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Business News/ Opinion / India’s growing federal fault lines

India’s growing federal fault lines

Inter-state disparities may set up a struggle between centrifugal and centripetal forces

Illustration: Jayachandra/MintPremium
Illustration: Jayachandra/Mint

In the year 1960, the per capita gross domestic product (GDP) of Maharashtra, then India’s richest state, was twice that of Bihar, the poorest. By the year 2014, the gulf between the richest state (now Kerala) and Bihar, still the poorest, had doubled. In a recent briefing paper, Vivek Dehejia and Praveen Chakravarty, two senior fellows at the think tank IDFC Institute—the former also a Mint columnist—have thrown into sharp relief India’s inter-state income disparity.

The per capita incomes of the 12 largest states of India, the paper shows, have been diverging instead of converging, as would be predicted by the neoclassical models of economic growth. India’s experience is at odds with those of states/provinces in the US and China, and the member states of the European Union. The incomes of constituent units in the US, China and EU have either converged or at least have not diverged.

In India too, the level of divergence, the authors find, remained static between 1960 and 1990 and only began to increase after the economic liberalization of 1991. The two, however, do not blame the liberalization and justifiably so, as more evidence would be required to make a tenable claim.

India’s inter-state disparity is not just confined to income levels. The states diverge on several other economic, social and demographic indicators. But one particular indicator needs to be mentioned. That is total fertility rate (TFR)—or the average number of children a woman bears during her entire reproductive period. Interestingly, the three poorest states in the Dehejia-Chakravarty analysis are also the three with the highest TFR in India, and in the same order. The culprits, Bihar, Uttar Pradesh and Madhya Pradesh, with 2013 fertility rates of 3.4, 3.1 and 2.9, respectively, are behind the lower middle-income countries’ average, according to World Bank data.

In fact, if the 12 states in the Dehejia-Chakravarty analysis are divided into upper half and bottom half on the basis of per capita incomes and TFR, the groupings are strikingly similar. There are two exceptions. Gujarat in the upper half of incomes is slightly errant with a TFR of 2.3, and West Bengal falling on the wrong side of the income divide has an impressive TFR of 1.6—better than the average OECD (Organisation for Economic Cooperation and Development) country.

This is not to make a case for a direct causal link between TFR and per capita income. To do that satisfactorily will involve not just explaining post-1990 trends but also the trends between 1960 and 1990. The inter-state disparity based on a potent combination of incomes and fertility rates, however, carries immense economic, social, political and hence policy implications.

The most obvious implication is on patterns of labour migration. Since the states with higher TFR are also struggling to provide better livelihoods, they will be natural exporters of labour to more prosperous states. This can create a social and political backlash against migrants in the recipient states, as has already been seen in states like Maharashtra.

Then there is the problem of redrawing the boundaries of Lok Sabha constituencies. The delimitation of constituencies has been postponed till the first census after 2026. A major reason behind the postponement was to avoid penalizing the states which do well on family planning effort. But this cannot be postponed till eternity. According to 2011 census figures, one Lok Sabha member from Rajasthan represents, on an average, a million people more than their counterpart in Kerala. The next delimitation will necessarily boost the political capital of Rajasthan at the expense of Kerala. Can the Indian union manage this transition or evolve a way around it by diversifying the delimitation criteria?

Then there will be inevitable contestation over distribution of resources. As it is, the goods and services tax (GST) will centralize the setting of indirect tax rates, reducing the room for states to extract resources. Also, as Dehejia and Chakravarty point out, the opportunity to use tax policy to attract investment to the state will also reduce. While GST is undoubtedly a net positive for the Indian economy, the interstate disparities may set the stage for some clashes in the GST council. The poorer and more populous states which are simultaneously net consumers will demand lower GST rates while the prosperous and net producing states will vie for higher rates.

The inter-state disparity in the milieu of increased fiscal devolution post the Fourteenth Finance Commission awards and the centralization of indirect taxation are going to produce a struggle between centrifugal and centripetal forces. More financial and political devolution will certainly help. And so will increasing female literacy and labour participation. Female literacy is the best antidote to rising TFR and female labour participation an effective way to boost per capita incomes.

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Published: 13 Sep 2016, 11:55 PM IST
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