Syllabus
GS Paper 3 – Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Context
Data from the paper titled, ‘Relative Economic Performance of Indian States: 1960-61 to 2023-24’, show a growing gap that is leading to a questioning of federalism
Source
The Hindu| Editorial dated 30th October 2024
A picture of a growing economic divide in India
The Economic Advisory Council to the Prime Minister (EAC-PM) recently published a paper highlighting disparities in economic performance across Indian states from 1960-61 to 2023-24. It showcases the widening economic divide, with western and southern states performing better and eastern and northern states, barring a few, lagging. These growing disparities raise concerns over federalism and call for policy changes to foster balanced growth across the country.
Regional Economic Disparities in India
- Income Disparity: Maharashtra, the highest contributor to the national GDP, has a per capita income 150% above the national average, while also having high-income inequality (e.g., Mumbai vs. Vidarbha).
- Geographical Divide: Western and southern regions are consistently stronger performers, while eastern states show weak economic output. Northern states lag, except Haryana and Delhi.
- Federal Tensions: Richer states question federalism, arguing for a fairer share of resources given their substantial contributions to the national GDP.
- Historical Trends: Liberalisation (1991) catalysed growth in southern states, though the economic performance of states has been diverging.
Factors Driving Regional Inequality
- Investment Disparities: Higher investment rates in richer states lead to a larger economy, while poorer states receive less public and private sector investment.
- Private Sector Preferences: Private investment favours developed urban centres with strong markets (e.g., Mumbai, Bengaluru) and coastal regions for export access.
- Public vs. Private Investment: The private sector focuses on profitability and urban centres, while public investment, which might support poorer regions, has diminished in importance.
- Role of NEP (New Economic Policies): The NEP of 1991 reduced the public sector’s leading role, channelling more investments to profitable regions, exacerbating inequalities.
Barriers to Investment in Poorer States
- Lower Credit-Deposit Ratios: Poorer states show a lower credit-deposit ratio, reflecting limited investment, as household savings from these states flow into richer states.
- Dominance of the Organised Sector: Policies favouring the organised sector have led to its growth at the expense of the unorganised sector, which is more prominent in poorer states.
- Historical and Political Factors: States like West Bengal and Kerala have low private investment due to labour militancy, while border and insurgency-affected states receive less public investment.
- Political Influence: Claims of “Double Engine Sarkar” and rising cronyism suggest investment decisions are politically motivated, lowering confidence and deterring investors in opposition-led states.
Impact on Federalism
- Threat to Federal Unity: Persistent economic disparities challenge federalism as wealthier states feel they are unfairly funding poorer states without adequate returns.
- Demand for Policy Reversal: Addressing disparities is essential for federal stability; maintaining current inequalities is unsustainable.
- Need for Balanced Growth: An approach balancing investment, infrastructure, and demand in lagging states is essential to reducing inequality and preserving unity.
Recommendations for Policy Change
- Improving Governance: Poorer states must enhance governance, reduce corruption, and improve service delivery to attract investment.
- Public Investment in Social Sectors: States should prioritize spending in health and education to improve human capital, attracting businesses seeking skilled labour.
- Focus on the Unorganised Sector: Shift focus towards supporting the unorganised sector in poorer states to raise incomes, boost demand, and create a stronger economic base.
- Demand-Driven Development: By increasing the purchasing power in poorer regions, the demand would stimulate local production, which could attract further investment.
Conclusion
The widening economic gap between Indian states threatens federalism and unity. Bridging this divide requires a nuanced policy shift from both the Centre and state governments, focusing on equitable investment, infrastructure development, and support for the unorganised sector in poorer states. This balanced growth approach would foster inclusivity, reduce disparities, and strengthen the federal fabric of India.
Related PYQ
Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard. [ UPSC Civil Services Exam – Mains 2023]
Practice Question
Examine the economic disparities among Indian states and their impact on federalism. Suggest measures to promote balanced growth across regions? [250 words]
Guidelines for Answering the Question
- Introduction:
- Introduce the economic disparity among Indian states.
- Mention its implications on federal unity and economic stability.
- Body:
- Highlight the economic divide between richer states (e.g., Maharashtra, Tamil Nadu) and poorer states.
- Explain the role of liberalization and investment concentration in widening these gaps.
- Mention the impact of infrastructure, urbanization, and governance quality.
- Discuss how disparities lead to tensions over resource allocation and demands for autonomy.
- Highlight the federal vs. state resource allocation debate and how richer states feel disadvantaged.
- Explain how persistent inequality threatens national unity and economic cohesion.
- Suggest improving governance and infrastructure in lagging states to attract investment.
- Recommend increasing public investment in social sectors like health and education.
- Emphasize supporting the unorganised sector in poorer states and promoting demand-driven development.
- Conclusion:
- Summarize the need for a balanced, inclusive growth approach.
- Highlight that reducing regional disparities will strengthen federal stability and national cohesion.