Why Is Maharashtra An Underperformer?

'Why has Maharashtra slipped up over the past couple of decades?'
'Not only is this question critical for residents of the state, but given that it accounts for 14% of India's GDP, a faster-growing Maharashtra implies a faster-growing India as well, point out Shishir Gupta and Rishita Sachdeva.

India's economic reforms, which began in 1991, have created significant and unexpected outperformers and underperformers in terms of states' relative economic growth.

One of the biggest underperformers is Maharashtra.

While it led the growth pack between 1981 and 1994, with real gross domestic product (GDP) expanding at a robust 6.6 per cent per annum as against the national average of 5.3 per cent, its subsequent estimated growth rate of 6.8 per cent per annum (1994 to 2020) was similar to the national average of 6.9 per cent.

This relative decline in growth (1994-2020) was unexpected, especially given the state's economic profile and the status of most of the growth indicators across human development, physical infrastructure, and governance.

Three globally connected sectors -- manufacturing, financial services, and information technology/business services -- played a pivotal role in India's growth acceleration after the reforms.

Together, they increased at a real compound annual growth rate of 7.2 per cent from 1994 to 2020, compared to 6.1 per cent for the rest of the economy.

One would have assumed that a state that is big in these sectors would benefit disproportionately.

Not true with Maharashtra. It had a significant headstart in these sectors, accounting for about 45 per cent of its GDP compared to 30 per cent for India at the start of the reform process.

However, the growth rates of Maharashtra's manufacturing and financial services were approximately 1 percentage point lower than the corresponding all-India sector growth rates between 1994 and 2020.

The lacklustre performance of these sectors is surprising, given that the state has been either on a par or stronger than India on most growth drivers over the past couple of decades, be it a. availability of the educated youth -- the gross enrolment ratio in higher education being at 22 per cent compared to 18 per cent all-India; b. infrastructure -- per capita road availability at 53 per cent higher than all-India; c. governance -- an average fiscal deficit of about 2.6 per cent compared to 3.7 per cent for the all-state average, among others.

This begs the question: Why has Maharashtra slipped up over the past couple of decades?

Not only is this question critical for the residents of the state, but given that it accounts for 14 per cent of India's GDP, a faster-growing Maharashtra implies a faster-growing India as well.

Mumbai (including suburban Mumbai), Thane, and Pune account for about 45 per cent of the state's GDP and hence hold the clue to decoding its growth performance.

One common feature of all outperforming states like Gujarat, Karnataka, and Tamil Nadu has been their key economic centres (KECs) leading the growth charge.

This has not been the case with Maharashtra; its three biggest economic centres, cumulatively, grew at the state average.

Let's analyse the dynamics of Mumbai along with Pune and Thane to understand what is holding them back.

Despite being the country's financial and entertainment hub, Mumbai, accounting for about 20 per cent of the state's economy, failed to lead the growth charge.

Maximum City real GDP grew at 5.9 per cent between 1994 and 2020, significantly slower than the state, with financial services growing at a paltry 3.6 per cent (2005 to 2020).

Mumbai suffers mainly from two main challenges -- expensive housing and weak transport.

The price-to-income ratio (the median price of a 90 square metre apartment relative to median familial disposable income) in Mumbai is around 40, making it one of the most expensive real estate centres in the world.

Likewise, road density in the poshest part of Mumbai, the Island City, is around 7 km per square km as against 10 km for Delhi.

Furthermore, Mumbai started developing its metro network relatively late.

While Delhi has around 400 km of metro network operational, it is close to 50 km in Mumbai, with about 150 km under construction.

Both Thane and Pune are prominent industrial hubs specialising in different industries.

Thane accounts for about a quarter of the state's production of pharmaceuticals, chemicals, and textiles, whereas Pune claims between 50 and 75 per cent of the state's organised production of electronics, machinery, and automotive.

While together they grew around 20 per cent faster than the state average, it was not because of their core strength in manufacturing but because of faster growth in financial services and information technology/business services.

This might be due to a positive spillover as a result of growth constraints in Mumbai, as discussed above.

Consequently, Maharashtra's share in national chemical manufacturing declined from 39 per cent to 14 per cent and automobiles declined from 31 per cent to 20 per cent (1994 to 2020).

The Special Package of Industrial Incentive announced in 2003 for Himachal Pradesh and Uttarakhand, giving significant tax incentives to firms investing in these two states, may partly explain industry gravitating towards them.

However, it does not fully account for why Maharashtra was disproportionately affected compared to other states such as Tamil Nadu, whose share in national automobile production increased from 16 per cent to 25 per cent and also the chemical hubs in Gujarat, whose share increased from 23 per cent to 27 per cent in the respective national industries between 1994 and 2020.

One intrinsic reason for Maharashtra's lagging industrial performance is the state's restrictive building laws.

A 2023 Prosperiti report highlights the restrictive nature of building laws in Maharashtra, resulting in large and mega factories (of 5,000 square metre plots or more) losing 50 to 60 per cent of the land compared to 30 to 40 per cent for Tamil Nadu and Haryana.

At the dawn of the reform process, not many would have expected Maharashtra to be an underperformer, given its strong industrial base and generally robust growth drivers.

The underperformance of the state is largely due to its KECs, not letting the state take advantage of its underlying strengths.

Maharashtra recently announced big connectivity plans for the Mumbai Metropolitan Region at an outlay of Rs 58,000 crore (Rs 580 billion) over the next few years and an international airport is going to be shortly operational in Navi Mumbai.

These developments augur well for growth prospects if they are implemented on time.

The economic agenda for the next government is clear: Focus on making Maharashtra's KECs its growth engines.

Land reforms coupled with fast-track development of transport infrastructure offer good starting points.

Shishir Gupta and Rishita Sachdeva are senior fellow and research associate at Centre for Social and Economic Progress.

Feature Presentation: Aslam Hunani/Rediff.com