southern states beyond 50 per cent which got reflected in faster growth of GSDP of southern states. This may be observed from Tables 1 and 2 below

Table 1: State-wise Percentage Share of Service Sector in GSDP:

State	1980-81	1985-86	1990-91	1995-96	2000-01	2005-06	2006-07	2007-08	2008-09
Andhra Pradesh	37.04	39.41	41.19	43.14	47.10	50.26	50.75	-	-
Assam	39.89	42.09	44.73	39.33	48.12	49.64	51.50	-	-
Bihar	27.65	28.23	30.48	43.96	50.48	56.10	55.25	57.63	-
Chhattisgarh	-	-	-	31.41	41.89	38.17	38.80	40.86	-
Gujarat	32.31	35.81	37.24	37.23	44.73	41.51	-	-	-
Haryana	26.77	28.67	30.71	32.28	41.57	47.04	47.66	-	-
Himachal Pradesh	33.08	35.85	37.75	37.54	38.62	38.10	38.50	-	-
Jammu & Kashmir	-	-	-	45.82	46.61	46.28	45.89	45.88
Jharkhand	-	-	-	28.15	41.88	35.74	35.83	-	-
Karnataka	33.56	37.80	41.18	40.83	47.58	53.49	54.80	55.72	-
Kerala	38.14	42.29	44.81	49.18	57.23	60.28	60.60	-	-
Madhya Pradesh	26.83	29.44	30.42	36.17	50.65	49.38	50.05	-	-
Maharashtra	37.23	41.81	42.32	47.91	57.15	60.58	-	-	-
Orissa	30.28	31.97	37.51	36.92	46.55	47.60	46.91	-	-
Punjab	30.86	27.96	28.77	32.93	40.27	42.36	42.13	-	-
Rajasthan	34.46	30.79	32.77	37.32	43.79	42.76	43.42	43.63	-
Tamil Nadu	40.66	42.82	43.27	42.86	52.83	57.84	58.35	-	-
Uttar Pradesh	32.77	34.45	36.82	38.27	43.42	45.18	45.20	-	-
Uttarakhand	-	-	-	36.54	49.96	48.93	48.29	-	-
West Bengal	38.75	40.49	41.54	44.13	52.89	54.38	-	-	-
Arunachal Pradesh	31.01	28.07	33.13	30.29	46.59	42.37	-	-	-
Manipur	43.38	47.04	51.09	47.27	48.81	37.28	35.96	-	-
Meghalaya	43.86	49.00	53.44	53.66	52.99	52.65	52.38	52.74	-
Mizoram	-	-	-	-	63.59	63.32	63.42	63.52	63.20
Nagaland	54.24	48.80	45.69	56.11	56.16	52.17	-	-	-
Sikkim	30.40	33.57	39.40	44.90	55.18	52.55	52.07	-	-
Tripura	37.47	45.01	50.12	53.98	53.15	55.09	-	-	-
Delhi	70.72	69.33	68.09	76.36	77.07	77.10	-	-	-
Goa	45.87	53.01	51.82	54.76	47.02	49.80	48.89	-	-
Andaman & Nicobar Islands	26.98	29.55	32.66	37.60	55.37	52.99	-	-	-
Pondicherry	27.12	28.35	29.75	53.66	45.42	47.83	46.55	45.16	-

Source: Economic and Political Weekly Research Foundation, 2009.

