“West Bengal, which held the third-largest share of national GDP at 10.5% in 1960-61, now accounts for only 5.6% in 2023-24. It has seen a consistent decline throughout this period.” the paper said.
| Photo Credit: AFP

West Bengal has experienced a continuous decline in its relative economic performance over several decades, according to a working paper by Economic Advisory Council to the Prime Minister (EAC-PM).

Authored by EAC-PM member Sanjeev Sanyal, the paper ‘Relative Economic Performance of Indian States: 1960-61 to 2023-24’ said the development of eastern part of the country remains a concern.

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It said maritime States have clearly outperformed other States, with the exception of West Bengal.

Although Bihar’s relative position has stabilized in the last two decades, it remains significantly behind other States and requires much faster growth to catch up, the paper noted.

Conversely, Odisha, traditionally a laggard, has shown a marked improvement in recent years.

“West Bengal, which held the third-largest share of national GDP at 10.5% in 1960-61, now accounts for only 5.6% in 2023-24. It has seen a consistent decline throughout this period.

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“West Bengal’s per capita income was above the national average in 1960-61 at 127.5%, but its growth failed to keep pace with national trends. As a result, its relative per capita income declined to 83.7% in 2023-24, falling below that of even traditionally laggard States like Rajasthan and Odisha,” the paper said.

It further noted that the western and southern regions of India have performed notably better than other parts of the country from 1960-61 to 2023-24.

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South leads GDP race

Southern States have significantly outpaced others after economic liberalization in 1991, with the five States — Karnataka, Andhra Pradesh, Telangana, Kerala and Tamil Nadu — collectively accounting for approximately 30% of India’s GDP in 2023-24.

“Before 1991, southern States did not show exceptional performance. However, since the economic liberalization of 1991, southern States have emerged as the leading performers,” it said.

In addition, per capita income of all southern States became higher than the national average after 1991.

The paper also noted that in the north, States like Delhi and Haryana also stood out. “Delhi has one of the highest per capita incomes throughout the study period.” As per the paper, Maharashtra, West Bengal and Tamil Nadu were home to India’s 3 largest industrial clusters in the 1960s.

“Their fortunes subsequently diverged- Maharashtra showed broadly steady performance throughout, West Bengal’s share has been in continuous decline. After a decline, Tamil Nadu picked up post-1991,” it said.

All data used are in current prices and the analysis spans 1960-61 to 2023- 24, providing insights into how individual States have performed in response to changes in national and State-specific policies.

For representative purposes.
| Photo Credit: Getty Images

The conventional way to assess a country’s economic situation is to look at the quarterly (three-month) and annual (12-month) GDP (gross-domestic-product) growth rate and compare it to previous quarters as well as years. In the quarterly release of GDP figures by the NSO (National Statistical Office), the country’s performance is likened to reviewing a report card of its economic performance. However, a critical difference between reviewing a report card and India’s economic figures is that the latter tells a far more nuanced story.

The Q1 data covering the GDP growth rate from April to June of FY24 boasts a nominal growth rate of 8% and a real growth rate of 7.8%. The growth story currently posits that the numbers reflect an uptick in the agriculture sector growing at 3.5%, unlikely to be sustained due to pressure from the El Niño phenomenon, and the services industry, with financial, real estate and professional services growing at 12.2%. Moreover, there is also talk of sustaining a close to 6.5% growth rate for the current financial year. However, a closer look at the numbers provides a far more interesting interpretation of the growth.

Calculating GDP

The first factor to consider is that calculating the GDP growth rate involves many complex statistical choices and sophisticated statistical operations. One such decision the NSO made while conducting their research was to use the income approach of calculating GDP rather than the expenditure approach. The income approach involves summing up all national incomes from the factors of production and accounting for other elements such as taxes, depreciation, and net foreign factor income. The assumption generally is that both methods lead to similar results.

However, the expenditure approach dictates headline growth to be 4.5% rather than 7.8% which is a large discrepancy. Moreover, another essential statistical operation is the adjusting for inflation using the price deflator. Typically, the deflator is meant to adjust growth figures when they are overstated by inflation. In this case, deflation due to falling commodity prices, reflected in the wholesale price index, has worked to overstate the real growth. Furthermore, there is a base effect from the COVID-19 degrowth period, which continues to plague India’s growth figures. Although less pronounced in FY24, the base effect has a role in comparative statistics due to sporadic growth in the years following FY20-21.

Additionally, one must consider whether the proposed, supposedly cooled, inflation rate calculated through the consumer price index can be sustained at current levels with the impending depreciation of the Indian rupee against the dollar due to capital outflow pressures resulting from the RBI’s reluctance to raise interest rates. India is a net importer, and its most significant import consists of crude petroleum, whose price seems to be rising due to Saudi’s $100 per barrel push and rupee depreciation. The domestic consumption of diesel, a proxy for economic activity in India, fell by 3% in August, which, if sustained, does not paint a rosy growth picture for the coming quarters.

Revenue from taxes

Moreover, the government’s tax revenue from direct taxes has weakened over the previous quarter while the indirect tax revenue remained strong, indicating a K-shaped pattern. The income streams from progressive taxation (more significant tax burden on those higher on the income ladder) seem to be a laggard compared to its regressive counterpart. A muted growth of direct tax collected in an economy boosted by the services industry is a statistical discrepancy which remains unexplained in the proposed GDP growth story. Direct and personal taxes should (in the absence of any significant policy changes) have grown closer to the nominal growth rate than it has currently. Narrowing revenue streams indicate forced austerity measures, as the government intends to control the budget deficit, and hence the interest rate. Therefore, growth in FY24 stemming from government expenditure seems to be a pipe dream.

A nuanced approach

In conclusion, after a meticulous analysis of India’s Q1 FY24 economic transcript, it becomes palpable that the reported growth narrative might be somewhat overembellished. The divergence in growth figures brought forth by the income and expenditure approaches manifest a significant disparity, raising fundamental questions about the veracity of the promulgated optimistic narrative. Moreover, the underpinnings of this growth story, nuanced by inflationary adjustments and conspicuous fluctuations in tax revenue streams, signal a cautious trajectory. Additionally, the apprehensive outlook on the agriculture sector and potential fiscal constraints paint an arguably more restrained picture than initially portrayed. Therefore, it seems prudent to assert that India’s economic performance, although showing signs of resilience, does not quite emerge as the unequivocal success story depicted in initial observations, urging a more nuanced and critical approach in assessing the trajectory ahead.

Anand Srinivasan is a consultant and Sashwath Swaminathan is a research assistant at Aionion Investment Services