States of inequality

Economic disparity among and within regions is on the rise. This growing divergence needs policy intervention

Written by N K Singh | Updated: April 21, 2017 8:25 am
The makers of the Indian Constitution were aware of these inherent dangers.

It is believed that a rising tide lifts all boats; unfortunately, this is not true about India. Economic development has enhanced divergence rather than fostering convergence. Inter- and intra-regional disparity has accentuated. The recent Organisation for Economic Co-operation and Development (OECD) Economic Survey of India, Article IV Consultations of the International Monetary Fund and the Economic Survey, all conclude that spatial income inequality in India is not only large but increasing. The increasing income divergence amongst states is clearly reflected in the chart alongside which captures the trend of average per capita Net State Domestic Product (NSDP) for the top three and bottom three states and Gross Fixed Capital Formation (GFCF) from 1993-94 to 2013-14.

Further, intra-regional disparity to overall income inequality has also increased substantially. The OECD Economic Survey of India concludes that the “difference across households living in the same state” is the most important source of income inequality. Utilising district-level data, Das, Ghate and Robertson (2015) infer that intra-regional disparity in India is as important a component of spatial inequality as inter-state disparity. Their analysis suggests that inter-alia, factors like distance to the closest urban agglomeration, differences in urbanisation, electricity provisions and state-specific characteristics play a crucial role in explaining divergence across districts.

Illustration: C R Sasikumar

The makers of the Indian Constitution were aware of these inherent dangers. The mechanism of appointing a Finance Commission every five years was designed to address this issue. The Gadgil Formula implemented in the fourth Five Year Plan took due cognisance of the need for balanced regional development by assigning weights to crucial parameters of states like population, per capita income, special problems, to name a few, for determining horizontal devolution. The concept of Special Category States was introduced in 1969 (fifth Finance Commission) for providing special assistance to disadvantaged states with a low resource base, difficult terrain, low population density, inadequate infrastructure and non-viable state finances.

The Planning Commission also adopted an area-specific approach in its planning strategy and introduced multiple centrally sponsored programmes. The Tribal Development Programme, the Hill Area Development Programme, the Western Ghat Development Programme were initiated, catering to geographically homogeneous and backward regions. Regrettably, such area-specific approaches for growing divergences in development patterns have not been successful. Reducing regional inequalities remains a daunting politico-administrative challenge. A credible and holistic strategy could include the following ingredients.

First, persisting with the belief that smaller states improve governance quality. In the context of the reorganisation of states in 2000, comparing pre-reorganisation (1993-94 to 2000-01) and post-reorganisation (2001-02 to 2008-09) data reveals that the increase in growth rates for the newly formed states was in the range of 4-6 per cent post-reorganisation, much higher than the national increase of around 2 per cent. Asher and Novosad (2015), using satellite and survey data, conclude that increased autonomy and political representation lead to accountable governance and help promote development.

Even though onerous, we should consider reorganisation of unwieldy, unmanageable states having distinctly identifiable regions. Uttar Pradesh, even after carving out Uttarakhand, has several regions at varying levels of growth and socio-economic development. The abysmal state of the economic and social development of eastern UP necessitates a radical solution. Similarly, the Marathwada and Vidarbha regions are drastically behind western Maharashtra in terms of growth and development. According to the Annual Report 2011-12 of the Marathwada Development Board, of the total MSMEs, large industries and SEZs in Maharashtra, Marathwada has only 7 per cent, 11 per cent and 10 per cent, respectively. Economic viability and administrative efficacy, while maintaining the Union’s integrity, must become the overarching principle for reorganisation. While carving smaller states is no panacea, the improved governance quality and anecdotal evidence supports what Ambedkar had professed in his Thoughts on Linguistic States.

Second, re-inventing the role of Inter-State Council and Zonal Councils. The Inter-State Council, established in 1990 under the provisions of Article 263, is a permanent constitutional body headed by the prime minister while Zonal Councils are statutory bodies formed under the States Reorganisation Act, 1956. Although the meetings of these councils were held recently under the current political leadership, yet there has been a considerable hiatus between their meetings. While Inter-State Councils mostly deliberate on promoting centre-state relations and coordinating policy actions, the genesis of the five Zonal Councils was during secessionist and linguistic agitations in the first decade of Independence. The core objectives of the Zonal Councils pertain to national integration and arresting regionalism.