Table 2: State-wise Percentage Share of Service Sector in NSDP

State

1960-61

1965-66

1970-71

1975-76

1980-81

1985-86

1990-91

1995-96

2000-01

2005-06

2006-07

2007-08

Andhra Pradesh

29.40

30.96

36.77

41.05

41.55

42.69

48.36

51.29

51.80

Assam

24.08

27.36

22.12

22.34

40.39

32.96

32.13

37.57

47.39

47.35

46.83

Bihar

31.38

29.36

20.41

21.60

27.43

28.03

28.90

34.24

50.64

57.37

57.92

60.31

Chhattisgarh

46.09

38.51

38.60

39.86

Gujarat

32.45

33.26

30.26

33.16

31.95

36.55

35.77

35.16

47.36

41.87

Haryana

20.94

21.67

20.01

24.59

26.42

30.22

31.34

33.27

42.44

47.29

47.27

Himachal Pradesh

24.71

25.99

30.96

33.56

37.15

37.22

38.02

36.54

37.86

Jammu & Kashmir

23.61

26.17

28.80

30.55

39.70

42.12

43.50

46.72

46.65

44.05

44.19

43.87

Jharkhand

44.66

35.51

35.34

Karnataka

23.58

24.46

22.17

22.95

33.18

37.26

39.86

41.35

50.12

55.88

56.72

57.05

Kerala

28.78

29.61

34.24

35.45

36.40

39.82

40.74

39.38

60.55

62.25

Madhya Pradesh

23.11

25.31

26.01

30.24

31.53

31.74

51.04

48.54

48.28

Maharashtra

31.74

35.71

37.19

36.12

36.80

40.75

43.01

46.28

59.41

61.40

Orissa

22.34

23.35

29.22

30.01

34.54

36.11

48.89

47.68

46.06

Punjab

30.37

30.40

26.32

28.67

32.02

33.90

32.97

33.96

41.38

45.15

44.06

Rajasthan

27.21

28.01

25.53

28.87

29.71

31.79

33.02

39.32

46.08

45.64

45.24

Tamil Nadu

30.42

34.00

34.02

35.03

40.60

43.75

44.57

48.72

54.92

58.34

58.68

Uttar Pradesh

32.69

33.75

32.36

36.30

36.61

37.61

44.47

47.48

47.60

Uttarakhand

38.12

38.79

40.50

41.34

48.79

48.08

47.81

West Bengal

33.17

32.64

32.22

33.06

25.15

27.83

35.75

29.04

53.56

55.45

Delhi

60.79

64.40

67.35

71.80

70.76

69.90

67.07

73.70

77.71

77.31

Goa

42.59

43.44

41.79

51.36

47.85

54.49

52.00

43.08

42.02

Arunachal Pradesh

20.48

21.43

30.51

27.37

35.36

33.54

45.28

39.62

Manipur

34.04

35.32

35.20

31.25

43.25

41.38

48.96

51.19

48.82

41.98

41.99

41.80

Meghalaya

43.56

46.08

51.17

54.81

53.47

53.68

54.14

54.90

Mizoram

50.64

49.83

49.87

48.19

64.69

64.42

64.85

65.27

Nagaland

53.37

55.51

56.28

57.77

55.54

51.93

Sikkim

30.30

32.59

40.54

34.31

54.92

48.88

47.80

Tripura

31.57

30.01

22.97

22.45

36.51

40.15

46.72

50.09

53.55

55.89

Andaman & Nicobar Islands

54.65

51.31

Chandigarh

84.47

84.17

Pondicherry

26.46

34.22

39.72

57.53

46.24

49.70

48.98

48.68

Source: Economic and Political Weekly Research Foundation, 2009.

Thus it may be observed that the share of service sector in GSDP/NSDP which was hovering around one-third in 1970’s suddenly jumped during the 1980s in all the four southern states. During 1990’s it reached around 50 per cent and in the last decade of the last century it almost reached 60 per cent, except in Andhra Pradesh, which was higher than the national average share. Such phenomenal increase was made possible by the expansion of private sector share in educational services, trade, transport and health services.

Relation between Human Capital and Economic Development

The relation between human capital and economic development has long been discussed and debated. Economists have come to recognize and accept the contribution of human capital to economic development in both developed and developing countries. In the context of globalization and economic liberalization, the role of human capital has come to be justifiably used as one of the determinants of interpersonal and interregional economic inequalities. Human capital increases productivity through skill and innovation. Increased productivity results in high growth rate of output. In India economists have used it to explain development performance of states after economic reforms. For example, Montek Singh Ahluwalia, has attempted to quantify the relation between human capital and state level growth. He has observed:

“The quality of human resources, broadly defined to mean the educational attainment and skill level of the labor force, is another factor that is generally regarded as a critical determinant of growth. We should expect that states with superior availability of human skills and more rapid growth in these skills are more likely to have higher per capita GSDP and also experience faster growth. However, since data on the educational and skill characteristics of the labor force are simply not available, the literacy rate of the population is commonly used as a proxy for the quality of human resources.”( Ahluwalia,2000)

Ahluwalia used regression analysis to quantify the contribution of human capital to state GSDP. He found weak relation between growth rate of GSDP and literacy rate. However, when used with investment rate he found significant result. He has observed:

“It could be argued that the role of human skills in promoting growth is not independent of the level of investment and the two interact with each other to generate positive responses. We therefore estimated a regression equation relating growth to a composite variable obtained by multiplying each of the capex investment ratios with the literacy rate in the base year of the post-reforms period. The multiplicative form implies that the response of growth to a higher investment rate is greater the larger the literacy variable, thus building in a positive interaction effect.”(2000).

Thus he has proved that there is significant impact of human capital (though represented by proxy variable) on economic development at the state level in India.

