A Tale of Two States: Maharashtra and West Bengal

Amartya Lahiri, Kei-Mu Yi
2006 Social Science Research Network  
In this paper we study the economic evolution between 1960 and 1995 of two states in India -Maharashtra and West Bengal. During this period West Bengal, which was one of the two richest states in India in 1960, has gone from a relative per capita income of about 105 percent of Maharashtra to a relative income of around 69 percent. Our diagnostic analysis reveals that a large part of the blame for West Bengal's development woes can be attributed to: (a) low aggregate productivity (b) poorly
more » ... ity (b) poorly functioning labor markets and sectoral misallocations. We find that sectoral productivity and labor market allocation wedges were strongly correlated with political developments in West Bengal, namely the increasing vote share of the leftist parties. In 1960, two of the three richest states in India were Maharashtra and West Bengal. Maharashtra, home state of Mumbai (Bombay), and West Bengal, home state of Kolkata (Calcutta) were centers of commerce and industry. In addition, West Bengal had the social and physical infrastructure that came with Calcutta's past as the long-standing capital of the British empire. Over the next three decades, however, the two states' economies diverged as West Bengal significantly under-performed relative to Maharashtra. Drawing on data from multiple sources, we are able to quantify the extent of West Bengal's relative decline. According to our calculations, by 1993, its per capita output had fallen almost 35 percent relative to Maharashtra's. For a pair of regions at the top of the heap to diverge at a rate exceeding 1 percent a year for almost 35 years is remarkable in and of itself. What makes the experience of West Bengal and Maharashtra even more remarkable is that these two regions are located within the same country, and, as such, are subject to the same national policies. The purpose of this paper is to better understand the relative decline of West Bengal and to shed light on the broad output and factor markets that may be the key sources of the decline. We believe this examination is a necessary first step to the ultimate goal of ascertaining the state-specific policies, institutions, and/or degree of implementation of national policies that may be the root causes of West Bengal's under-performance. Our data analysis is mainly conducted from the prism of neoclassical growth theory. We first document the decline in West Bengal's per capita GDP relative to Maharashtra. We then turn to aggregate growth and (relative) levels accounting. Using data assembled from numerous sources, we find that West Bengal's under-performance can be attributed
doi:10.2139/ssrn.931465 fatcat:ry5doxc7ujhi7g3ennyrvzcrky