Dangerous divergence

Growing regional inequality must be addressed

Economists have long argued the likelihood of “convergence” — in which similar economic units, such as states in a federal union, will eventually converge in output and related indicators. There has, in the past, been much evidence to support this, not least the notion that poorer countries and regions are capable of growing faster. However, in recent times Indian states have provided little evidence of convergence. Unless action is taken to address the degree of regional inequality in India, there is widespread concern that such inequality is now great enough to pose a major challenge to India’s unitary and federal structure itself. Data collated by this newspaper on the basis of figures made available by the Reserve Bank of India suggest that the richer states, such as those in the south of India, are between three and four times as wealthy in terms of per capita income as the poorest, heavily populated states of north and east-central India. Worse, this multiple has increased over the past decade and not decreased. Inflation also hits the citizens of poorer states more than it does those in richer states.
 

One answer to this issue, of course, is substantive fiscal transfers from the richer geography to the poorer one. This has traditionally been the solution attempted in India, but it may rapidly be reaching a point where it runs up against a political wall — and, anyway, it has had little enough to recommend it in the past. Some Opposition leaders have already begun to point out the unsustainable level of this redistribution. According to Praveen Chakravarty of the Congress, for example, even if corporate tax collection (which tends to be concentrated in some major cities) is excluded, the average Indian in Maharashtra pays Rs 20,000 in taxes to the Union, while the average person in Bihar pays Rs 2,000. This is a difference that is wide by any standard, and perhaps already unsustainable. When put together with the redistributive activity of the Union government, this would imply that the average resident of Bihar receives Rs 600 for every Rs 100 they put into the central kitty, while the average resident of Gujarat receives Rs 42. Cross-regional subsidisation of this magnitude has rarely been attempted in human history.

Some hope that dynamic leadership in these states will cause a business-led change. But attempts to attract corporate investment to these states will likely founder on a simple question: Who would freely choose to invest in Uttar Pradesh or Bihar when Gujarat or Tamil Nadu is an option? Clearly other solutions need to be found to this problem of regional inequality. Public spending, for example, might be focused on building up human capital in these regions rather than on consumption subsidies. Yet, this too will not work unless the returns to human capital in these regions are clear and demonstrable. One other solution — the one that has worked in economic history most often — is to enable and protect internal migration. India has failed its migrants repeatedly — most recently during the national lockdown that was announced as a result of the first wave of the pandemic in 2020. Internal migration acts as a safety valve and equalises the returns to labour and human capital allocation across regions.