The financial aid package for Andhra Pradesh announced by the Narendra Modi government once again throws light on an important issue in the Indian political economy—the fact that even the most advanced states depend heavily on economic activity in their capital cities to fund their budgets. The loss of revenue to Andhra Pradesh because of the loss of Hyderabad to the new state of Telangana is one of the main reasons why such a package was agreed upon as part of the bifurcation of united Andhra Pradesh.
It is the same story in several other states. Think of the role of Mumbai in the public finances of Maharashtra or of Bengaluru in Karnataka. And then think of the urban decay in these cities. The reason is then easy to figure out. Regional political elites use the revenues from their capital cities to buy votes in the politically important rural areas. This nexus will not be broken until urbanization ensures cities have greater representation in state legislatures.