The stark economic divergence between India’s states makes a strong case for greater federalism

In Economy, Scroll by Praveen ChakravartyLeave a Comment

The needs and priorities of much poorer Bihar or Madhya Pradesh will be vastly different from that of, say, Kerala or Tamil Nadu.

The average Bihari is 19 years old, has attended primary school and earns roughly Rs 35,000 per annum. The average Tamilian is 30 years old, has matriculated and earns Rs 136,000 per annum, nearly four times more. This demographic, literacy and income gap between the richest and poorest big states of India is the starkest among all large economies in the world.

In China, the average person in the poorer Yunnan province is nearly as educated and old, but earns one-third the wage of the average person in the richer Jiangsu province, a similar ratio to other large federal economic zones such as the US, European Union and Japan.

Stark divergence

Levels of income disparity across the big states of India are at an all-time peak. India is currently experiencing a 3-3-3 paradox – the richest three are three times richer than the poorest three large states. The corresponding ratio is two for China, and 1.5 for the US and European Union member states.

Further, our research reveals that there is no visible trend indicating that this inequality gap across India’s states will narrow any time soon, as in the case of China and the rest of the world. This means, a child born in Bihar today is still likely to earn only one-fourth the amount earned by a child born in Tamil Nadu, when they both become adults.

India is today the only large economy in the world that is experiencing an economic divergence across its large states, and not convergence, as neo-classical economic theory would posit. It was not like this in the early days of the republic.

In 1960, the average Tamilian earned roughly Rs 330 per annum while the average Bihari earned Rs 215, and both were roughly of the same age. Up until 1990, the difference in average income between the richer and poorer states in India was around 1.5 times. In the subsequent 25 year period from 1990 to 2015, the difference shot up to four times, implying that the richer states grew much faster than the poorer states in post-liberalisationIndia. Primarily, the southern states, and Maharashtra and Gujarat grew at a scorching pace in the post-1990 period leading to this great divergence among states.

Decadal analysis from 1960 to 2015 shows that in the decades until 1990, India did not experience any significant divergence across its big states and may have even experienced slight income convergence between 1970 and 1980 but has shown puzzling divergence in every decade since 1990. There have been various scholarly attempts to explain this disparity and economic outperformance of some states (primarily the southern states) vis-à-vis others, but none have done so satisfactorily.

A new reality

It is tempting to credit political leadership and their policies for the outpaced growth of some states versus others, but there is always a counter narrative. For example, Kerala went from being the fourth poorest (per capita Net Domestic Product) of the 12 large states in 1960 to the richest state in India today, governed by Communists and a left-of-centre Congress party during this entire period. While West Bengal went from being the second-richest to the fifth poorest, all under the same Communist party rule. Determining exact causes for this large economic divergence across states can be laborious and even futile. It is perhaps more pertinent and important that we internalise and acknowledge this economic diversity of India and re-orient policy making to this new reality.

It is quite evident that the needs and priorities of much poorer Bihar or Madhya Pradesh will be vastly different from that of, say, Kerala or Tamil Nadu. Bihar may need a more robust state-run social security mechanism, focus on primary education, flexible labour laws, inexpensive energy and public health system. Tamil Nadu may well need a focus on higher education, cleaner energy, privatised health care and perhaps a cash transfer-based social security net.

True federalism

It is established wisdom that different sovereign states will have different policy priorities in their development cycle. In this context, true federalism doesn’t merely imply more devolution of financial resources but also granting true legislative and political autonomy to the states to enable a “horses for courses” policy paradigm.

Wouldn’t it be better to let Maharashtra and Odisha make their own choices about, say, adopting a cash-transfer subsidy regime than handing down such a policy from Delhi? While the passing of the Goods and Services Tax Act is a laudable achievement, it is important to remember that efficiency gains of a common tax market come at a cost of fiscal autonomy to states, as the Tamil Nadu chief minister J Jayalalithaa pointed out. As with most other things, there is a big gap between the co-operative federalism rhetoric and corresponding actions. Formulating a national education policy, proposing concurrent elections to states and the Centre – which will remove the powers of the states to call for elections – are all fundamentally anti-federal in nature.

There is an inherent tension between efficiency and federalism – the former demands commonness and the latter demands acceptance of differences. Whichever camp one belongs to, there is no denying the vast cultural, political and now economic diversity of India. It is then also time to ponder greater legislative autonomy to states, perhaps by transferring some of the concurrent list subjects such as education, land and labour back to the states.

Published on 1 October, 2016 in Scroll