The inequality problem

Extreme inequality is one of the key characteristics of the way economic activity is distributed in the country. The poorest Indian state, Bihar, had a per capita GDP of just a third of all India average. The richest Indian state, Goa, had a per capita GDP of more than 3x the national average. The poorest Indian state thus has a per capita GDP of 1/10th of the richest Indian state.

What is worse though is that a large part of India’s population lives in the poorer states. The top 3 richest states – Goa, Sikkim, and Delhi – account for less than 2% of the population. In contrast, the bottom 3 states in terms of Per Capita GDP – Bihar, UP and Jharkhand – account for almost 30% of the population. Of the 5 most populous states – Uttar Pradesh, Maharashtra, Bihar, West Bengal, Madhya Pradesh – 4 have per capita GDP below all India average. Prosperity is thus sparsely distributed while poverty is widely distributed.

The following makes it clearer: the per Capita GDP of every Indian state is below the World average. World Bank estimates Global per Capita GDP to be US$11,000 in 2019. In comparison, the per Capita GDP of Goa, the state with the highest per Capita GDP in the country, was just over US$7,000 in FY20. Indeed only 3 Indian states – Goa, Sikkim, and Delhi – had per Capita GDP higher than the average of middle-income countries globally – estimated by World Bank to be around US$5,500 in 2019. Per Capita GDP of Bihar, the state with the lowest per capita GDP, is lower than that of Sudan. While per Capita GDP of UP, the state with the second-lowest per capita GDP, is lower than both Pakistan and Nepal.

This income inequality is driving a range of problems currently – political, social, and economic. And this drives home the need for rapid economic growth. But rapid growth by itself is not good enough. For this inter-regional inequality to reduce, the poorer states need to grow faster than the richer states. That means states like Bihar and UP ought to grow faster than states like Gujarat and Maharashtra.

After this slightly depressing post, we promise next week we will look at something optimistic. Now onto the quiz.

Quiz: How many years will it take for Bihar’s per capita GDP to catch up with the current (not future) all India average assuming it grows at the same rate as it has grown in the last 5 years.

Answer to the last quiz: With a nominal GDP of almost US$400bn, Maharashtra will rank 33rd in the global GDP rankings, if it were to be considered a separate country.