1 Trends in Regional Disparity

At independence, the Indian economy was characterised by not only economic stagnation, but also wide regional disparity. The reasons for this have been well documented by a growing corpus of work by historians and are beyond the scope of this paper. But to set out the context, it is worth observing that colonial economic policies in different periods between 1757 and 1947, in the content of trade policy itself, the differential land tenure systems and “personal laws” or the selective role of public investment, were entirely guided by the country’s change in strategic importance in the British empire. The regions that had undergone significant economic transformation at the time of independence were all around the three seats of colonial economic power – Calcutta, Bombay and Madras. Outside these, there were only a few regions where because of reasons other than trade (for example, location of military establishments) or some highly specific conditions leading to the development of a local capitalist class (for example, the textile industry in Ahmedabad), some significant economic transformation had taken place. The British administrative machinery had on the one hand limited economic development of India by separating the link between economic and political power. This meant that at the turn of the century, emerging Indian capital could only develop in and around the “capitalist enclaves” in a s ociety where non-capitalist social relations still dominated. On the other hand, the Indian commercial classes were protected from the wrath and struggles of the exploited and the oppressed through the “rule of law” enforced uniformly by an elaborate p olice force and judicial structure. The same administrativejudicial institutions later combined with a discriminatory electoral franchise provided a convenient means of depriving the peasantry of their crops, resources, customary security and personal protection. That the existing regional disparities like social inequalities and sectoral disparities at the time of independence were the consequences of economic policies and were almost wholly unrelated to the resource endowments of different regions is apparent from the fact that the central Indian plateau where the mineral resources of the country are concentrated was one of the poorest regions of the country. So was the Gangetic plain which is endowed with extremely fertile agricultural land along with rich biodiversity (except certain parts of Bengal – the seat of the colonial establishment till 1912 and colonial enterprise till the first world war).

It was, therefore, not surprising that within the realm of economic policy, right from the First Five-Year Plan, the goal of a

186 “balanced regional growth” was considered politically as important as the goal of aggregate growth (Kumari 2006). Up to the Fourth Five-Year Plan, three basic strategies that mentioned balanced economic growth as one of the aims were undertaken –

(a) according priority to agriculture, irrigation, and community development, which all related to the rural sector where development deficits were most stark, (b) providing equitable infrastructural facilities (power, roads, communications, educational and health institutions) in all regions, and (c) locating new enterprises, whether public or private, based on the need to address regional disparity. It must be noted that these strategies did yield results, but they evolved over a period of time and as such the reduction of regional disparities in the early period of planning, observed later in the paper, cannot be causally ascribed to the basket of policies.

However, the long-term trend in regional disparity in India has been one of widening. Taking the period from the 1950s to the 1980s and using a weighted coefficient of variation, Mathur (1994) concluded that regional disparity in India had lessened during the 1950s and up to the mid-1960s, but had thereafter widened steadily. Because of the reorganisation of the states in 1956, other studies on long-run trends in regional disparity refer to periods, starting from 1960-61 or a year later. In one such study (Chaudhuri 2000), regional disparity is measured as the coefficient of variation (CV) of per capita state domestic product (PC-SDP) indices, taking the all-India per capita gross domestic product (GDP) as 100. Starting with 1961-62, the CVs of PCSDP indices are computed at five-year intervals, again showing that it steadily increased from 18.2 in 1961-62 to 35.4 in 1997-98. In another exhaustive study (Dasgupta et al 2000), covering the period 1970-71 to 1995-96 and using the CV of PCSDP as the measure of interstate disparity, it was concluded that “Indian states have diverged in terms of per capita real state domestic product (SDP) over the 25 years under consideration”. Apart from establishing the widening of regional disparity, the study also showed that it is the low-income states that have exhibited lower growth rates in SDP, another important aspect of the dynamics of regional disparity in India. Since liberalisation has meant a major paradigm shift in the source of economic growth, some authors have compared the growth performance of different state economies during the 1980s and 1990s, that is, in the immediate pre- and post-reform decades. Based on the coefficient of variation of growth rates of SDP, it is observed that regional disparities were wider in the 1990s than in the 1980s; these disparities are even wider in terms of growth rates of per capita SDP, since low-income states are also at the lower end of the demographic transition (Bhattacharya et al 2004). That the process of liberalisation has accentuated the trend in widening of regional disparity in India is also corroborated by two other studies (Nagraj et al 1998; Ahluwalia 2002), which taken together show that the Gini coefficient of per capita SDP was 0.152 in the beginning of the 1980s, rose to 0.171 in the beginning of the 1990s, and increased faster thereafter to reach

0.239 in 2003-04. The existing literature thus brings out the f ollowing conclusions about the pattern and trend of regional i nequalities in India.

