Analyzing the Growth Performance of Indian States in the 1990s

The 1990s reshaped India’s economic map. After the 1991 reforms opened up the economy, growth accelerated nationally, but it did not spread evenly. Some states surged ahead while others crawled along, and the gap between them widened sharply. This decade is a useful case study in how economic liberalisation interacts with regional inequality, and why a single national growth figure can hide very different stories at the state level.

Why state-level growth matters 🔗

India’s economy is best understood not as one block but as a collection of state economies, each with its own resources, industries, and policies. The standard measure used to track this is State Domestic Product (SDP), the state-level equivalent of GDP. When economists study growth in the 1990s, they usually compare the growth rate of SDP across the 14 major states, since these account for the bulk of the population and output.

The 1990s are especially important because they were the first full decade after the reforms of 1991, which dismantled the licence-permit system, reduced trade barriers, and encouraged private investment. The big question was whether these reforms would help all states rise together or allow some to pull far ahead. The data points clearly to the latter.

The great divergence in growth rates 🔗

The most striking feature of the 1990s was not just that growth varied, but how much the variation increased compared to the earlier decade. The economist Montek Singh Ahluwalia captured this in an influential study of state-level performance under reforms.

In the 1980s, the spread of growth rates was fairly narrow. According to Ahluwalia’s analysis, SDP growth ranged from a low of about 3.6% per year in Kerala to a high of 6.6% in Rajasthan, a gap of less than a factor of two. In the 1990s, that range widened dramatically, running from roughly 2.7% in Bihar to 9.6% in Gujarat, a gap exceeding a factor of three and a half.

Gujarat led the country with a growth rate of around 9.6%, followed by Maharashtra at roughly 8.0%. These two middle-income states experienced the sharpest acceleration of the decade. At the other end, the poorer and more populous states of Bihar, Uttar Pradesh, and Orissa actually decelerated compared to the 1980s. This widening spread is what scholars call the “great divergence” among Indian states.

Where the states stood 🔗

The pattern was not random. Growth tended to cluster geographically and by initial income level:

High performers: Gujarat, Maharashtra, and a group of southern states such as Karnataka and Tamil Nadu recorded the fastest growth. As a group, these states averaged around 7.4% per year in real terms during the reform period, well above the national average.

Middle performers: States like Rajasthan, Madhya Pradesh, and West Bengal did reasonably well, with Madhya Pradesh notably accelerating after a slow 1980s.

Laggards: Bihar, Uttar Pradesh, and Orissa grew well below the national average and slipped further behind the leaders.

The hidden role of population 🔗

Headline SDP growth tells only part of the story. What ordinary people experience is per capita SDP growth, which measures how fast income grows per person after accounting for population change. This is where the gap between states becomes even more revealing.

Gujarat achieved a per capita SDP growth rate of around 7.6% in the 1990s. Because the state managed strong economic expansion alongside relatively controlled population growth, the gains translated into real improvements in average incomes. Bihar’s per capita growth, by contrast, was only about 1.1%. The little economic growth Bihar managed was largely swallowed up by a rapidly rising population, leaving almost nothing for individuals to gain.

This is a crucial point for understanding regional inequality. As one analysis of post-reform variations notes, poorer states tended to suffer from both high population growth and low economic growth at the same time. The combination meant that disparities in per capita income across states grew even faster than disparities in total output. A state can post a respectable total growth number, but if its population is expanding quickly, the average citizen may see little benefit.

Why measuring per capita matters 🔗

Imagine two states growing their total output at 4% a year. If one has stable population and the other’s population is growing at 3%, the first state’s residents become meaningfully richer while the second’s barely move. This is exactly the dynamic that separated states like Gujarat and Maharashtra from Bihar and Uttar Pradesh. The richer states were not only growing faster overall; they were also converting that growth into per capita gains far more efficiently.

What explains the disparity? 🔗

If reforms applied to the whole country, why did some states benefit so much more than others? Researchers have identified several factors that explain the variation, and most of them favoured states that were already better off.

