Open Forum

New Delhi, 6 December 2023

Regional Imbalance

WILL FINANCE PANEL BRIDGE GAP?

By Dhurjati Mukherjee 

The BJP’s victory in three states appears to suggest the promise of development via ‘double engine’ sarkar has takers. And the timing should make the task of the 16^th Finance Commission, recently recommended by the Union Cabinet to be set up, easier. It is to decide on sharing of taxes between the states and Centre. States are entitled to 41% share of the divisible pool, which comprises all taxes, excluding the cesses and surcharges. However, they have been demanding a larger share of the pie, arguing they are burdened by many schemes announced by the Centre. On its part, the Centre believes it’s funding several schemes, such as health and education is part of the States’ mandate. The difference of opinion may steadily disappear now.    

The existence of regional imbalance in India cannot be denied as there has not been balanced development. As in the case of literacy and educational attainment, where the states of southern India are far ahead than others, similarly in financial matters, states in the western part as well as Tamil Nadu and Karnataka in the south are stronger than their counterparts. The pace of growth in the two southern states and in Maharashtra and Gujarat has been phenomenal in recent years and experts believe their performance may be even better in the coming years. 

The per head income of states such as West Bengal, Bihar, Jharkhand and Odisha is far below the national average. In fact, the per head income of Bengal has been one of the lowest in the country in 2022-23 at Rs 141,373 whereas in Telangana, Karnataka and Haryana it’s more than double. These are indicative of regional imbalances in economic development. The Centre’s strategy of tackling this has not been successful enough and India suffers from a strategy of balanced economic development. 

Prior to liberalisation, the Centre’s efforts yielded some results with the economic emergence of Karnataka, Andhra Pradesh (undivided), and Haryana and helped the hilly and smaller states to stand on their own. But presently, the government has hardly any means of restricting regional imbalances. If is left on the market forces and in all likelihoodimbalances in the standard of living of people in different states shall reach a crisis proportion. By 2047, some states will be as prosperous as some East European nations while most others will be comparable to some central African nations. 

According to the International Monetary Fund’s (IMF) estimate, the average GDP per head in India, based on purchasing power parity, was $9,073 in 2023 which came to around Rs 213,215. It is indeed distressing to note that an emerging country like India ranks 127^th and is in the league of small and virtually unnoticed nations like Laos (125), Cape Verde (126) and Bangladesh (128). 

Undeniably, in the coming years some parts of the country will be more equal than others due to the uneven nature of development. An aver­age person in Telangana, Kar­na­ta­ka or Goa will be having more or less a similar standard like those living in the west, comparable to say today’s Hungary or Croatia. Thus, the relative diffe­rences in the economic condi­tions of different states will be more differential than what it is today. 

The present determination to make India the third largest economy of the world after the US and China is obviously a positive development. India’s per capita GDP increased from $442 in 2000 to $2389 in 2022, which is considered quite impressive. But what has been of great concern is the widening inequality in incomes along with regional, spatial and gender disparities. Unless the laggard states can increase their incomes, even if the achievement becomes a reality, the development would not be balanced. 

India’s human development index, which is a composite of incomes, health and education, has been falling rapidly. The nation’s current rank is 132 among 191 countries, which indeed is quite shameful since India is aspiring to be among the top nations of the world. A recent UNDP report found that India’s economic inequalities in wealth and income to be among the highest in the world, which obviously goes against the concept of inclusive growth. Regionally, states comprising 45 percent of the population contain 62 percent of the poor. 

Thus, the importance of the 16^th Finance Commission comes into play. Obviously, the poorer states would be given a larger chunk of funds compared to the performing ones but this strategy, adopted by the earlier Finance Commission, hasn’t yielded expected results. The high growth states continue to make rapid strides in their incomes while only Odisha has shown some promise among the poor states. 

Economic justice demands that the Finance Commission allocate tax proceeds in such a way that the rich states subsidise the poor. Then there is the Backward Region Grant Fund (BRGF) which is implemented in 272 identified backward districts in all states to redress regional development imbalances. Besides, there’s the Pradhan Mantri Khanij Kshetra Kalyan Yojana (PMKKKY), launched in September 2015 for the welfare of tribals and tribal areas and others affected by mining. But all these have not had any significant impact in boosting up the said incomes. 

India’s geographical diversity and different levels of development across regions mean that location specific targeted action would be required in less prosperous regions to ensure a minimum acceptable level of prosperity. The NITI Aayog has aThree-Year Action Agenda which underlined specific action for north Himalayan states, North-Eastern states, coastal regions and islands, desert and drought prone areas. There is obviously the need for implementing this action plan in a diligent and judicious manner. 

The belief that giving more funds to the poor states would result in a shift in the composition of India’s GDP away from agriculture has not become a reality as movement of labour from agriculture and from rural to urban areas has not taken shape. Thus, the inequality among states remains a big challenge, which needs to be seriously looked into and, it would be better, if the responsibility is given to the Finance Commission to suggest ways of improving the per capita income of the laggard states.     

Making agriculture more lucrative through value-addition and setting up agro-based industries may need to be considered. Though there may not be much scope for large-scale industrialisation and thrust on manufacturing in some states, they could concentrate on agro-based and cottage industries as also various types of ancillary products which may have a lucrative export market. Additionally, the electronics and IT sector could set up small hubs in various states as well small pharma manufacturing centres to meet regional demands. 

Economists and financial analysts are unanimous that merely providing funds will not help, unlessit’s supported by a plan, which the laggard states may be advised to follow. Accordingly, there’s anurgent need to frame some mechanism to boost incomes of the non-performing states and bridge the gap.---INFA 

(Copyright, India News & Feature Alliance)