Synchronisation between national and regional business cycles has increased over time with western and southern regions showing stronger co-movement with the national cycle since 2000s, according to the latest RBI monthly bulletin.
Business cycles are the outcome of movements in multitude of economic variables interacting with each other.
High correlations among regional cycles could be due to a larger bearing of common factors such as monsoon and weather shocks, global crude oil and commodity price shocks, global demand and global financial market spillovers, fiscal policy, monetary policy and exchange rate fluctuations, impacting all the regions simultaneously, per an article “Synchronisation of Indian States’ Business Cycle”, put together by RBI officials.
Nonetheless, moderately high one-year lagged cross-correlations also underscore the presence of spillover effects of idiosyncratic shocks across certain regions.
“Geographical proximity of the constituent States is likely to have an influence over synchronisation as regions comprising bordering States showed higher cross-correlations. Agricultural States showed more synchronisation among themselves as compared to industrial and services oriented States.
“Geographical proximity appears to play an important role for interlinkages with industrial and services States,” said RBI officials Satyananda Sahoo, Kunal Priyadarshi, Chaitali Bhowmick, Sapna Goel and Preetika.
The authors said the regression analysis validates the positive role of geographical proximity on synchronisation of business cycles, albeit with smaller magnitude in relatively recent period. The sectoral composition of the States, however, has no influence over the synchronisation of cycles.
In the last decade (2010-11 to 2019-20), the compounded annual growth rate (CAGR) of Real Gross State Domestic Product (GSDP) (in per cent) for southern region was the highest at 7.3 per cent, followed by western region (7.2 per cent), northern region (6.7 per cent), central region (6.5 per cent) and eastern region (6 per cent).
The northeastern region has not been included due to unavailability of longer time series of select northeastern States of Mizoram, Nagaland and Sikkim.
Services contribution
An overview of economic activity composition exhibits that in the last decade, services have been contributing more than 50.0 per cent to gross state value added (GSVA) on average in all regions, the authors said.
“While services comprise on average 65.4 per cent of the activity in the southern region, central region has the lowest share at 53.6 per cent. In comparison to other zones and national level, the western region has the largest proportion (roughly one-third of the region’s economy) contributed by industry; in Gujarat the average share of industry is closer to twice of the national level,” per the article.
Both central and eastern regions have on an average 20 per cent share of agriculture and allied activities in their GSVA. Amongst all, the northern region, closely mirrors the national sectoral structure.
The RBI officials said Rajasthan has the maximum share in northern region GSDP followed by the NCT of Delhi; Maharashtra has the largest share in GSDP of the western region followed by Gujarat; in the eastern region, West Bengal is followed by Bihar and Odisha; Tamil Nadu and Karnataka hold a major share in the southern region. In the central region, Uttar Pradesh holds more than half of the region’s GSDP share.