(a) Independent India inherited an economy which had wide regional disparities because of colonial interests; its few relatively

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developed regions consisted of industrial and trading enclaves mainly around the port cities. Removal of regional disparity has been constantly underlined in all plan documents. But, except during the early years of planning, inter-state disparity in India has steadily widened. One should emphasise here that this is the only aspect of India’s development experience where actual “progress” has been in the “opposite” direction. For other socioeconomic development objectives like income, employment, education or health status, progress might have been slower than desired, or reversals apparent in the recent period as in the case of poverty, hunger and nutrition, but no other indicator has shown such a secular regressive trend in the entire postindependence period.

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households, while in low-income states it extends to other occupational groups (Radhakrishna and Ray 2005). Poverty is also concentrated among dalits and adivasis. The poor among those classified as scheduled castes in rural areas are concentrated in Uttar Pradesh (58%), Bihar, and West Bengal while the poor among dalits in urban areas are concentrated in Madhya Pradesh and Uttar Pradesh (41%). Although official poverty is relatively low in Punjab, around 80% of the rural poor in this state are dalits.

Intensification

Before we move to the next section on the implications of everwidening regional disparities on political developments in India, the first argument can be set out: regional disparities have intensified not in spite of the country’s development strategy, but largely because of it. Notwithstanding federal constitutional provisions that allocate different social and economic sectors b etween the central and state governments and elaborate guidelines regarding their fiscal dimensions, the “core” of economic development strategies in India has always been decided at the centre, mainly through the sectoral allocation of resources, r egional allocation being only a by-product of this exercise. Consequently, regional disparities are largely a consequence of sectoral disparities. Taking the two major sectors, agriculture and non-agriculture, one may note that their long-term growth rates (1950-2000) have been 2.6% and 5.8% respectively (Sivasubramonian 2004). For both these sectors, the core of the development strategy was substantial state intervention, either through public investment or administered prices, both of which contributed to creating the regional, sectoral and social epicentres of economic growth, at least up to the 1980s.

For the non-agricultural sector, the most important component of state intervention was public investment in infrastructure and basic industries. Starting with a share of around one-fourth during the early 1950s, the contribution of the public sector in total gross capital formation in India had risen to nearly half by the middle of the 1980s; thereafter, it started decreasing because of the reversal entailed in the reform paradigm (Chaudhuri 2000). With the huge investments that infrastructure and basic industries entailed, the strategy of public investment under planning was to “crowd in” private investment in the non-agricultural economy. Together with this investment support, the state also followed a policy of administered prices, which amounted to subsidising many of the industrial inputs like steel and energy. Thus, along with some regulatory measures restricting the free play of private capital in sectors of its choice, the state provided the private capitalist sector with considerable patronage and incentive through huge public investment.

In parallel, the core element of the state’s development strategy for the agricultural sector was the Green Revolution policy introduced after the food crisis of the 1960s. Unlike the strategy of industrialisation which remained unaltered through the period of planning (except for the Patent Act of 1970 which changed the nature of technology acquisition and development), the state had to change its policy of non-intervention in agriculture during the mid-1960s after a serious food shortage in the urban areas (commonly interpreted as a wage goods bottleneck) started unsettling

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its growing industrial sector. At this point, the agricultural develop ment strategy changed to concentrate only on those areas where, because of earlier investment in agriculture, irrigation f acilities were of an assured nature and landholding patterns were not frozen through the zamindari system. This covered barely one-fifth of the cultivated areas in the country, mostly in northern India. And the outcome of the water-seed-fertiliser technology, all of them subsidised, was the Green Revolution enabling the Indian economy to attain self-sufficiency in foodgrains (Sen 1974). This self-sufficiency was, however, a limited phenomenon because the aim of the policy was itself narrow. It did not imply adequate food for all; instead, it only meant adequate food for those who had the purchasing power to buy it, leaving a large majority of hungry households without purchasing power ( Patnaik 2007). Thereafter, agricultural production levels in I ndia have been sufficient to meet the entire urban food demand and also create a large food stock, the two together ensuring that the industrial sector does not suffer from any food supply constraint even in the face of serious crop failures and agrarian d istress. Thus the narrow aim of sector-specific intervention within an overall policy of non-intervention was instrumental in reinforcing social, sectoral and regional bias.

