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September/October 2013
ESSAY
The Rise of the Rest of India
How States Have Become the Engines of Growth
RuchirSharma
RUCHIR SHARMA is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management and the author of Breakout Nations: In Pursuit of the Next Economic Miracles.
When Nitish Kumar became chief minister of the dirt-poor Indian state of Bihar in 2005, kidnapping was said to be the leading industry in the capital city of Patna. People searching for stolen cars were advised to check the driveway of a leading politician, who reportedly commandeered vehicles for “election duty.” Although known for his soft-spoken manner, Kumar cracked down hard. He straightened out the crooked police, ordering them to move aggressively against all criminals, from the daylight robbers to the corrupt high officials. He set up a new fast-track court to speed the miscreants to jail. As Biharis gained the courage to go out on the street, even after dark, Kumar set about energizing a landlocked economy with few outlets for manufactured exports. He focused on improving the yields of Bihar’s fertile soil and ushered in a construction boom. Within a few years, a state once described by the writer V. S. Naipaul as “the place where civilization ends” had built one of the fastest-growing state economies in India. And Kumar was recognized as a leader in the new generation of dynamic chief ministers who are remaking the economic map and future of India.
This generation includes the socialite turned statesman Naveen Patnaik in Orissa, the spellbinding orator Narendra Modi in Gujarat, the self-effacing Raman Singh in Chhattisgarh, and the quiet personalities of Sheila Dikshit in Delhi and Shivraj Singh Chauhan in Madhya Pradesh. As a result of their economic successes, these leaders have each won consecutive reelection bids; India now has six chief ministers who have returned to office for at least three terms in a row, a feat unheard of in a generation. Kumar and Patnaik represent ambitious regional parties that are ready to compete with the country’s two dominant political forces: the ruling Indian National Congress and the opposition Bharatiya Janata Party, or BJP. But the best known among these chief ministers is Modi, who now looks poised to run as the prime ministerial candidate of the BJP in the next national elections, set for May 2014.
That these chief ministers have managed the double feat of economic success and political longevity belies the conventional wisdom about India’s doldrums. After a decade of strong economic growth, during which India was hailed as democracy’s answer to China, the bad news is back: New Delhi seems politically paralyzed in the face of the global economic slump. India’s GDP growth rate has fallen from near double digits to five percent, and the capital has been buried in scandalous headlines about corruption, power outages, and incompetent police.
Things do look bad in New Delhi, but the capital is not the whole of India. Think of the country as a continent, like Europe. After all, it is made up of 28 states, the largest of which, Uttar Pradesh, has more than 200 million people. India has 34 officially recognized languages, and only 40 percent of Indians speak a dialect of its first language, Hindi. There is as much variation in the political and economic culture among India’s states as there is within Europe; Bihar and Gujarat are as different as Germany and Greece. Drive a hundred miles between any two states in India, and everything from the names of the leading political parties to the kind of hair tonic sold in the stores can change completely. For all the talk of India’s booming young population, nine of its major states have fertility rates below the replacement level.
As India’s most dynamic states post rapid and sustainable growth rates, the country is rediscovering its natural fabric as a nation of strong regions. States still growing at or near double-digit rates represent India’s secret weapon for competing with the other major emerging markets, from China to Brazil, Indonesia to Mexico. The only hitch is that despite the chief ministers’ high popularity in their home states, many of them are pushing rapid development with an autocrat’s haste. Nevertheless, if India is to come back as a success story among the emerging markets, New Delhi should find ways to encourage the rise of its breakout states and the spread of their success to India’s other states.
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(Foreign Affairs)
NEW ROADS FOR VOTES
Until recently, India’s state chief ministers did not have the power or much incentive to push economic development. Before its independence, in 1947, India was divided into hundreds of major, minor, and princely states with varying degrees of autonomy, including, in some cases, the power to raise taxes. After independence, the country’s new political leadership worked to centralize power, both to stave off the very real threat of secessionist movements and to address the nation’s deep poverty through Soviet-style central planning. The Indian public was so grateful to the Congress party for liberating them from British rule that it was willing to tolerate the desperately inadequate economic growth of only three percent a year that resulted from central planning. For decades, the Congress party, and the Nehru-Gandhi dynasty that rules it, was able to cash in on the liberation dividend come election day.