However, in the contemporary economic and political milieu, issues of growth, development and equity assume priority. In this light, restructuring the Zonal Councils to meet contemporary challenges, and re-energising Inter-State Councils could have positive multipliers. Re-conceptualising the mandate of the Inter-State Council in facilitating a comprehensive partnership for collective and balanced regional growth deserves priority. Placing the Inter-State Council under the aegis of the NITI Aayog would augur well as the prime minister is the chairman of both these institutions. With similar composition and mandates, the synergistic advantages from the cooperation of these two organisations would seek greater regional convergence.

Third, can exports become an engine of growth for the more laggard states? Backward states, especially in eastern India, have comparative factor advantage for labour-intensive industries like textiles and leather. Harnessing their comparative advantage for low-skill labour-intensive activity can create a viable export sector. Surmounting logistical challenges and competitive labour regulations would be central in creating new export hubs. While creating special economic zones in coastal India has obvious logistical advantages, mobilising the abundant labour supply coupled with skill inculcation makes the export-led approach an attractive policy for many laggard states. Export sectors attract capital, technology and improved managerial practices which could greatly improve their competitive efficiency.

Finally, inter-state competition in improving governance and the ease of doing business should be fostered. According to the Department of Industrial Policy and Promotion (DIPP), between April 2000 and December 2016, Maharashtra and the NCR alone accounted for 52 per cent of the total FDI equity inflows. Similarly, during 1990-91 and 2013-14, Maharashtra and Gujarat alone accounted for more than 30 per cent of Gross Fixed Capital Formation (GFCF), a proxy for investments in the country. Mundle et al (2016), while ranking the governance performance of 19 states, observed that five of the six best-performing states in 2001 were also the best performers in 2011.

This persistent stagnation needs rigorous action. Fostering competition amongst states through the Business Reform Action Plan, where progress in 2016 in achieving a national implementation rate of 48.93 per cent (compared to 32 per cent in 2015) is significant. But enticing private investment will need further action on simplifying regulatory architecture, reducing the onerousness of litigation and alternative dispute settlement mechanisms, and easing factors of production, particularly land and labour, where action rests with the state. This could also catalyse private investment and innovative public-private partnerships.

The mandate and role of the Niti Aayog should be redefined and enhanced to evolve models aimed at balanced regional development. It is axiomatic that the reticence of private investment in backward states can be somewhat overcome through enhanced public outlays. Given the constraints of fiscal space, seeking greater engagement of multilateral agencies, both traditional and non-traditional, like the World Bank, the Asian Development Bank, the New Development Bank as well as the Asian Infrastructure Investment Bank would be helpful. Special infrastructure programmes designed for the more backward states will have multiplier benefits. The growing divergence of states, with the exception of health parameters, needs policy-induced reversal. Growth begets development because, as Henry Ford once put it, “If everyone is moving forward together, then success takes care of itself”.