Both these core elements of India’s development strategy were sector-specific and hence apparently region-neutral, more so the strategy of industrialisation. But, much to the disadvantage of low-income states, this strategy was region-specific as well. Both the strategies of industrialisation and agricultural growth entailed asymmetric geographical distribution of resources in favour of states that were already better off because of historical reasons. Considering the strategy of directed investment in industry through licensing first, one may note that at least initially it implied favourable private investment patterns in some low-income states like Bihar, Madhya Pradesh and Orissa because of their rich mineral resources. But this possibility was more than offset by the policy of freight equalisation which ensured availability of basic industrial inputs like coal and steel at the same prices throughout India. This promoted the growth of industries in those regions where the industrial economy was already relatively large (to take advantage of external economies) and deprived the remaining regions of India, including even those states which arguably had a natural comparative advantage for industrialisation. In the case of the Green Revolution strategy, the economic rationale was not an increase in agrarian productivity-led growth as such, which would have entailed extensive institutional change (Rao 1999), but only ensuring that the supply of foodgrains was adequate to meet the food demand of the urban market. A failure to do so would have caused wages to rise, threatening the profit levels of the industrial capitalist. For this limited objective to be met it was not at all necessary to promote growth in agricultural productivity throughout India through institutional and technical change; covering barely one-fifth of the cultivated area in the country under the Green Revolution was sufficient to attain the goal. Apparently, it could be argued that once a region (initially uncovered by the new technology) managed to set up an adequate irrigation infrastructure, the benefits of the substantially subsidised new technology were as much within its access as the areas already covered. But once the limited objectives of the industrial sector had been served, public investment in agriculture started declining even in absolute size in the late 1970s (Rao C H 2006), Consequently, the spread of Green Revolution after its initial “success” in selected areas thinned out elsewhere in the country. One can, thus, conclude that within the clear sector-specificity of the state-led long-term development strategy of the Indian economy, namely, the modality of industrial development and the narrow aim of agrarian policy goals, was hidden a region-specificity, a result of which was the widening of regional disparities in India.

An analysis of long-term trends in inter-state disparity in per capita income shows that it has been widening all along since the 1960s; but during the 1990s, the process has been faster (Ahluwalia 2002). This is apparently paradoxical – for, if the argument of those who called for narrowing down the role of the state in the economy was to hold, and if the earlier regional disparities were caused by the development strategies of the state, its much smaller role during the 1990s should have at least arrested the trend of widening regional disparities if not reversed it. That did not happen because low-income states, when exposed to the unfettered forces of the market, were inherently more disadvantaged than during the period of directed development. By the end of the 1990s, the low-income states in India were not only poor vis-à-vis their income levels, they also had accumulated deficits in infrastructure, suffered a weakening of the institutional structures of social transformation from above, and their governments were incapacitated because of their steadily weakening financial base.

2 Federalism and Regional Disparity

The Indian Constitution does not easily lend itself to the standard binary classification of unitary and federal (Rao and Singh 2006). On the one hand, the provision of legislative bodies in different states makes it a federal constitution; on the other, through a number of legislative and executive powers that the Constitution bestows on the central government, relating to both command over resources and exercise of political power, its unitary character is too prominent. The Indian Constitution is generally characterised as a “federal constitution with unitary bias,” a description that is far from definitive and only underlines its dual character. As a consequence, over the last 60 years, federalism in India has had to face not only the challenge of an evolving modus operandi, but also a parallel one of holding its own space, often threatened by the elements of unitarism. At the root of this contestation lies the political structure that the British bequeathed to the colonial administration, finding it advantageous to promote subnational political entities to forestall the emergence of a strong national identity, starting with the partition of Bengal in 1905, which had to be reversed but was pursued in other ways after the Government of India Act of 1912 (Rao and Singh 2006). When the Constitution was drafted, its authors felt that, after independence, what could possibly hold together a large nation like India was a strong central government, even when the contradictions due to such a centralising state were apparent in the debates in the Constituent Assembly and the National Planning Committee

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(Chibber 2003). The problems with this political arrangement were clear after the use of Article 356 in Kerala in 1959. But it was only by the end of the 1960s, when the diverging trends of regional disparity started that the pressing questions about the functioning of the state and economy, including the issue of federalism, came to the political foreground.

The most important liberal rationale for federalism is its efficacy as a “mechanism of managing diversity,” a phenomenon more likely in large countries marked by plurality. But that is not the only task of federalism. Besides a liberal answer to the question of identity, federalism also incorporates the constitutional arrangement of sharing of power, outlining the domain of political federalism, and a parallel arrangement for the sharing of resources, not the whole of which is defined constitutionally, to delineate the space for fiscal federalism. Admittedly, these two subsystems, political and fiscal federalism, may influence each other, but their trajectories are not necessarily parallel. The working of Indian federalism since independence appears to be a telling example of a divergence.

