State-wise Economic Growth Performance in India

When India launched its landmark economic reforms in 1991, dismantling the License Raj and opening its markets to the world, the expectation was that growth would lift all boats. But as the decade unfolded, a striking reality emerged – not all states benefited equally. The 1990s became a decade of sharp divergence in economic performance across India’s states, with some racing ahead while others fell further behind. Understanding why this happened is essential to grasping one of the most important and enduring challenges of India’s development story: the problem of uneven regional growth.

The national picture vs. the state-level reality
High-performing states: Gujarat and Maharashtra lead the way
Low-performing states: Bihar, Uttar Pradesh, and the challenge of backwardness
Why did the reforms deepen regional inequality?
The poverty-growth connection
Governance and infrastructure: the real dividing line
Lessons from the divergence

The national picture vs. the state-level reality

India’s overall GDP grew at around 6.3% per year following the 1991 reforms, a visible acceleration from earlier decades. But this national average masked enormous variation beneath the surface. Macroeconomic data for India’s 14 major states reveal that the degree of dispersion in growth rates increased very significantly in the 1990s compared to the 1980s. The coefficient of variation of state growth rates nearly doubled – from 0.15 in the pre-reform decade to 0.27 in the post-reform period. In plain terms, states were growing at increasingly unequal speeds, and the gap between the fastest and slowest growers was widening fast.

In the 1980s, the range of state growth rates ran from about 3.6% to 6.6% per year – a ratio of roughly 1.8 between the best and worst performers. By the 1990s, the range expanded from a low of 2.9% for Bihar to a high of 8.2% for Gujarat – pushing the ratio between the highest and lowest performer to 2.8. This was not just a statistical curiosity. It represented real differences in jobs, incomes, and living standards for hundreds of millions of people.

High-performing states: Gujarat and Maharashtra lead the way

Gujarat emerged as the standout performer of the decade. Gujarat led the pack with an impressive growth rate of 9.6%, followed closely by Maharashtra at 8.0%. These were not just headline numbers – they translated into tangible improvements in per capita incomes. Gujarat’s combination of political stability, business-friendly governance, and strong industrial infrastructure made it a magnet for private investment. Gujarat’s share in India’s national GDP, which had remained broadly flat through the 1970s and 1990s, began rising rapidly after 2000-01, eventually reaching 8.1% of the national economy by 2022-23.

Beyond Gujarat and Maharashtra, Karnataka and Tamil Nadu also posted strong growth, particularly in industrial and services sectors. The most rapidly growing states in economic terms over the period 1993-94 to 1998-99 were Gujarat, Karnataka, and Tamil Nadu. What these states had in common was a relatively higher share of the secondary (industrial) sector, which grew further over the decade – a structural shift that underpinned sustained growth.

Low-performing states: Bihar, Uttar Pradesh, and the challenge of backwardness

While some states raced ahead, others experienced the 1990s as a decade of stagnation – or even regression relative to the national average. Bihar recorded the lowest growth rate among major states. Per capita income in Bihar grew by just 0.12% per year in the 1990s, compared to 4.08% for India as a whole. Even the modest aggregate growth Bihar achieved was largely cancelled out by its high population growth rate, leaving almost no improvement in the average person’s standard of living.

Uttar Pradesh, India’s most populous state, also fell into the low-performing category. Uttar Pradesh and Bihar both recorded average growth rates in the 1990s well below those of the 1980s, placing them firmly in the group of low-performing state economies (LPSEs) alongside Orissa and Punjab. In the non-agricultural sector specifically, Bihar’s growth rate was just 3.19% during the 1990s, while the all-India rate rose to 7.25% – a gap that reflected the state’s failure to industrialize or attract private investment at any meaningful scale.

What drove this poor performance? The poor growth performance of states like Bihar and Uttar Pradesh cannot be explained solely by low literacy levels. The deeper issues were structural and institutional: poor infrastructure, inadequate governance, political instability, and a hostile environment for private business. Entrepreneurs setting up an industrial unit in many states typically needed as many as 30 separate permissions from various government departments – covering environment, labour, utilities, health, and taxes – and each step exposed them to the risk of harassment, delay, and corruption. This kind of bureaucratic burden hit the weakest-governed states hardest.

Why did the reforms deepen regional inequality?

