There is a widening gap between affluent and poor areas as a result of household savings and private investments being concentrated in wealthier nations. Significant ramifications for Indian federalism result from the growing economic divide between Indian states.

Data on the country’s Income per capita income

• Relative Economic Performance of Indian States: The Economic Advisory Council to the Prime Minister’s (EAC-PM) Relative Economic Performance of Indian States: 1960-61 to 2023-24 presenting the share of each State in the country’s income and the per capita income compared to the all-India average.

• Importance of the data: The data tell us the importance of each State in the country’s economy and the average welfare of the citizens of each State relative to the all-India level. 
• Inequality: The average welfare data hides the inequality. 
  • For example., Maharashtra, the largest contributor to India’s economy, has a per capita income of approximately 150% of the national average. However, it includes both affluent Mumbai and impoverished Vidarbha, known for farmers’ suicides. 
  • Large-scale disparity: While Mumbai’s wealthy pay the highest direct taxes and its municipality (BMC) is the richest in India, the city also has extensive slums (Dharavi) with poor living conditions.

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Important data from the Report

• Difference in performances: The report points to the consistently better performance of the western and southern regions of India and the weak performance of the eastern States (Bengal, Assam, etc). 
• Period post LPG reforms: The report lists liberalisation (1991) as a marker of when the Southern States began to perform better. But it does not go into the causes.
• Poor performance of northern states: The northern States have done poorly except for Haryana and Delhi.
• Increasing divide: The report gives a picture of a growing divide in the country, which is not good for a federal and diverse nation such as India. This growing gap is leading to the questioning of federalism.
• Performance of coastal regions: It also points to the coastal areas doing better, which includes Odisha in the east. Business people find it beneficial to start businesses in these locations because of their strategic locations which influence import and export costs and the availability of ports.

Investment as a determinant of better performance

• Key driver of output: Higher investment levels lead to a larger economy like the southern states of India where governance, infrastructure, logistics, and availability of skilled labour are precise. There are two types of investments- public and private. 
• Public investment: Such investments are made by the government mostly in backward locations to ensure balance in the process of development not being concerned about profit accrued in the short run.
• Private investment: These are made in regions where private companies would get more profit. Also, private companies invest in regions that are already developed like the southern states. 
  • The private sector will not do so unless the government gives it concessions such as tax breaks and electricity at concessional rates.
• Preference to urban conglomerates: Private investment favours developed areas with large markets, making cities like Mumbai, Delhi, Chennai, Bengaluru, and Hyderabad prime destinations. 
• • Haryana (mostly Faridabad) benefits from its proximity to Delhi, while Kolkata is less preferred for various reasons.
• Preference to Coastal regions: These regions are preferred since they enable cheaper access to external markets through exports. Also, cheap imported inputs may be available.

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Other factors behind the better performance of richer states

• Loan facilities: In states like Bihar, people tend to save their money by depositing in banks. Even though a large sum of money is deposited and available for loan facilities, banks prefer not to extend their loan facilities to these states but rather are more willing to give loans to affluent and developed states offering higher profits.
• Shift in the role of the public sector: Following the launch of the New Economic Policies (NEP) in 1991, the market replaced the public sector as the leading force in the economy, directing more investment to wealthier states with higher profits. 
• Focus on the organised sector: The NEP favours the organised sector, while poorer states rely more on the unorganised sector, which operates with low productivity and incomes. 
• Infrastructure improvements like freight corridors and highways have allowed the organised sector to expand into rural areas, contributing to faster growth in wealthier states.

Reason behind lower investments in certain states: 

• Leftist ideologies: West Bengal and Kerala are special cases. Both States have had strong Left movements and labour militancy. So, the private sector has invested little in these States.
• Militancy and insurgencies: The border States of India have received less public investment for strategic reasons. It is also because many of them suffered from insurgency which scared the private sector.
• Political inhibitions: Opposition-ruled states have accused the Centre of politicizing public investment, reflected in the slogan “Double Engine ki Sarkar.” 
• Impact of cronyism: Increasing cronyism in India affects investment decisions, creating a skewed climate where cronies face lower risks, while others experience higher risks. This leads to a decline in overall investment rates, disproportionately impacting poorer states.
• Parallel black economy: This is proportionately more in the poorer States. This vitiates the investment climate due to policy failure and weak governance and reduces the investment they receive, thus, reducing growth potential.

Way forward

• Improved governance: The persisting differentials in the economic performance of different States are threatening federalism. 
• For this, efforts need to be taken to improve governance, and infrastructure, keep a check on the black economy, limit corruption, and improve educational facilities at least at the lower level. 
• Cooperation between the State and the Centre: Both the Centre and the States need to act. The States need to improve governance and reduce the levels of corruption in their jurisdiction.
• Increase in Public expenditures: Public spending on social sectors must be significantly increased. Private investment in poorer states cannot be mandated in a market-driven economy; it requires a shift in the Centre’s strategy to support the unorganised sector. 
• Upliftment to attract investments: Focusing on the unorganised sector would raise incomes for marginalised populations, boosting demand and production in poorer states, which in turn would attract more private investment. 
• Benefit of the organised sector: The organised sector, currently constrained by low demand, would also benefit. More government concessions aren’t necessary, as they have sufficient resources for investment. 

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Conclusion

The report emphasises that bolstering India’s federal unity requires a reduction in regional inequities otherwise the economic divide would never be scaled down. The required changes in policy would not hinder growth in richer states but would reduce disparities, promoting development from below, strengthening federalism, and preserving national unity.

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