Private investment and infrastructure 🔗

The single most consistent finding is the importance of private investment. Ahluwalia’s study concludes that variations in the private investment ratio were strongly and positively correlated with growth, while public investment and plan expenditure had little direct impact. After liberalisation, capital was free to flow toward the most attractive locations, and these were states with better infrastructure, ports, power supply, and connectivity. Indicators such as literacy, tele-density, the proportion of villages electrified, and per capita energy consumption were all found to be positively associated with SDP growth.

Initial conditions and the “advantage of the advantaged” 🔗

States that entered the 1990s with stronger social and economic infrastructure were simply in a better position to seize the opportunities reforms created. The IMF’s panel study of Indian states observed that the rapid divergence of the 1990s coincided directly with liberalisation, and that the reforms appear to have disproportionately benefited states with high initial per capita incomes. With fewer impediments to private activity, the states with existing advantages could grow even faster, while the lagging states found it harder to attract the investment they needed.

Governance and policy 🔗

State governments also played a direct role. The quality of governance, the investment climate, fiscal management, and the willingness to support private enterprise differed considerably. In several poorer states, plan expenditure as a share of SDP actually fell during the decade, which limited their ability to invest in the very infrastructure that drives growth. The result was a self-reinforcing cycle: weak investment led to weak growth, which left fewer resources for future investment.

Convergence or divergence? 🔗

A long-running debate in development economics asks whether poorer regions naturally “catch up” with richer ones over time, a process called convergence. Neoclassical growth theory predicts this should happen. The Indian experience of the 1990s suggests the opposite occurred.

Studies analysing data across this period found a clear tendency for states to diverge in per capita SDP even as they converged in the sectoral structure of their economies. The coefficient of variation, a statistical measure of how spread out the figures are, rose noticeably. As one summary of the research notes, regional inequality remained largely unchanged through the 1980s but rose dramatically after the reforms were adopted. In short, market forces on their own did not pull the states together; they pushed them apart.

A nuance worth remembering 🔗

It would be too simple to say the reforms were biased against poorer states. Ahluwalia is careful to argue that the divergent patterns do not by themselves prove the national reforms were unfair, because so much depended on state-specific characteristics such as governance, geography, and existing infrastructure. The lesson is less about the reforms being flawed and more about the need for lagging states to address their own internal deficiencies and deepen reforms locally. Madhya Pradesh and Rajasthan, both landlocked heartland states, managed reasonable growth, showing that geography alone did not determine outcomes.

Why this matters for development 🔗

The widening gap of the 1990s carried real consequences beyond the statistics. Rising regional inequality has direct implications for poverty reduction, since faster growth in already-prosperous states does little to lift the millions living in lagging regions. When the poorest and most populous states grow slowest, national poverty becomes much harder to tackle, because that is precisely where most poor people live.

The experience underlined a key lesson for a federal democracy like India: balanced regional development cannot be left to market forces alone. It requires deliberate policy attention to the states that fall behind, including investment in infrastructure, education, and health, alongside efforts to improve governance and attract private capital. Without this, the benefits of national growth concentrate in a handful of regions while inequality between states keeps widening.

What do you think? Should the central government play a larger role in directing investment toward lagging states, or does that risk weakening the incentives that drive successful states to grow? And if a state posts high overall growth but barely improves its per capita income because of rapid population growth, can that genuinely be called development?

References

1. https://kingcenter.stanford.edu/sites/g/files/sbiybj16611/files/media/file/96wp_0.pdf
2. https://www.icrier.org/pdf/wp144.pdf
3. https://openresearch-repository.anu.edu.au/server/api/core/bitstreams/87ce4cf6-1143-4917-9f2d-d5634004cacf/content
4. https://www.india-seminar.com/2004/537/537%20s.%20mahendra%20dev.htm
5. https://www.elibrary.imf.org/display/book/9781557759924/ch008.xml
6. https://www.researchgate.net/publication/258184000_Income_Convergence_and_Regional_Growth_in_India_Before_and_After_the_Economic_Liberalization