One of the more uncomfortable findings of the 1990s growth story is that national-level liberalization, rather than narrowing the gap between states, appeared to widen it. States like Karnataka, Tamil Nadu, and Maharashtra, which had better infrastructure and a skilled workforce, benefited significantly from the reforms, while states like Bihar and Odisha lagged behind, creating a pattern of uneven development.

The underlying mechanism is not hard to see. When the central government’s controls over investment were reduced through liberalization, private capital became free to flow wherever it found the best returns. This meant it flowed toward states with better infrastructure, stronger legal systems, and more capable administrations – reinforcing existing advantages. Market forces tend to direct private investment to regions with higher purchasing power – the already richer regions – and do not on their own provide resources or productive assets to underdeveloped regions.

This created a vicious cycle for poorer states: low incomes meant a smaller tax base, which meant less public revenue, which meant less spending on infrastructure and social services, which in turn made the state even less attractive to private investors. Rising regional inequality, as measured by an increase in the Gini coefficient from 1986-87 to 1997-98, had important implications for poverty reduction at the national level – because the states with the most poor people were growing the slowest.

The poverty-growth connection

The variation in state growth rates was not just an economic curiosity – it had direct consequences for India’s ability to reduce poverty. Growth is one of the most powerful tools for reducing poverty, both through higher incomes directly and by generating tax revenue that can fund health, education, and social programs. Extreme poverty in India did fall – from 36% in 1993-94 to 24.1% in 1999-2000 – but this national decline concealed deeply unequal outcomes.

The reduction in poverty was primarily concentrated in urban areas and among the relatively better-off sections of society. Rural poverty, particularly in states like Bihar, Odisha, and Uttar Pradesh, remained stubbornly high. The states that needed poverty reduction the most were precisely those where growth was weakest. This meant that the national poverty figures, while improving on paper, were being pulled forward by high-growth states, while the most disadvantaged populations in low-growth states saw only minimal improvement in their lives.

Governance and infrastructure: the real dividing line

Across the research on this period, one factor emerges consistently as the key differentiator between high- and low-performing states: the quality of governance and the stock of economic infrastructure. Variations in the private investment ratio were positively and significantly correlated with variations in growth, while public investment and plan expenditure had little direct impact. What mattered was whether states could attract private capital – and that depended heavily on how functional their governments were and how developed their roads, power supply, and connectivity were.

States like Gujarat and Maharashtra had built up institutional capacity and infrastructure over decades, and this gave them a head start when national controls were relaxed. Bihar and Uttar Pradesh, on the other hand, entered the reform era with weak institutions, poor infrastructure, and histories of political instability that made it extremely difficult to attract or retain investment. India’s poor states – Bihar, UP, Orissa, and Rajasthan – failed to attract new private investment partly because of poor infrastructure and an unfavourable investment climate.

Lessons from the divergence

The 1990s made clear that national economic reforms, however well-designed, cannot substitute for state-level governance and capacity. Deepening reforms and addressing the specific deficiencies that decelerated growth in some states was identified even then as the key to correcting regional imbalances. This required not just fiscal transfers from the centre but a genuine improvement in how state governments delivered public services, managed infrastructure, and created an environment in which businesses could operate without harassment.

Some states did eventually course-correct. Bihar, which had one of the worst performances in the 1990s, grew at 11.03% between 2004-05 and 2008-09, making it the second-fastest-growing state in India for that period – driven by improved governance under new political leadership. This shows that the divergence was not irreversible, but that turning it around required deliberate, sustained political will at the state level.

The story of state-wise economic growth in India during the 1990s is ultimately a story about the limits of liberalization as a one-size-fits-all solution. Markets reward capacity, and states that had built that capacity thrived. Those that had not were left behind – deepening inequalities that India’s policymakers continue to grapple with today.

What do you think? If national economic reforms benefit better-governed states more than struggling ones, should the central government take a more active role in building state capacity before introducing further liberalization? And given that Bihar eventually turned its growth around through political change, what does this suggest about the relationship between democratic accountability and economic development at the state level?

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References

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Table of Contents

The national picture vs. the state-level reality 🔗

High-performing states: Gujarat and Maharashtra lead the way 🔗

Low-performing states: Bihar, Uttar Pradesh, and the challenge of backwardness 🔗

Why did the reforms deepen regional inequality? 🔗

The poverty-growth connection 🔗

Governance and infrastructure: the real dividing line 🔗

Lessons from the divergence 🔗