Human capital has been formed on a wider scale in southern states over a long period of time thanks to social reform movement which encompassed the suppressed/neglected sections which created a broad base of English educated and skilled young population. This broad based human capital has contributed at least partially for higher growth rates of GSDP of southern states. But this is only a part of the story. A far more significant contribution has been that social reforms not only created broad based human capital in the southern states but also enabled suppressed/neglected caste groups to use their newly acquired political clout to start professional educational institutions to raise interest free capital funds for investment in service sector enterprises which in turn created jobs and added to GSDP through service sector contribution. This I consider as a major economic impact of social reforms on growth performance of southern states. Because of the difficulty in finding relevant data to substantiate this, economists have sidelined this factor. Whatever relevant data that are available are presented in Tables 3 to 8 to prove the point that social reforms in southern states enabled the former suppressed and neglected caste groups to acquire modern education and capture political power .They used both these to encourage private enterprise professional education .The combined impact of these factors unleashed unprecedented urge to prosper economically. This urge lead to the emergence of broad based private enterprise in southern states. When the Congress government at the centre led by P.V.Narasimha Rao introduced economic liberalization and encouraged the process of globalization, the southern entrepreneurs jumped and exploited the new economic opportunities thrown open by the economic reforms. The cumulative result of these factors has enabled the southern states to outpace the growth performance of other states in the Indian Union.

State	1961	1991	2001
	P	P	M	F	P
Andhra Pradesh	21.19	44.08	71	51	61
Assam	32.95	52.89	72	56	55
Bihar	21.95	37.49	60	34	48
Goa	35.41	75.51	89	76	82
Gujarat	31.47	61.29	81	59	70
Haryana	NA	55.85	79	56	69
Jammu & Kashmir	12.95	NA	86	68	77
Karnataka	29.8	56.56	76	57	67
Kerala	55.08	89.91	94	88	91
Madhya Pradesh	21.41	44.67	77	50	64
Maharashtra	35.08	64.87	86	68	77
Orissa	21.66	49.09	76	51	64
Punjab	NA	58.51	76	64	70
Rajasthan	18.72	38.55	76	44	61
Tamil Nadu	36.39	66.64	82	65	73
Uttar Pradesh	20.87	40.71	70	43	57
West Bengal	34.46	57.7	78	60	69
India	28.3	52.27	76	54	65

State	Engineering Colleges	Business Management Schools	Medical Colleges	Colleges for Computer application Courses	Pharmacy Colleges
Andhra Pradesh	431	263	36	126	62
Assam	33	9	3	13	2
Bihar	50	31	10	50	2
Goa	8	6	12	25	8
Gujarat	138	61	5	1	34
Haryana	105	64	4	32	25
Jammu and Kashmir	32	14	52	9	NA
Karnataka	485	174	51	114	89
Kerala	117	45	1	69	32
Madhya Pradesh	169	81	1	53	62
Maharashtra	536	264	7	85	102
Punjab	108	121	13	46	63
Rajasthan	90	66	13	46	63
Tamil Nadu	525	304	49	219	75
Uttar Pradesh	24	146	23	82	56
West Bengal	124	120	15	75	11

STATE	No. of All Types of Colleges
Andhra Pradesh	2149
Assam	493
Bihar	211
Goa	54
Gujarat	845
Haryana	1225
Jammu & Kashmir	475
Karnataka	3287
Kerala	1231
Madhya Pradesh	1434
Maharashtra	3109
Orissa	988
Punjab	1344
Rajasthan	1723
Tamil Nadu	2876
Uttar Pradesh	2822
West Bengal	734
All India	26950

State	1980-81 to	1985-86 to	1990-91 to	1995-96 to	2000-01 to
	1985-86	1990-91	1995-96	2000-01	2005-06
	1980-81 Prices		1993-94 Prices		1999-00 Series
Andhra Pradesh	5.1	7.5	5.3	6	6.5
Assam	5.1	3.1	3.6	2.2	5.3
Bihar	5.2	4.4	-0.5	9.6	2.5
Delhi	7.2	7.7	8	10.3	7.4
Goa	1.7	9.6	6.1	9	7.1
Gujarat	4.8	5.8	7.7	4.4	10.1
Haryana	6.6	6.2	3.4	6.6	5.3
Himachal Pradesh	3.1	6.9	4.4	6.8	6.9
Jammu & Kashmir	3.8	2.9	4.9	4.4
Karnataka	4	6.3	6.3	8.6	5.8
Kerala	2.1	5.1	5.3	5	6.8
Madhya Pradesh	3.6	6.6	4.2	3.5	4.4
Maharashtra	4.5	7.6	8.1	3.9	7.1
Orissa	4	1.6	5.4	3	7.8
Punjab	5.9	4.6	4.6	5	4.2
Rajasthan	4.9	10	2.9	5.2	5
Tamil Nadu	5.7	5.6	5.9	6.3	4.9
Uttar Pradesh	4	4.7	6.6	7	6.3
West Bengal	4	4.7	6.6	7	6.3
All India	4.6	6.1	5.2	5.4	7

