The Progress of Policy Reform and Variations in Performance at the Sub-National Level in India

Abstract

The reform process in India has so far mainly concentrated at the central level. India has yet to free up its state governments sufficiently so that they can add much greater dynamism to the reforms. Greater decentralization of decision making from the center to the states will lead to greater competition among the states and therefore to higher efficiency and productivity in these regions. Policy making at the sub-national level is essential in order for the state governments to be able to follow development strategies suitable to their socio-economic, cultural, and geographic characteristics. Coastal states, for example, can follow a more focused export-led growth strategy, or states with a large pool of trained manpower, such as IT professionals in Tamil Nadu or Karnataka can lay more emphasis on IT and service sector. A few of the Indian States have been more reform-oriented, such as Andhra Pradesh, Gujarat, Karnataka, Maharashtra, and Tamil Nadu, but states, such as Haryana, Kerala, Orissa, Madhya Pradesh, Punjab, Rajasthan and West Bengal have a lot to catch-up with. Of course, Bihar and Uttar Pradesh are even further behind. We analyze the state-level situation in fifteen major states based on the progress of state-level policy reform. Accordingly, we have divided these states into three categories of reformers. These are the reform-oriented states, intermediate reformers and the lagging reformers. We then examine the performance of these states in terms of SDP growth, foreign direct investment, industrial investment proposals, and software exports among other variables. Real annual average growth rates of per capita gross state domestic product bear testimony to the fact that our group of reform-oriented states are the fastest growing states in India in the post-reform period. Also, these states have performed better in attracting both domestic and foreign investment, software exports, and in the areas of primary health and education.