India is projected to be the world’s fastest-growing large economy for the rest of the decade, according to projections from the World Bank and the International Monetary Fund. It will also soon be the world’s largest country by population, if it isn’t already. Put together, rapid economic and population growth will soon make India the world’s fifth largest economy overall. In the 2020s it will likely overtake Germany to become the fourth largest, trailing only the United States, China and Japan. Measured in purchasing power parity terms, it’s already number three.
That’s great news for the big business groups of Delhi and Mumbai and their billionaire owners: large and growing markets create the perfect conditions for expanding profitability. It also bodes well for foreign investment. India is one of only two developing countries to score in the top 10 in A.T. Kearney’s Foreign Direct Investment Confidence Index (the other is China), and the only country with a GDP per capital of less than $5,000 to be ranked at all. According to Kearney, India is perceived as “chaotic” but “competitive.”
Which one best describes India probably depends on what part of India you’re describing. Home to nearly one-fifth of the world’s population, India is a study in contrasts. Its 36 states and union territories range from giant Uttar Pradesh with more than 200 million people to tiny island territories and former Portuguese enclaves with fewer than half a million. But unfortunately for India, some of its largest states are also its poorest. Uttar Pradesh and neighboring Bihar have a combined population roughly equal to that of the U.S., but a combined GDP less than that of Michigan.
All of India is poor. The GDP per capita of Delhi, the National Capital Territory with a population of 20-25 million, is roughly equal to that of Indonesia at around $4,000. Bihar and Uttar Pradesh, India’s poorest states, are on a par with sub-Saharan Africa (less than $1,000). And geographical disparities matter much more in India than in other large countries. In the United States, the richest state (Massachusetts) has roughly twice the GDP of the poorest (Mississippi). In China the ratio is 4-1 between Beijing and Gansu. In India, Delhi’s GDP per capita is eight times that of Bihar.
In southern India, Bangalore is famous as India’s technology capital, home to companies like Flipkart, Infosys and Wipro, as well as the Indian Institute of Science, India’s top-ranked university. Yet the state of which Bangalore is the capital, Karnataka, has a GDP per capita of around $2,400, roughly the same as Papua New Guinea. Tech entrepreneurs drive to work past open sewers and shantytowns. The real Silicon Valley in California has similar problems with inequality, but the scale of inequality in Bangalore is something completely different.
If India’s Prime Minister Narendra Modi is serious about his election slogan Sabka Saath, Sabka Vikas (Together with All, Progress for All), then reducing India’s regional disparities should be high on his agenda. Modi’s GST reform was an indispensable measure to reduce internal trade barriers, and his highway construction program is a good start toward knitting the country together. But India will need a lot more regional growth and much more generous fiscal transfers to its poorer states to overcome its extreme regional disparities.
India as a whole won’t reach middle-income status until it unites its poorer states into the same Incredible India economy as the rest of the country. That’s a challenge beyond the remit of any one government. But Modi and his BJP government swept to power in 2014 on the votes of India’s poorest states, of the people most excluded from India’s economic growth. If Modi wants to retain his majority in the next parliamentary elections, he would do well to focus on reducing the regional disparities that played such a key role in bringing him to office in the first place.