Gujarat “growth story”: A distorted model which promotes crony capitalism

Hirway_006This is Prof Indira Hirway’s* rejoinder to Columbia University’s Prof Arvind Panagariya’s article “The Gujarat Miracle” published in the Times of India close on the heels of Gujarat chief minister Narendra Modi’s birth anniversary, which fell on September 17:

The article by Arvind Panagariya on The Gujarat Miracle (TOI, September 22, 2012) starts with stating that the high rates of growth of the Gujarat economy including its manufacturing sector and the consequent high rate of growth of its per capita income are impressive, as these rates are almost the best in the country.

Prof Panagariya is also impressed by the accelerated rate of decline in the poverty ratio (measured using the Tendulkar Committee methodology) of the general population as well as of its scheduled caste population, and the achievements in education and social sector. Though he views the high incidence of poverty on the scheduled tribes (47.6% in 2009-10) and malnutrition of women and children as serious concerns, he argues that the state, with its increased revenue (thanks to the high growth rate), will be able to address these concerns effectively. He thinks that on the whole, the Gujarat story is a miracle story!

There are several problems however with the logic as well as the data used in this paper. To start with, Prof. Panagariya has used the available data only partially. For example, he states, very correctly, that poverty in Gujarat has declined much faster during 2004/05 – 2009/10 (at 1.7 percentage point per year) than during 1999/00 – 2004/05 (at 0.56 percentage point per year). However he does not see that (1) in urban areas, where 43 percent population lives, there is no such acceleration, and in fact there is clear deceleration. The urban poverty ratio declined by 1.1 percentage point during 1993/94-2004/05 and by almost half the rate, 0.56 percentage point, during 2004/05 – 2009/10); (2) the rate of decline in overall poverty in Gujarat is much lower than many other states which have shown much lower GDP growth. The state ranks 10th among the major 20 states in terms of decline in poverty; and (3) the elasticity of poverty reduction to economic growth is one of the lowest, 0.17, in Gujarat as against 0.27 in India. As a result, the state’s rank in the incidence of poverty has decelerated from 7th in 2004/05 (the lowest incidence gets the first rank), to 9th in 2009-10.

There has been rapid deceleration in the human development achievements in the state with the state achieving poor improvement in the HDI in the past decade. As the latest report of the Planning Commission states, Gujarat’s HDI was 0.466 in 2000, and it rose to 0.527, showing an improvement of just 0.061 in 2008. The state ranked almost at the bottom (18thamong the major 20 states) in terms of improvement in HDI during this period! Also, overall rank of the state HDI declined from 6th in 2000 to 8th in 2008. In the case of literacy, the state showed an improvement of 18.02 percentage points during the past decades, but this improvement was much less compared to other states. In fact, the state is 16th among the major 20 states in this improvement! With the other concerns of the social sector, namely, persistent malnutrition and marginalization of the tribal population (both accepted as important concerns by Prof Panagariya), one can say that the state has achieved far from impressive improvements in the social sector.

Arvind Panagariya

It is important to recognize that the deceleration in the achievements of developmental goals is largely a consequence of the growth process. A sustainable improvement in developmental goals happens when these goals are integrated into the growth process itself. For example, if the growth process that generates productive and quality employment with “decent work conditions” for the masses, it makes the growth broad-based, participatory and sustainable. Improvement in nutritional levels and better human development are built-in in this process to a great extent. However, when one examines carefully the causes of the persistent malnutrition of women and children in the state, one can see that it emanating largely from (1) the poor quality of employment of the large army of informal workers (whose share is larger in Gujarat than in India) who earn low wages and who do not have the purchasing power to buy adequate food; (2) as shown by several studies, the special nutrition schemes such as PDS, MDM, ICDS etc are not working very well to ensure nutrition to the deprived and (3) the poor status of drinking water and sanitation in the state does not allow food absorption, i.e. transformation of consumed food into nutrition. According to the latest data from the NSSO (2009-10), the wage rates of regular and casual workers, for men and women workers in both rural and urban areas are highly suppressed in this rapidly growing state. The state’s rank is not only low, but it has continuously declining during 1999-2010. Again, according to the Census of Population 2011, only 16.7 percent households in rural areas and 69 percent households in urban areas get treated tap water. Also, more than 65 percent rural households and 40 percent urban households do not have an access to latrines and they use open spaces for defecation polluting the environment. The state once again ranks poorly in these areas among the major states in India.

Prof. Panagariya expects that Gujarat government will spend higher amounts on health and education in the coming years to take care of these concerns. Let me draw his attention to the fact that according to RBI reports, the per capita state public expenditures on health and education have been much less in Gujarat than in India and in many other states. In 2009-10, for example, the per capita state expenditure on health and education was Rs. 1148 and Rs.293 respectively, and the state stood 17th and 16th respectively among the major 20 states in India!
Only the states like Uttar Pradesh, Madhya Pradesh and Bihar were behind Gujarat. It is also important to add that the state stood 6th in both health and education expenditure a decade ago. With social sector expenditure consisting 37.8 percent of the total public expenditure, this fastest growing state ranked 15thamong the major 20 states in India in spending on the social sector. Once again, the root causes for this low public expenditure on health and education perhaps lie in the high spending on subsidies and incentives to attract corporate sector investments in industries and infrastructure for promoting rapid growth. As our recent study has shown, this high spending has left limited resources for public health and education on the one hand and raised political power of the capitalists to enable them to suppress wages of the workers on the other hand. The crony capitalism that has crept into the state, particularly in the last decade, has, unlike competitive markets, encouraged sub-optimal allocation of resources as well as denied level playing field to small players to a considerable extent.

To conclude, the Gujarat growth story is distorted in many ways: the growth process has not generated adequate productive employment with “decent work” conditions as well as promoted crony capitalism, which has given a big push to economic growth, has disrupted the relationship between growth and well-being of people.

* Indira Hirway is director and professor of economics, Centre For Development Alternatives, Ahmedabad. (

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