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

States of inequality

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

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”.