A picture of a growing economic divide in India

In September 2023, the Economic Advisory Council to the Prime Minister (EAC-PM) released a paper titled "Relative Economic Performance of Indian States: 1960-61 to 2023-24," highlighting significant income disparities among Indian states. The report underscores the growing economic divide, raising concerns about federalism and the equitable distribution of resources.

Income Disparities

• Economic Contributions and Per Capita Income: Maharashtra, as the highest contributor to India’s economy, has a per capita income of about 150% of the national average. However, this average conceals stark inequalities, such as the contrast between Mumbai's wealth and Vidharba's poverty, reflected in high rates of farmers' suicides.
• Regional Performance: The report identifies consistently better performance in western and southern states, while eastern states lag behind, leading to a widening economic divide. Northern states show poor performance, with Haryana and Delhi as notable exceptions.
• Impact on Federalism: The growing economic divide raises questions about the viability of federalism, with representatives from wealthier states claiming they receive less from the Centre relative to their contributions. This mirrors past sentiments seen during the 2000 'Conclave of the Successful.'

Investment Dynamics

• Investment as a Growth Determinant: Investment levels significantly influence economic output, with better-performing states attracting higher rates of public and private investment. This trend perpetuates disparities as richer states continue to thrive.
• Private Sector Preferences: Private investment tends to flow into developed areas with established markets, while poorer states struggle to attract such investments due to perceived risks and lower profitability. Urban centers like Mumbai and Delhi remain preferred destinations for investment.
• Infrastructure and Governance: Infrastructure quality and governance are crucial for attracting investments, with richer states generally performing better in these aspects. This relationship emphasizes the need for targeted public policies to enhance conditions in lagging states.

Policy Recommendations

• Need for Governance Improvement: To address these disparities, states must enhance governance and reduce corruption, alongside increased public expenditure in social sectors. Effective governance can create a conducive environment for investment in poorer states.
• Shift in Focus to Unorganised Sector: Policy should prioritize the unorganised sector, as enhancing its productivity can lead to increased incomes and demand, thereby attracting private investment back to lagging regions.
• Balanced Growth for Federal Unity: Strategic policy shifts aimed at reducing disparities can ensure that while richer states continue to develop, the overall economic growth becomes more equitable, strengthening the fabric of federalism and national unity.

Practice Question

Q: What are the implications of regional economic disparities on federalism in India? What policy measures can be implemented to ensure balanced economic growth across states?