To take the case of political federalism first, the democratic and political process has triggered a gradual but significant dispersion of power to state-level political parties, and regional parties have become a more important, often critical, part of coalitions at the centre in the period of economic reform (Jayal et al 2007). This is not an isolated view. Another summative judgment on the working of federalism in India notes that it would be an exaggeration to maintain that federalism has withered away in the actual working of the Constitution. The most conclusive evidence of the survival of the federal system is the coexistence of state governments with sharply divergent ideological complexions. A more assured space for the federal components of overall political power is also apparent now, as the arbitrary use of Article 356 of the Constitution has been tempered after a series of political and judicial contestations, though the constitutional provision has not been amended.

However, the weak basis of fiscal federalism has been eroded further in the same period. There are several economic trends, stemming from the dominant policy paradigm, that have severely weakened the space for fiscal federalism since the economic reforms of 1991 because of the increasing shift to rule-based fiscal control (Isaac and Chakraborty 2008).

The erosion of fiscal federalism has led to competition between state governments in several economic fields. The recent scenario vis-à-vis the location of private investment in industry, either domestic or foreign, where the different states engage in fierce competition in terms of the incentives they offer prospective investors is one example. As a consequence, industrial units are now located not where the cost advantage lies as advocated by pure marketists, but on the lure of a range of incentives which, for historical reasons, are larger in high-income states. The states competed with each other even before the economic reforms when public investment played a larger role in industrial development, and the centre, by virtue of its constitutional position decided the nation’s industrial policy, and through its economic policy paradigm had some regulatory authority to influence the destination of private investment. But such vertical competition, where the states

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at the regional level were vying for the attention of the centre, has now been replaced by horizontal competition where state governments vie for the attention of private investors. The winners and losers in this competition form two separate groups, the former ascribing their success to their efficiency and quality of governance and the latter underlining the historical burden of post-independence neglect and the “race to the bottom.”

The above transformation of Indian federalism to a stage where the competitive elements shaping the constituent regions are involved in a contest was a gradual process initially, but since the early 1990s, has been a very pronounced phenomenon. The allocative role through policy tools like freight equalisation and industrial licensing had already reinforced regional economic divergence (Banerjee and Ghosh 1988; Singh 2008). This horizontal competition between regions and states has been concomitant with the intensification of the horizontal contradictions within the dominant classes in the different regions during the decade after liberalisation. The tension between industrial capitalists and agrarian capital was aggravated in Punjab, Haryana and western Uttar Pradesh in the aftermath of the Green Revolution and underlined the politics of center-state relationships in the 1970s (Sathyamurthy 1997). But by the beginning of the 1980s, agrarian change outside the classic Green Revolution belts laid the foundations for capitalist development in the non-farm sector (Kapadia and Lerche 1999). In Punjab, Haryana, Gujarat, Maha rashtra, Tamil Nadu, Andhra Pradesh and Karnataka, regional accumulation processes led to the emergence of first-generation business houses mainly drawing from the agrarian economy unlike the old business houses that emerged from trade, commerce and moneylending (Baru 2000). The changing political basis of federalism has emerged from this section of the dominant classes and their relationship with successive state and central governments and regional political parties (Gupta 2007). Thus, the very basis of the potential for growth in the liberalised economy has also been the basis of increasing regional disparity. The political tensions inherent in this paradox have been reflected in demands for fiscal federalism, as is evident from the increasing collaboration among states in representations to the centre, as well as the political articulation of diverging interests between rich and poor states, sometimes cutting across party-political divides. These pushes and pulls have had considerable impact on Indian democracy.

3 Democracy and Regional Disparity

The question of the relationship between regional disparity and democracy has been treated as a subsidiary one in much of the literature. However, economic development (Lipset 1959), interelite relations (Rustow 1973), relationship between social classes (Moore 1967), and political institutions to channel and contain conflict (Heper 1991) have been put forth as the determining b asis of the advance of liberal democracy (Pinkney 2004), where it is conceived as a specific governmental form (Kaviraj 2000).

While much of the recent literature on democracy in India has focused on the question of coalition politics (Yadav 2000, Hasan 2000, Arora 2000), by the mid-1960s, while the paradigm of economic growth and social redistribution under the “Nehruvian consensus” broke down, the political debate revealed an underlying

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lack of agreement on the form of strong state and, among some groups, resistance to the goal of creating a nation state in the absence of a dominant culture. The tension between centra lising and decentralising tendencies culminated in the Emergency. Since then, this tension heightened to reach recognisable patterns by the mid-1980s (Frankel 2005). The nomenclature of national and regional parties obfuscates the fact that even the Congress has been unable to preserve its national character through regional representation in party structures and the Bharatiya Janata Party (BJP) is struggling to break from regional confinement.

