Decoding state growth

Strengthening existing economic centres, rather than building greenfield cities, is key to faster state-level growth

- SHISHIR GUPTA & RISHITA SACHDEVA

Prime Minister Narendra Modi has given a clarion call for India to achieve developed country status by 2047. While there is near-unanimity that India's state governments will drive the future reform agenda, the jury is still out on what it takes to accelerate growth. Should states strengthen human or physical capital, or the quality of governance? Should they focus on existing cities or greenfield developments? And should all states pursue the same strategy?

An analysis of the gross domestic product (GDP) growth performance of 20 major Indian states over the past 30 years reveals two fundamental axes for accelerated state growth: Strong growth attributes and specialised key economic centres (KECs), or large cities. Nine growth attributes include physical capital, such as road density; social capital, such as gross enrolment in tertiary education; and quality of governance, such as labour market flexibility.

KECs are mainly defined as districts comprising million-plus urban agglomerations (UAs) as well as capital cities. These 58 KECs accounted for 30 per cent of India's GDP in 2000, which increased to about 35 per cent by 2020—indicating a faster growth trajectory. A few key messages emerge from this growth framework.

No one-size-fits-all growth strategy: Growth attributes serve as foundational elements, while KECs act as catalysts. Focusing only on state attributes may miss the binding constraints facing KECs, while singularly focusing on KECs is not desirable, since we find little evidence of isolated pockets of growth pulling up state growth meaningfully in an environment of weak growth attributes. States must determine their strategy based on their performance on these two fundamental axes.