India is an immense and vast country (a train ride from Dibrugarh in the northeast to Kanyakamuri in the south takes more than 80 hours), with large variations in climate zones (from snowy mountains to dry deserts to humid rainforests), and considerable historical, cultural, religious and linguistic differences. Furthermore, it is the fastest growing large emerging market, as it sheds its decades-old inward-looking mentality and opens up to the world. As the country is catching up with the world, within it, we see a different story: that of a diverging India.

Our observations

  • After a blip in 2017, due to its costly demonetization move and chaotic introduction of the goods and services tax (GST), India has again become the fastest growing emerging market in 2018.
  • As we noted before, India’s unity should be understood from its spiritual and cultural unity, instead of from political, ethnic, or institutional unity. India has a federal system and is made up of 29 federal states and three union territories, with a high degree of autonomy from the central government.
  • We have written before that India (along with Sub-Saharan Africa) will lead the next urbanization wave, given its low urbanization base and growing population. A recent study estimates that Mumbai, New Delhi and Kolkata will all be in the top five most populous cities by 2050, with many of the fastest growing hubs in South India, such as Hyderabad, Bangalore, Pune, Chennai. and Kanpur.
  • India’s service sector will contribute almost 72.5% of all gross added value of the Indian economy between 2017 and 2018, as service exports are growing twice as fast as exports and headline GDP. India’s service exports have increased ten-fold since 2000, and almost forty-fold since the 1990s. As a result, India is now the seventh largest service exporter in the world, but with much faster growth in this segment. Most of India’s service exporters are in Southern India, e.g. in Mumbai (financial services), Bangalore (IT), Hyderabad (knowledge).
  • We have written before about India’s emerging foreign policy, and how the country is actively engaged in international infrastructure projects, securing new economic ties, and building new trade routes. India’s south plays a pivotal role.

Connecting the dots

We often perceive the world through the lens of nation states and a Westphalian system under which these countries have exclusive sovereignty over a specific territory. From this perspective, India is a massive country. Since its 2001 economic reforms, India has turned outward, opening up for foreign investment and seeking more relations and trade with other countries. Given its low income-level and high economic growth, India is catching up with (i.e. conforming to) the rest of the world. However, looking at the details of India’s economic rise, we see a process of divergence within India’s economy: of a fast-growing and wealthy south versus a more backward and poor north.
First of all, the Indian subcontinent has a rich history and large cultural diversity. India’s south is populated by Dravidian people, who speak Dravidian languages that are distinct from the other languages spoken in India. Historically, most of South India was never dominated by Muslim forces from the north (e.g. the Moghul empire), but was shaped by its maritime culture, which connected it with Arabic traders in the west and other Southeast Asian sea traders (including colonial settlers) along the Bay of Bengal and the Arabian Sea. Although primarily Hindu, Dravidian culture adheres largely to the non-Vedic Hindu traditions, as the Vedic tradition of Hinduism was the religion of the Indo-Aryans, who arrived from northern India around 1500 BCE and then spread through the subcontinent, creating the “Hindu Belt” across the Indo-Gangetic plains. Furthermore, North Indians primarily speak Hindu, and their scripts are based on Sanskrit. In the northwest of India, we find different religions, including Sikhism in Punjab and Haryana, and Islam in Jammu and Kashmir and other northern states, as the mighty Moghul empire settled in Delhi during the 16th to 19th century.
Along these historical, ethnic and cultural lines, we can see that India actually consists of a southern and northern part, which each seem to follow different trajectories. India’s south consists of the states Andhra Pradesh, Karnataka, Telangana, Goa, Kerala, Tamil Nadu, Maharashtra, and the union territories of Puducherry, Lakshadweep, and the Andaman and Nicobar Island. Population growth is much lower in this region, after decades of successful family planning. Fertility rates are far below India’s national average of 2.3 and even below replacement level, with a weighted average of 1.8.

Furthermore, South India is by far the richest part of India, with per capita income two to three times as high as in North India. India’s southern economy is much more driven by services and international trade, as exemplified by its vibrant metropolitan regions, such as Mumbai (financial), Bangalore (tech), Chennai (industrial production and port), Hyderabad (knowledge and services). These hubs will play an increasingly important role in India’s emerging foreign policy, with Southwest India being the base of India’s “Look West” policy (dubbed Modi’s Middle East policy), with major manufacturing and industrial hubs (e.g. Ahmedabad). Southwest India, along with Northeast India, is home to India’s “Act East Policy”, with large ports and industrial and manufacturing hubs (e.g. Chennai and Kolkata in the East). Other socio-economic indicators, such as sanitation and education, are on par with middle-income countries, which contrasts starkly with India’s more
impoverished north. Although South India accounts for less than 30% of India’s population, the combined GDP of its seven states accounts for over half of India’s GDP.
India’s north, on the other hand, is still primarily an agrarian economy, with significantly higher poverty rates and lower incomes, and much higher fertility rates. However, India’s power base is traditionally centered around this region, with its largest state (Uttar Pradesh, with over 200 million people) and New Delhi, India’s capital and political center. Furthermore, it is India’s cultural center, with a more conservative population and numerous spiritual (e.g. sadhus) and religious (e.g. yogis) centers, along the holy Ganges. The Bharatiya Janata Party’s (India’s dominant and ruling party) and Prime Minister Modi’s main voter base is in this part of India, due to its socialist programs to help India’s poor and appeal to more conservative Hindu voters. In contrast, India’s south is divided between votes for Congress (the BJP’s main national competitor) and other regional parties, and the recent Legislative Assembly elections in the southern state Karnataka show the fierce opposition that the BJP faces in India’s south. As such, we can perceive India’s north and south as two distinct worlds within the same Indian state.

Implications

  • As India’s north is the most populous but also most poor and conservative, there will be increasing rifts between the economic and political power of India’s south and north. For example, southern states, such as Kerala, oppose new budgetary rules that take demographic differences into account for the allocation of India’s public resources across states. These South Indian states are big net payers for India’s central budgets.
  • With both different fiscal and monetary conditions, like significantly different unemployment and inflation rates between India states, it will become more difficult to centrally govern India’s economy. Questions might arise whether India is an “optimum currency area”, as was the case with the Eurozone, and whether even more autonomy should be delegated within India’s federal system.
  • India, much later than China, for example, only opened to the global economy a little more than a quarter century ago. In time, we can see increased focus and specialization in the Indian economy, making this process of divergence only temporary. Like China, India might develop its own regional capital for trading and integrating into the global economy (e.g. Mumbai for financial services, Kolkata and Chennai for Southeast and East Asia, Kochi to the Gulf region, Guwahati for Central Asia).