India CSEP 
Interlinkages Between Economic Growth and Human Development in India: A State-Level Analysis

Janak Raj, Vrinda Gupta & Aakansha Shrawan, CSEP | 28/12/2023

Courtesy: CSEP/LinkedIn

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Executive Summary

Traditionally, economic growth or income alone was considered the primary measure of human development. However, health and education have gradually emerged as crucial components of human development, besides income. A significant impetus for the inclusion of health and education in human development came in 1990 when the United Nations Development Programme (UNDP) introduced the Human Development Index (HDI). This index comprises income, health, and education as the three fundamental elements of human development. All three elements are interconnected and influence one another. For example, a higher income level provides individuals, households, or nations with greater resources that can be allocated to health and education. Likewise, health and education have multifaceted impact on economic activity by boosting individual productivity, enhancing capabilities, and facilitating technology diffusion. This study explores the relationship between the non-income aspects of human development, i.e., health and education, and economic growth at the state level. In this context, the study seeks to answer the following questions: (i) Whether there exists a long-run relationship between human development (health and education) and economic growth in India? (ii) Whether economic growth causes human development and vice-versa? (iii) Does public expenditure on health and education impact human development outcomes? (iv) Is there a relationship between different levels of education and economic activity? While India’s overall HDI has steadily improved over the years, significant disparities exist among states. For example, during 1990–2019, Bihar, Uttar Pradesh, Odisha, and Madhya Pradesh consistently registered the lowest HDI values, while Delhi, Kerala, and Goa showed the highest values. Analysing data from 1990 to 2019 for 26 Indian states, a bi-directional relationship between economic growth (EG) and human development (HD) was identified. Both HD and EG significantly influence each other in the long run, with a causal relationship observed in both directions, indicating the need for balanced development. Notably, education was found to contribute more to EG than health. To better understand the impact of education on EG, the study examined the relationship between various education levels (primary, secondary, and tertiary education) and the sectoral value added to the economy. It revealed that higher levels of education beyond primary schooling positively influenced different economic sectors. While secondary education positively affected the agriculture and manufacturing sectors, tertiary education notably impacted the service sector. The influence of tertiary education on services was four times greater than that of secondary education on manufacturing. The effects of secondary and tertiary education on economic activity were noticeable after a lag of three years. It is noteworthy that tertiary education enrolment rates surged after 1997. When seen this in conjunction with the role of tertiary education in driving the value added of the service sector, it is not surprising that the share of the service sector in India’s GDP increased sharply from 39.1% in 1997 to 50.1% in 2019. Regarding the role of public expenditure in human development, the study found that public expenditure alone did not impact human development outcomes, but total expenditure (public and private) did. This might be due to low public sector efficiency and also because public expenditure accounts for only 40–50% of the total expenditure on health and education, with the remaining coming from households or the private sector. Expenditure on health and education is non-discretionary, making households to allocate funds to these critical items by either borrowing or reducing expenditure on other items. An inverse relationship exists between public and private expenditure, suggesting that low public spending on human development is compensated for by high private expenditure. Thus, while public expenditure may not directly impact human development outcomes, it remains critical in reducing households’ financial burden and preventing the impoverishment of poor households due to catastrophic health expenses. 

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