STATE OF WEST BENGAL- DOWN DOWN AND DOWN

FROM THE ECONOMIC REVIEW

A study of the economic evolution between 1960 and 2005 of 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 down to a relative income of around 39 percent as on 2005 and this figure is continuing to fall on a YoY basis…… From one of the richest states in India, to one of the poorest in India.

This is compounded by the fact that the WB State now has the currently ongoing India’s worst violent Maoist/Naxalite movements – and the disgruntled people of the “earlier special administrative zones – under the British Raj” of Darjeeling and Dooars areas demanding separation from Bengal to form the “Indian Union State of Gorkhaland”.

Analysis reveals (as per various independent sources) that a large part of the blame for West Bengal’s development woes can be attributed to: (a) low aggregate productivity (b) poorly functioning labour markets and (c) sectoral misallocations.

It was found that sectoral productivity and labour 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), was a center of commerce, industry, finance and arts. West Bengal, home state of Kolkata (Calcutta), was a center of manufacturing, and it had the social and physical infrastructure that came with Calcutta’s past as the long-standing capital of the British Empire.

Over the next four decades, however, the two states’ economies diverged as West Bengal under-performed relative to Maharashtra. Both states experienced growth, but West Bengal just grew more slowly. In fact too slowly to even keep up with national inflation. Drawing on data from multiple sources, the extent of West Bengal’s decline could be quantified. According to calculations, by 2003, its per capita output had fallen almost 43 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 45 years is remarkable in and of itself.

What makes the experience of West Bengal and Maharahstra 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 article is to better understand and expose the relative decline of West Bengal. We believe this examination is a necessary 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.

The Labor Market

1. The share of total GDP of the other key sector, services, increased in both states. Agriculture, manufacturing and services comprise about 90 percent of output of these two states during this period.

2. Wedges indicate that the marginal product of labor in West Bengal’s manufacturing sector was too low relative to labor’s marginal product in the services sector. The remaining 70 percent difference is attributed to differences in sectoral productivity. Interestingly, we find that agricultural productivity in West Bengal relative to Maharashtra remained unchanged between 1960 and 2005. However, there was an increase in the relative agricultural share of the labor force in West Bengal during this period. This positive agricultural employment effect was the primary reason for the relatively muted decline in agricultural’s share of output in West Bengal.

We find that our measured wedges are strongly correlated with political developments in West Bengal, namely the increasing vote share of the leftist parties over the last 45 years. (This trend is currently being reversed as of the last Lok Sabha Elections of April 2009 and the further electoral defeat may be in further sectoral rectification of the current State of Bengal). The vote share of the leftist parties, in turn, is positively correlated with the incidence of sectoral misallocation, industrial action, strikes, lockouts etc…

The incidence of industrial action in West Bengal (measured by the ratios of days lost to days worked) increased sharply in the mid-1960s and thereafter has remained at about three times the level in Maharashtra. This suggests to us that an increase in the bargaining power of labour in West Bengal may have been a significant ingredient in the relative decline of West Bengal.

We find the results interesting on two counts. First, as alluded to above, we are unable to find a similar example of two regions within the same country, who were jointly at the top of the income distribution at some point in time, exhibiting such a marked difference in economic performance over a 45 year period. Indeed, even looking at the cross-country income data it is hard to find similar cases.

But, as pointed out by Kehoe and Ruhl (2003), there are a couple of cases like New Zealand and Switzerland which showed 40 percent declines. In per capita incomes relative to the USA between 1960 and 2000. However, New Zealand (4 million people in 2000) and Switzerland (7 million) are tiny when compared with West Bengal (80 million) and Maharashtra (97 million).

Key Stylized Facts

Then, we employ the Annual Survey of Industries (ASI), as well as some of the data from Besley and Burgess (2004), to obtain manufacturing sector numbers.

In order to compare per capita incomes across states, we splice several constant-price net state domestic product (NDP) series covering 1960 through 2003. The series are normalized to 2003 prices. That is, in 2003, real NDP in each state equals nominal NDP. The resulting series are still not comparable across states, because aggregate prices may differ across states.

To make state-level comparisons possible, we employ two consumer price indices from the World Bank data set, one for industrial workers and one for agricultural labourers, which are adjusted for inter-state price differences, i.e., they are all expressed relative to an all-India price index. For each state, we take an average of these two indices in 2003 and then divide this average by Maharashtra’s average. We multiply this ratio by the constant-price NDP series. Lastly, we divide by population for each year, where population in years between.

State-level distribution of per capita NDP in 1960 and 2003, expressed relative to Maharashtra. Maharashtra was the third richest state in 1960, while West Bengal was the richest state in India with a per capita income that was about 5 percent higher than Maharashtra’s. However, by 2003, West Bengal’s per capita income had fallen to just 39 percent of Maharashtra’s. Meanwhile Maharashtra became the second richest state. In addition, the fall in West Bengal’s relative income was the largest drop in percentage point terms across all the states.

Rest of India

Decline in the relative per capita income of West Bengal has been going on for decades, and that even as West Bengal is losing ground to Maharashtra, the rest of India is exceeding that of West Bengal.

A fall in income of this magnitude in such a short period of time by a leading economy is rare. To put this in perspective, consider the OECD countries’ performance relative to the United States between 1960 and 2000. Kehoe and Ruhl (2002) use the Penn World Tables data to show that the two countries that suffered sharp drops in their per capita income.