But times changed. Chronic slow growth made it difficult for India to earn the foreign currency it needed to pay for imports, leading to an economic crisis in 1991. In response, the Congress party began to unwind the stifling bureaucracy known as “the license raj,” which gave the central planners the authority to decide who could manufacture what products, in what quantities, and in which areas of the country. The easing of these restrictions freed entrepreneurial businesspeople and state officials alike to begin looking for ways to meet the rising aspirations of the consumer classes. It was in the early 1990s, too, that the advent of satellite television and the Internet exposed Indians to the economic booms in China and other developing nations and fed their dreams for a richer life.
The fall of the license raj and the devolution of powers to the states came at the right time. Before, chief ministers had built their political support by positioning themselves as champions of religion and caste, the touchstones of Indian identity. Even into the late 1980s, it was commonplace for lower castes to be refused entry to the same buses, temples, or even police stations occupied by members of the upper castes. For this huge mass of voters who weren’t allowed on the public bus, developing the roads was a secondary priority. State politicians focused on building caste-based coalitions, but with shaky results. Because India is divided among several thousand subcastes, many of which exist in only one state, caste coalitions are inherently fragile and short-lived. In the 1980s and 1990s, nearly three out of every four state governments lasted only one term, which made economically ineffectual state governments even weaker.
Starting in the mid-1990s, state politicians realized that they could build more enduring bases of support if they used their newfound economic clout to cater to voters’ rising economic aspirations. One of the first to do this was N. Chandrababu Naidu, who came to power in Andhra Pradesh in 1995. He focused so heavily on reviving the state’s blighted cities that he was voted out by the rural majority after nine years in power. But by then, others were getting the balance right as voters elsewhere looked to their state’s chief minister for economic leadership. That is why, since 1999, voter turnout has been declining at the national level but rising at the state level. And those state governments that have lived up to voters’ expectations have been rewarded: in the 30 state elections since 2007, 50 percent of the incumbent chief ministers have won reelection, compared with just 25 percent in the preceding three decades; nearly 66 percent of those reelected had delivered five years of growth that was faster than the national average.
Today, caste and religion still matter, but in many states, economic competence matters more. Kumar’s career in Bihar embodies this evolution in state politics. Kumar rose as a champion of his own Kurmi caste, which is concentrated in Bihar and represents around two percent of the state’s population. He had spent much of his career building a caste coalition that included the Kurmis and Bihar’s other marginal castes, before turning to development issues in his run for the chief minister’s office.
Regional parties and the BJP have gained strength at the expense of the ruling Congress party by showing that they have a closer connection to the aspirations of local people. In the 1960s, the chief ministers of India’s ten largest states were all from the Congress party. That number has fallen steadily and is now just two. The decline of the Congress party has led, in turn, to weaker and more divided governments in New Delhi but stronger and more lasting governments in the states, run by regional parties such as Kumar’s Janata Dal (United) and Patnaik’s Biju Janata Dal and by the BJP under leaders such as Modi and Chauhan. These durable state governments may provide the political push India needs to delegate even more power to the states.
AUTOCRATIC GROWTH
The new generation of state leaders sets itself apart from the genteel Brahmans of the Congress party, who have dominated Indian politics for decades and have never been comfortable promoting what they see as crass commerce. The new state leaders, eager to compete, are younger, too. In contrast to the aging New Delhi elite, headed by an 80-year-old prime minister and a cabinet with an average age of 65, in the last five years, the average age of a state chief minister at election has been 56. This relative youth matches the country’s demographics; the average age of the population is expected to decrease for another three decades. And younger voters, impatient for India to catch up with the rest of the world, have sent clear signals to the state chief ministers that they expect competence, not just political handouts.
In their hunger for economic performance, Indians have proved tolerant of creeping authoritarianism. Several of the new state ministers emerged from feudal provincial cultures to lead parties built on promoting a single strong figurehead. Most of these men and women are unmarried, an unusual trend in India’s culture, which suggests a relentless focus on self and career. Several have set up personal television channels to promote their own achievements. One went so far as to erect monuments to herself while in office; Kumar has been accused of violating civil rights in his crackdown on Bihar’s crime.