The writer, a former Rajya Sabha MP, is a member of the BJP

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  1. R
    Raman Govindan
    Apr 23, 2017 at 10:25 am
    regional leaders want their states to be declared as underdeveloped and poor! they can get the maximum benefit and subsidy from center. to prevent it the center should pay only bonus to the states that top in GDP ranking! that will prevent them from acting poor!
    Reply
    1. G
      Gopal
      Apr 22, 2017 at 3:23 am
      Nehruvian thinking is embedded so deep in our society that even BJP echoes those fallacious ideas without thought. To wit, all parts of India have improved even if the disparity has increased. So, rising tide does lift all boats and there is no point in fooling ourselves that India is different in this regard.
      Reply
      1. G
        Gopalkrishnan Nair
        Apr 21, 2017 at 9:44 pm
        The disparity in economic disparity In opportunity is a reality. But the disparity btween sections of society is more dangerous. This is aprt from the caste devide. The most visible is the regional devide. Let us look at the trends. 1. Few high rich individuals helped at the cost of poor. Look at the details of NPA with banks. 2. See what is happening to lower caste people whether in the name of COW or religion 3.Look at the way muslims are targetted, excuse may be cow or beef. Now why is this happening. It is because those who are suffering are timid and devided. That is the proof of success of the establishment. When one the original RSS guy insulted south indians by saying that they are tolerating the dark ones and that is the proof of not being racists. No out cry, no protests. The TAMIL NADU farmers are protesting in NEW DELHI for last few weeks. The issue is concerning all the farmers in India.No, others will not join or support them. That is the strength of devide and rule.
        Reply
        1. P
          Pradeep
          Apr 21, 2017 at 8:46 pm
          Economic disparity among states will continue until we stop announcing packages eyeing for election. Niti Aayog should have free hand to advice the policy measures and central govt should strictly implement with proper guidelines without seeing which state is going for poll. See the case of farm loan waiver - because of lack of policy and election gift only UP could benefit whereas other states are effected more but state govts are not able to diversify funds, there is no clear policy of central istance. Cutting down the fund for MNREG scheme is going to worsen the disparity. Even the so called advanced states disparity among poor and rich are very high. We are eagerly waiting to see what policy NITI Aayog announces for upliftment of 67 of indian housrhold who earns less than 10,000 per month as per ministry of labour report 2015-16.
          Reply
          1. P
            Pradeep
            Apr 21, 2017 at 8:49 pm
            correction - Central istance, 67 percent
            Reply
          2. C
            CClements
            Apr 21, 2017 at 6:47 pm
            The disparity between rich and poor will get wider after the introduction of the GST. It will be the poor that will be paying and the rich will be unaffected. Also, wider the disparity, less the growth. Australia had an annual growth of 4.5 before the introduction of the GST in 2000-1. Now the growth is 2.5 . Moreover, the Government of the day abolished some taxes after the introduction of the GST but within a few years, the same taxes have returned in different names. Over the years the prices of food have tripled.and quadrupled. While the working cl and the poor are diligently paying their taxes, the rich have been claiming back theirs on their tax returns. They have also been getting tax exemptions and exploiting the tax system. The wage growth has shrunk to 1.5 taking wages back by five years. Indians should be aware of the politicians. They would hardly be affected.
            Reply
            1. H
              Harsh
              Apr 21, 2017 at 6:19 pm
              Economic disparity is the basic prin l of capitalism and one has to maintain it to sustain capital and power. Henry Ford statement or special financial istance to backward states appears feasible in socialism, but certainly it is harmful to capitalism. It is pity that we have failed to recognize that the people of India have w heartedly rejected socialism, which was legally enforced by Mahatma hi. Thus, if backward states prosperous, then from where we will get the cheap workforce that will generate capital for capitalist. In capitalism we have to do selective charity to get wider publicity to maintain capital and power. This way we can keep all the poor happy in anti tion that they may get some charity someday and if they failed to get it, then they can blame their destiny or accept as a punishment for sin committed in previous birth. This is the simple and tested formula of thousands and thousands years of successful governance that can keep all contained and happy
              Reply
              1. R
                Raman Govindan
                Apr 21, 2017 at 10:59 am
                there is another aspect to the phenomina! the leaders of poorer states want to keep them in a declared state of poverty and wants to get the maximum benefit from the center. there is income in declaring one as poor. the compensation should be discontinued and instead bonus for better performing states should be given.
                Reply
                1. V
                  Varun singh
                  Apr 21, 2017 at 10:29 am
                  With resurgent India seeking global platform, shear accentuation of inequality can doom its aspirations in the international arena. Need of the hour is more synergetic, coordinated and comprehensive approach where team India should be the winner. If the economic rights are not secured then political rights will never pave way to secure India, as seen in various and plans like jat aandolan, maraṭha aandolan etc. Rise of India will not be judged on the pretext of what she does to flex its military muscle but on how she care about its one third po tion trying to meet the basic need of survival. Cooperative federalism and decentralisation of power coupled with compe ive environment can surely change the present environment.
                  Reply
                  1. Y
                    yousef
                    Apr 21, 2017 at 9:46 am
                    True. Smaller states will mean more political high money earning non office of profit elected posts, more administrative posts with ries and wages. Surely this leads to improved economic condition and reduces social disparity. In economics, after all earning of drug peddler and that of anybody else are counted as GNP. Economics is not normative. Also when we start distributing MGNAREGA money in cash and ration subsidy in cash to all, there would be no reason to an honest works pay. No disparity.
                    Reply
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