It is worth pointing out that population in West Bengal and Maharashtra have followed very similar paths. West Bengal’s population has been between 86 and 88 percent of Maharashtra’s between 1961 and 2003. So differences in per capita NDP performance cannot be attributed to unusual population dynamics.

Relative to that of the United States were New Zealand and Switzerland. Both declined by about 40 percent relative to the United States. However, the population of New Zealand and Switzerland in 2000 are 3.9 million and 7.2 million, respectively. By contrast, the population of West Bengal in 1991 (2001) was 68 million (80 million). The relative decline of a region that is 20 times as populous as New Zealand and 10 times as populous as Switzerland, and, moreover, is within the national boundaries as the faster growing regions, is what makes this case study so compelling.

Proximate Explanation

Of particular interest to us is to identify factors specific to West Bengal that could have simultaneously depressed total factor productivity in manufacturing and services, reduced the marginal product of labour in manufacturing, and increased incentives for labour employed in agricultural in the state. The usual practise in exercises like these is to look for specific policies that could have caused these outcomes. The complicating factor here is the compulsion of electoral politics in India.

The strong socialistic bent of the country since gaining independence from Britain in 1947 has caused political parties across most of the ideological spectrum to converge on a similar set of stated economic policy goals. These stated goals typically include being pro-labour, pro-rural, pro-agriculture, pro-small scale industries, etc. policies across states in India often doesn’t reveal the true picture.

Besley and Burgess (2003) found that West Bengal was the state with the highest number of pro-labour changes in labour regulations, they ended up classifying both West Bengal and Maharashtra as being pro-labour. Rather, in our opinion, the key difference across states is the implementation record: which policies are implemented and how rigorously are they implemented. But this is precisely what makes the mapping between policies and outcomes hard and can only be discerned.

In order to make some progress on understanding the different outcomes between West Bengal and Maharashtra, we start by describing the political history of these two states. With the exception of some brief interludes, between 1960 and 2005 Maharashtra was governed almost throughout by the Congress party.

However, since 1977 West Bengal has been governed uninterrupted by a leftist coalition called the Left Front led by the Communist Party of India (Marxist) making it the longest running government in the country.

Since the Leftist political parties are the biggest supporters of labour and the rural poor, one candidate explanation for the differential performance between the two states is that the politics of West Bengal caused it. It is important to reiterate that despite the similarity between the stated political and economic objectives of both the leftist parties as well as the socialism oriented Congress party, there may well be a difference in policy implementation between a government run by a party that courts labour votes and a government that is run by labour interests itself. We assess the potential of this margin by examining the interaction of the political power of the left with the wedges that we identified above.

The leftist vote share is defined as the combined vote share in local Assembly elections of the following parties: Communist Party of India, Communist Party of India (Marxist-Leninist), Communist Party of India (Marxist-Leninist) (Liberation), Communist Party of India (Marxist), Forward Block, Forward Block (Socialist), Farward Block, Forward Block (MG), Forward Block (RG), Forward Block Marxist), Revolutionary Socialist Party.

We have data for the Assembly elections in 1951, 1957, 1962, 1967, 1971, 1972, 1977, 1982, 1987, 1991, 1996, and 2001. We generated an annual series for the vote share by filling in for the years between elections using the average annual growth rate of the share between successive elections.

Manufacturing and services sectors in West Bengal (relative to Maharashtra). The figures show a strong negative relationship between the vote share and the wedges with correlations of -0.49 and -0.55, respectively. Clearly, leftist votes didn’t translates into productivity gains in general.

Given the pattern of co-movement between the leftist vote share and the different wedges in West Bengal, the obvious next step is to determine what exactly happened in response to the growing political strength of the left. The first suspect is that an increasing leftist vote.

Share may have been accompanied by rising bargaining power of the trade unions may have induced more aggressive trade union demands for higher wages, more labour-friendly work rules etc.. To examine this possibility, in Figure 18 we look at the ratio of man-days lost to man-days worked in West Bengal and Maharashtra between 1960 and 1995.

Figure is Revealing

The level of industrial action in the two states was almost identical till 1966. Starting in 1967 there was a sharp spike in industrial action in West Bengal. Thereafter the man-days lost ratio in West Bengal was always higher than in Maharashtra (with the exception of one year, 1982, which saw a brutal strike in Maharashtra). During the period the mean for the man-days lost ratio in West Bengal was almost three times that in Maharashtra.

The fact that days lost due to industrial action in West Bengal started rising in the late 1960s is interesting as that was precisely the time that the leftist coalition first came to power in the state, albeit for a short period of time. Against the ratio of man-days lost to man-days worked in West Bengal. As is obvious, the more powerful the left became the greater was the incidence of labour action, strikes etc. — The correlation between the leftist vote share and man-days lost ratio is 0.59. Another sign of increasing labour power in West Bengal during this period was rapid expansion in the number of registered trade unions in West Bengal from 2057 in 1957 to 4808 in 1970, i.e., a 2.5 fold rise. During the same period the number of registered trade unions in Maharashtra only increased from 1586 to 2560.

To put these numbers in perspective, it is worth noting that Maharashtra was not exactly a state with a particularly docile labour force. The level of trade union power in the textile industry in Maharashtra was extremely high with some of the state trade union leaders like Mr. Datta Samant having a national profile.

Sources: Amartya Lahiri and Kei-Mu Yi at the Iowa Development Conference, Iowa State University, and Indian Statistical Institute, Delhi.