This leads us to the next significant question about the relationship between democracy and power. The tension around centralisation has been attributed to size, diversity and fragmentation, but the sources of fragmentation have not been unchanging. Since the Green Revolution in agriculture, renewed efforts to enforce land ceiling legislation in the 1970s, the increasing political assertiveness of the emerging elites in state-level politics, the increased prominence of social issues concerning dalits, adivasis, women, the poor and the landless, the question of status and safety of minorities and the salience of issues of law and order have intensified in recent decades (Brass 1997). While there is no one-to-one mapping between regional disparity and the tensions around centralisation and thus the question of extent of diffusion of power in the democratic polity – both show the same pattern over time – the decisive factors in the political arena over democratic power can be traced to the mid-1960s and have only intensified in the last two decades.

It is in addressing the question of left-wing extremism that a consensus around issues that connect our earlier observations about the trends in regional disparity and the concentrated dimensions of the social and the sectoral by region can be seen. This literature raises three interconnected dimensions of disparity and exclusion – regional, social and sectoral (Kujur 2008) – and concludes that the institutions of liberal democracy in India have not been conducive to ensuring political participation in the mainstream of the polity of groups in the interstices of these three forms of exclusion and disparity.

Inter-elite relations have been another domain but the literature is highly contested. However, two dimensions of the question can be addressed. One set of questions relate to elite anxieties about more equitable sharing of economic and political power through affirmative action. Here, the political experience of the last two decades since the implementation of the Mandal Commission report in 1989 provides a clear indication that the contest between the traditional and emerging elite was concentrated in the social milieu of widening regional disparity in the Hindi heartland states (Shah 2004). The other set relates to the question of the limits of coalition politics as a power-sharing arrangement to address regional disparity. First, coalition politics while setting regional questions on the national agenda has not in itself been able to reverse the centralising aspect of the economic reforms paradigm of the union government. Second, coalition politics has not in itself meant a move towards policies to reverse the trend of widening regional disparity though the question has come to the fore because of the increasing importance of regional aspirations in the national polity.

4 Implications for the Finance Commissions

In this paper, we have tried to trace the political issues around federalism and democracy that stem from the widening of interstate and regional disparity in India.

The finance commission has the status of a constitutionally mandated “neutral” arbiter in the process of financial devolution in a context where the structure of Indian federalism and democracy in the post-reform period entails the concentration of fiscal and financial resources in the hands of the central government. As we noted earlier, the post-liberalisation period has seen a significant increase in interstate disparity, contrary to the expectation that removing the policy barriers that had been the cause of widening regional disparity would entail a reversal of the process. Successive finance commissions, through their assessments of the states’ own revenue capacity and the structural constraints on these, have historically accepted and acted on this question while deciding on horizontal devolution. The emergence of the per capita income gap as the most important index in the devolution formula reflects this fact. But the per capita income gap, while it reflects the trends in regional disparity, does not in itself address the causal factors of regional disparity and the pressing question of widening regional disparity, which is a product of the reigning policy paradigm.

On the question of vertical devolution, central political priorities on economic policy matters have played a far greater decisive role, reducing the question of vertical devolution to a residual matter through the mandates in the Terms of Reference. This has been a marked development since the Tenth Finance Commission. In the post-liberalisation period, the onus has fallen on the states which have fallen behind to find ways in which they can find resources to fulfil their committed expenditure requirements, leave alone the question of expenditure to reverse trends in disparity. The latter is difficult due to a constrained fiscal space where revenue mobilising powers are constrained by the socioeconomic structure and borrowing powers are curbed by central decisions, conditions and directives. This has accentuated the institutional gap between the states that have fallen behind and those that have forged ahead. The corpus of vertical devolution, though increasing, has fallen far short of the need for public expenditure and investment necessary in laggard regions to reverse the process of divergence.

If widening interstate disparity in its three intersecting dimensions – regional, sectoral and social – has to be addressed within the institutional space provided by democratic and federal structures to the finance commission operating within permanent rules set by the Constitution, while it responds to the political implications of such disparity, two broad conclusions can be drawn.

Central policy goals that accentuate competition between states and impose rule-based constraints on the policy flexibility of states should not be institutionalised through finance commission recommendations.

If widening interstate disparity has to be addressed both by the own action of states and broader central policies, then very high levels of public expenditure are needed not just in social sector, but also in vital economic sectors by states constrained

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