Even Patnaik, who came to office with little political experience, surprised many with his Machiavellian knack for sidelining rivals in Orissa. The son of a two-time chief minister, Patnaik spent much of his life abroad as a socialite and writer and had never held a regular job before he came home and won a seat in parliament in 1997, and then the chief minister’s post in 2000. Patnaik quickly impressed the state’s elite by assembling a team of accomplished technocrats to push forward a reformist economic policy, working to control runaway spending and encourage industrial growth. Today, Orissa’s deficit stands at less than two percent of its GDP, the state’s growth has averaged close to double-digit rates throughout his term, and this relatively small state of 20 million people is one of the top state destinations for foreign companies investing in India. Like other savvy chief ministers, Patnaik is focused on exploiting his state’s local advantages: in Orissa, that means mines to produce iron ore and bauxite and steel plants to refine those metals.
Modi is the most controversial of the new chief ministers, because his aggressive push to develop and industrialize Gujarat has earned the state a reputation as the upcoming China of India. The sun sets red over the newly constructed highway that leads into Gujarat’s commercial capital, Ahmadabad, one of the fastest-growing cities in the world. Factories sprout from the farmland just outside town, in scenes evocative of southern China. Today, Gujarat generates about 40 percent of its income from industry, compared with 15 percent nationwide. Modi is widely admired by businesspeople for his efforts to attract investors, but he is loathed by human rights activists, who consider him a Hindu chauvinist because of his alleged complicity in the deadly 2002 riots against the state’s Muslim minority. With opposition politicians whispering that Gujaratis live in fear of challenging the state boss, Modi embodies the inherent tension surrounding the rise of can-do autocrats in a developing country with a strong democratic tradition.
The fact remains, however, that Modi, like many of the new generation, is highly popular, and this popularity allows him, and the others, to push painful but necessary decisions, such as hiking electricity tariffs and cutting state subsidies. Indeed, since 2005, state budget deficits have declined to 2.5 percent of state GDP on average, whereas the federal deficit is rising and now stands at five percent of national GDP. New Delhi lacks the support to push unpopular cuts.
At the state level in India, there is no European-style contest between the free market and government power. On one side, there is the socialist tradition of the Congress party, in which patrons argue over who has done more to help the poor. On the other side, there is the new breed, also peddling populism but with a more practical focus on building roads, schools, and other infrastructure that generates growth.
It is not at all clear, however, that any of the bold, autocratic chief ministers can be a good fit to lead the whole country. Since independence, the most successful prime ministers have had weak regional roots but strong nationwide appeal, starting with India’s founding father, Jawaharlal Nehru of the National Congress. Successful chief ministers have typically failed to reach the prime minister’s office because the political formula that works in one state tends to be a liability in others. Until recently, for all his popularity in Gujarat, Modi had shown little more drawing power outside his home state than, say, Angela Merkel enjoys outside Germany. Now, Modi’s run for national office will depend on a growing feeling among middle-class Indians that the political paralysis in New Delhi runs so deep that the country’s rebound depends on a return to strongman rule.
But Indians should recognize that it doesn’t take an autocrat to deliver growth. Since 1980 in emerging markets, democratic and authoritarian regimes have been equally likely to deliver GDP growth averaging more than five percent for a decade. What it does take is good governance, and there is no reason why democrats cannot push growth in India, as Dikshit has proved in Delhi and Chauhan has demonstrated in Madhya Pradesh.
BACKWARD STATES FORWARD
Even if one of these formidable regional leaders cannot, in the end, secure the national throne, they have already redrawn the economic map of India. In the 1990s, the first states to benefit from the fall of the license raj were the rich ones of the southern and western coasts, particularly Gujarat, Maharashtra, and Tamil Nadu, which already had strong industrial bases. But in the last decade, the center of rapid growth has shifted northward and inland, to the states of Bihar, Chhattisgarh, Madhya Pradesh, Orissa, and others. The average growth rate of these northern states jumped from 2.2 percent in the 1990s to 9.1 percent over the past decade, while India’s national growth rate gained just two percentage points.
The rise of the north is nothing less than a revolution. For decades, much of the country’s elite looked at the stagnant poverty there and concluded that these states were fast-breeding, overpopulated regions that were somehow culturally ill suited to economic development. Today, although some of the northern states are growing faster than the national economy, southern elites tend to dismiss this success as a result of “the base effect,” the idea that it is easier for an economy to grow fast from a low per capita income level. But this is starting to look like an excuse for poor leadership in the south. For one thing, the rich southern states of India are seeing their growth slow down at much lower income levels than the rich southern provinces of China, which grew rapidly for many decades, not just one. Good leadership produces good economic results: Modi has proved that even a relatively rich state such as Gujarat can grow at a double-digit pace for more than a decade. Meanwhile, in the absence of strong leadership, southern states such as Andhra Pradesh and Karnataka have seen their growth slow.
