In this paper the authors study the economic evolution between 1960 and 1995 of two states in India — Maharashtra and West Bengal. In 1960, West Bengal’s per capita income exceeded that of Maharashtra. By 1995, it had fallen to just 69 percent of Maharashtra’s per capita income. The authors employ a "wedge" methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the sources of the divergent economic performances. Their diagnostic analysis reveals that a large part of West Bengal’s development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets. These patterns, together with additional evidence on developments in the labor market, the manufacturing sector, and voting behavior, suggest a systematic worsening of the business environment in manufacturing in West Bengal during this period.
