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21 February 2017 Question Bank


21st  FEBRUARY 2017 


(1 Question)


Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.


1.    The Economic Survey 2017-18 throws up a deep puzzle about convergence among states within India. Elaborate.



  •  If India has to do well, the States as a whole must do well — which also requires that large differences in economic development between them must narrow over time.
  • Convergence is narrowing or reduction in relative disparities.
  •  This year’s Economic Survey throws up a deep puzzle about convergence within India. Rather, one striking outcome suggests two puzzles.


The outcome :


  •  In the 2000s, while standards of living (measured in terms of Gross State Domestic Product or consumption) per capita increased in all the States, the disparities among them also increased.
  •  In other words, there was divergence across the States instead of convergence.
  •  Despite the promise that less developed States such as Bihar, Madhya Pradesh and Chhattisgarh had started improving their relative performance. But the data show that those developments were neither strong nor durable enough to change the underlying picture of divergence or growing inequality.
  •  Convergence occurs when a State that starts off with a lower level of per capita GDP sees faster growth of per capita GDP in the future so that it catches up with better-performing States


The two puzzles:


  •  The first puzzle stems from the international comparisons: across countries disparities are declining in contrast to India. The second puzzle is a temporal one: the tendency towards disparities within India has been strengthening, not weakening, over time.
  •  Convergence happens essentially through trade and through mobility of factors of production.
  •  The findings suggest that India stands out as an exception. Within India, where borders are porous, convergence has failed whereas across countries where borders are much thicker (because of restrictions on trade, capital and labour) there is a convergence dynamic. That is not easy to explain. That is the cross-country puzzle.
  •  The Economic Survey shows that trade within India is quite high and mobility of people has surged dramatically — almost doubled in the 2000s.
  •  These indicate that India has porous borders — reflected in actual flows of goods and people — and that porosity has been increasing.
  •  Yet over time, divergence has been increasing rather than narrowing. That is the inter-temporal puzzle within India.
  •  The driving force behind the Chinese convergence dynamic has been the migration of people from farms in the interior to factories on the coast, raising productivity and wages in the poorer regions faster than in richer regions.
  •  But India is not lagging far behind and yet disparities have been widening.


Probable reasons:

1.      Governance or institutional traps:


  •  Although further research is required to understand the underlying reasons, one possible hypothesis is that convergence fails to occur due to governance or institutional traps.
  •  If that is the case, capital will not flow to regions of high productivity because this high productivity may be more notional than real.
  •  Poor governance could make the risk-adjusted returns on capital low even in capital-scarce States.
  •  Moreover, greater labour mobility or exodus from these areas, especially of the higher skilled, could worsen governance.


2.      India’s pattern of development


  •  A second hypothesis relates to India’s pattern of development.
  •  India, unlike most growth successes in Asia, has relied on growth of skill-intensive sectors rather than low-skill ones (reflected not just in the dominance of services over manufacturing but also in the patterns of specialisation within manufacturing).
  •  Thus, if the binding constraint on growth is the availability of skills, there is no reason why labour productivity would necessarily be high in capital-scarce States.
  •  Unless the less developed regions are able to generate skills (in addition to providing good governance), convergence may not occur.


Puzzle still remains:


  •  Both these hypotheses are ultimately not satisfying because they only raise an even deeper political economy puzzle. Given the dynamic of competition between States where successful States serve both as models (examples that become evident widely) and magnets (attracting capital, talent, and people), why isn’t there pressure on the less developed States to reform their governance in ways that would be competitively attractive?
  •  In other words, persistent divergence amongst the States runs up against the dynamic of competitive federalism which impels, or at least should impel, convergence.
  •  The move towards economic divergence across India in the face of the equalising forces of trade and migration is a deep puzzle waiting to be unravelled.









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