A recent analysis by Credit Suisse confirmed the connection between strong state leadership and solid economic performance. The report found that most of the periods of rapid state GDP growth in India over the last 20 years came when a competent regional party leader was at the helm. In only one instance, in Maharashtra in the mid-1990s, when Sharad Pawar was chief minister, was that leader a Congress party member. The culture of the Congress party, so steeped in the personalities of the Gandhis and the socialist instincts of Nehru, discourages the rise of new leaders and only reluctantly embraces market competition. Increasingly, businesses recognize which states understand economic reform and are steering their investments accordingly.
Beyond the north-south power shift, some Indians see the transfer of power from New Delhi to the states as a symptom of national decline. They shouldn’t. Weak central governments are common in other major democracies, particularly in those, like India, that merged once-autonomous principalities into a unified state. In Germany, coalition rule does not spell anarchy, and it doesn’t have to in India, either. The rise of India’s states could just as easily be read as a sign of national maturity: a tacit recognition among voters that the country will not fall apart just because its states can control their own economies.
POWER TO THE REGIONS
To revive India’s competitiveness in the global economy, New Delhi should step aside and allow the rising states to reclaim even more economic decision-making power from the center. Some chief ministers are already contesting the right of the national Environment Ministry to regulate the height of high-rise buildings in various cities. Others are challenging New Delhi’s authority to manage the distribution of coal supplies to power plants.
Still more question the rationality of the so-called centrally sponsored schemes, a throwback to socialist central planning. These projects are hatched in the capital, with funds disbursed by the central Planning Commission, which often sets uniform targets that don’t account for the stark socioeconomic differences among the county’s states. The newest scheme would expand the government’s heavily centralized food-distribution network, promising subsidized grain to two out of every three Indians at an annual cost to New Delhi of at least $20 billion. Another scheme promotes universal enrollment in primary school, a largely redundant goal in those states, such as Kerala, where enrollment levels are already high. Similarly, the National Rural Health Mission, a program to improve health care in the countryside, does not account for states’ varying levels of malnutrition. Left to their own devices, India’s new state leaders would be able to mold social policies in ways that suited regional conditions.
New Delhi appears ready to step back, recognizing what one of India’s foremost state leaders, N. T. Rama Rao, once said: “The center is a myth and the state is a reality.” The government recently resolved a major controversy over whether to allow international retailers such as Walmart and Tesco to open stores in India by kicking the decision down to the state level. The Planning Commission has proposed allowing states more flexibility in how they spend federal funds, and the newly constituted Finance Commission is looking at ways to devolve more power to the states. In a symbolic gesture, in the National Development Council, where state and federal officials coordinate economic policy, plans are afoot to change the seating arrangement so that the state leaders sit alongside the central leaders instead of looking up to the New Delhi VIPs from seats in the gallery.
New Delhi should go even further: the latest opinion polls suggest that the upcoming general elections could spell a major Congress party defeat. Some of the seats that the party could lose are likely to go to the BJP, but the polls suggest that even more will go to the ascendant regional parties, such as Kumar’s Janata Dal (United) and Patnaik’s Biju Janata Dal. There is even growing talk that the next government might be led by a coalition of regional parties. That does not, however, mean that one of the better-known or more controversial state leaders will become prime minister. Often in India, the backroom negotiations to build a coalition government lead to the choice of a compromise candidate or an accidental prime minister, such as the current one, Manmohan Singh. Singh got the job in 2004 only after the leader of his coalition, Sonia Gandhi, unexpectedly turned it down and nominated him instead.
As a rising force, the regional parties represent hope: they are young, energetic, focused on economic development, and very much in sync with the practical aspirations of the youthful majority. The next elections will see a generational shift, with 125 million new voters raising the likely turnout to more than 500 million. This is a post-liberalization generation: all the new voters will be too young to remember the darkest days of caste discrimination or the worst absurdities of the license raj, and they are likely to push the outcome in favor of younger leaders who understand their economic aspirations. If a combination of state leaders spurs India to embrace its natural federal structure and delegate more economic power to the states, it could well put the country on the path to a comeback.
Copyright © 2002-2012 by the Council on Foreign Relations, Inc.
But officials familiar with the discussion say there was one dissenting voice over what is now destined to become one of the world’s largest welfare programmes. 
