Regional Disparities in India – The Role of State Governance

At the time of Indian independence in 1947, considerable disparities in economic and social development existed across Indian states. One of the key objectives of the planning process undertaken from the 1950s was to address these systematic regional differences and achieve balanced development. In the 1990s however, the disparities were 1.6 times higher than in the 1970s. This article addresses these disparities within India, highlighted by the formation of a high-income club and a low-income club. 

Convergence Clubs

The high-income club includes states such as Gujarat, Maharashtra, Punjab and Haryana, with the more recent additions of Tamil Nadu and Karnataka that have converged at about 125% of the national average income. The rich states club includes states whose infrastructure is developed to the level of a middle-income country, both in agriculture and industry, and are relatively urbanised.

The low-income group exists at about half of the national average income and includes states such as Orissa, Bihar, Rajasthan, Madhya Pradesh and Uttar Pradesh, amongst others. The Poor States club contains regions that have low levels of urbanisation, agricultural development and industrial development. 

The composition of these clubs has remained mostly unchanged over the last four decades, and the persistence of such disparities is cause for concern. If the economy’s extensive and populous spatial segments remained backwards while the other regions move ahead for long periods, the overall national development strategy becomes unsustainable. The recognition of this is seen by replacing India’s planning commission in 2015 with the NITI Aayog. This policy commission aims to achieve sustainable development through cooperative federalism by fostering India’s State Governments. 

Therefore the crucial question is how to bring about spatially equitable development and which institution has the primary responsibility for bringing such equitable development. One such institution is the state government who can attract foreign & domestic private investment and provide infrastructure. 

Attracting Investment

As the central government’s role in funding state governments has become less important, the main consequences of state-level policy reforms have been increasing competition in attracting domestic and foreign private investment. States in the high-income club are the most reform-oriented and have thus performed better in attracting investment than their low-income counterparts, leading to faster comparative growth in the post-reform period. 

For example, Chief ministers like Chandra Babu Naidu of Andhra Pradesh became reform icons who tried to improve governance in their states to attract investment and successfully pleaded for funds from development banks. Simultaneously, the low-income states were left behind, suggesting that the political economy’s divergent foundations have led to different attitudes towards business and engagement with the global economy among Indian states. These different attitudes are reflected in the high levels of regional diversity in economic outcomes. Therefore, besides the ability to attract investment, smaller government and better state-level institutions have also been positively associated with growth performance. 

Infrastructure Investment

A wealth of literature has shown the polarisation in income associated with the disparate distribution of infrastructure. The extent of state development expenditure is also strongly related to whether a state falls into the rich or poor club. 

Despite recent efforts, infrastructure supply in terms of quantity and quality remains low, and differences across states remain wide for many key inputs, including the density of the road network, electricity connections, water supply and education. Many firms face frequent power cuts, and transport projects often face extended delays, weighing particularly on the manufacturing sector’s performance. Policy at the state level plays an essential role in this pattern. For example, Gujarat has seen a comparably low population share without electricity access, which is partly related to the states’ promotion of solar power since 2009. Other policy factors – challenging land acquisition and the lack of environmental and other clearances – continue to play an important role.

Therefore, the causal mechanisms that drive rich and poor states apart are straightforward: a lack of infrastructural investment and poor fiscal management from less-reform orientated states. 

Policy Recommendations

The divergence in income clubs in India highlights the need for institutional reform at the state level. In particular, those belonging to the low-income club must make reforms that encourage investment flows and increase infrastructure expenditure. It is also worth noting that structural differences are responsible for a lack of spill-overs from rich states to poor states. Their industries do not mutually benefit each other and are not dependent on each other. So the recommendations provided in my previous article should also hold in this setting to supplement state governance reforms in achieving spatially-equitable development.

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