State	1980-81	1985-86	1990-91	1995-96	2000-01 to
	to 1985-86	to 1990-91	to 1995-96	to 2000-01	2005-06
	1980-81 Prices		1993-94 Prices		1999-2000 Series
Andhra Pradesh	2.8	5.2	3.4	4.9	5
Assam	3	0.8	1.4	0.7	3.9
Bihar	2.9	2.3	-2.6	6.8	0.6
Delhi	2.7	3.3	4.2	6.3	4.1
Goa	0	8.2	4.1	7.4	4.1
Gujarat	2.6	4	5.9	2.3	8.4
Haryana	4	3.7	1.2	3.9	5.2
Jammu & Kashmir	1.2	0.3	2.5	2.1	N A
Karnataka	1.8	4.4	4.7	7.2	4.8
Kerala	0.7	3.7	3.9	4.6	6.9
Madhya Pradesh	1.2	4	2.1	1.4	2.8
Maharashtra	2.3	2	2.8	3.9	8
Manipur	2.7	2	2.8	3.9	8
Orissa	2.2	-0.2	3.5	1.6	10.5
Punjab	4	2.6	2.6	3	2.2
Rajasthan	2	7.4	0.7	2.6	3.2
Tamil Nadu	4	4.3	4.8	5.3	4
Uttar Pradesh	1.6	3.7	0.6	1.5	2.1
West Bengal	1.8	2.3	4.8	5.4	5
All India	2.3	4	1.7	4.4	5.2

State	1960-61 to	1970-71 to	1980-81	1985-86	1990-91	1995-96	2000-01	2006-07
	1970-71	1975-76
	1970-71 Prices		1980-81 Prices		1993-94 Prices		1999-2000 Series
Andhra Pradesh	NA	585	625	1380	1573	2060	16622	22835
Assam	251	535	559	1284	1510	1546	12447	15623
Bihar	215	402	409	917	1074	1197	6557	8056
Goa	0	915	1224	3145	3091	4883	38623	50565
Gujarat	362	829	818	1940	2186	2641	17227	27027
Haryana	327	877	938	2370	2893	3509	24328	35779
Jammu & Kashmir	269	548	573	1776	1832	1784	13859	16817
Karnataka	296	641	666	1520	1644	2039	37405	21931
Kerala	259	594	610	1508	1507	1815	19724	27284
Madhya Pradesh	NA 0	484	499	1358	1409	1696	11154	12577
Maharashtra	409	783	878	2435	2705	3483	21892	30750
Orissa	0	485	476	1314	1442	1383	10211	15096
Punjab	366	1070	1192	2674	3249	3730	25990	30158
Rajasthan	0	645	584	1222	1338	1942	12840	16401
Tamil Nadu	334	581	598	1498	1795	2237	20249	25898
Uttar Pradesh	0	486	474	1275	1375	1652	9700	11188
West Bengal	390	722	1125	1773	1929	2145	16185	21953
All India				1563	1742	2109	16172	22580

	Rural			Urban
State	1973-74	1993-94	1999-2000	1973-78	1993-94	1999-2000
Andhra Pradesh	48.41	15.92	11.05	50.61	38.33	26.63
Assam	52.67	45.01	40.04	36.92	7.73	7.47
Bihar	62.99	58.21	44.3	52.96	34.5	32.91
Gujarat	46.35	22.18	13.17	52.57	27.89	15.59
Haryana	34.23	28.02	8.27	40.18	16.38	9.99
Karnataka	55.14	29.88	17.38	52.53	40.14	25.25
Kerala	59.19	25.76	9.38	62.74	24.55	20.27
Madhya Pradesh	62.66	40.64	37.06	57.65	48.38	38.44
Maharashtra	57.71	37.93	23.72	43.87	35.15	26.91
Orissa	67.28	49.72	48.01	55.62	41.64	42.83
Punjab	28.21	11.95	6.35	27.96	11.35	5.75
Rajasthan	44.76	26.46	13.74	52.13	30.49	19.85
Tamil Nadu	57.43	32.48	20.55	49.4	39.77	22.11
Uttar Pradesh	56.53	42.28	31.22	60.09	35.39	30.89
West Bengal	73.16	40.8	31.85	34.67	22.41	14.86
All India	56.44	37.27	27.09	49.01	32.36	23.62

Policy Implications:

Past studies which identified factors like lagging infrastructure development, low quality of governance et., naturally recommended for their improvement. I have tried to explain the economic performance of southern states in terms of institutional reforms which produced positive impact on growth performance of southern states over a long period of time.While it is necessary to continue to make concerted efforts to promote infrastructure development and improve quality of governance, it is also necessary to pay some attention to social reforms which go to achieve inclusive development.

References:

1. Damodaran, Harish, (2008), India’s New Capitalists: Caste, Business and Industry

in a Modern Nation, Permanent Black.

2.Paul, Samuel and Sridhar, Kala Seetharam, ( 2008), The Paradox of India’s

North-South Divide,

PAC, Bangalore.