“The progress of a nation depends, in a real sense, on the development of the weaker states.”
– Finance Commission, 1969
INTRODUCTION:
India is a country of diversity, where some states are as large as many countries. Regions differ enormously in terms of geography, language, demography and social norms. More importantly, the Constitution of India clearly demarcates areas of responsibility for state and central governments. India is also characterized by fiscal federalism, by a currency union – all states share the Indian rupee as the legal tender – and a customs union – it is the Union government, not the states, which sets external tariff and trade policies. At the same time, there are varying interest groups lobbying the legislators to implement their agendas. Widespread corruption, long lags, and implementation inefficiency is omnipresent.
These structural features have had huge implications in the significant differences in levels of economic development across Indian states. The regional economic and industrial disparity that was a legacy of the British Raj thrust India on course of widening divergence over the years. The initial Nehruvian period was characterised by a ‘command economy’. The license and tariff policies were designed with the view to increase the size of the ‘national cake’ with a tolerance for regional inequality, which Nehru hoped would be reduced in the long run. This led India on course to a widely unequal economy that has seldom showed a tendency to convergence. The gradual withdrawal of state from economic activity after the Emergency exacerbated the prevailing disparity by allowing to the richer states to reap the benefits of its historical endowment and hence increase its share disproportionately. Even in rich states, the capital and a few other cities are endowed much better than the remote rural area. This has led to intrastate and interstate migration of population to urban centers in search for jobs.
While the talk of an integrated national economy has increased recently, with reference to Goods and Services Tax (GST), it is worthwhile to analyse the disparities in income levels of different states that constitute this national economy. Despite the huge influence of successive union governments, many national issues play out politically at the level of individual states. Hence, the effects of changing economic policy have different results in different regions, especially after economic liberalisation, which has resulted in a greater role for state level policy initiatives. It is, therefore, important to assess these actual outcomes. This paper analyses this disparity in order to arrive at possible reasons as to why there is such stark dispersion in economic development in India.
Rising disparity among states of the Union is a major political economy issue that is not going to disappear. Divergence among states can play out starkly in programmed performance and implementation. Hence it’s imperative to consider this divergence while making policy prescriptions. This is important also because large and persistent inter-regional income disparities may have annoying political consequences, affect the stability of a federal system of government and danger to national unity and strength. Given than India has more than 17% of the world’s population, this regional disparity has important consequences for global poverty and inequality too.
Changing Economy and Politics 