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September 14, 2016

India’s Interstate Disparity

This Livemint article talks about how Vivek Dehejia and Praveen Chakravarty, Senior Fellows at IDFC Institute, have thrown India’s inter-state income disparity into 'sharp relief'. It highlights certain exemplary points from Dehejia and Chakravarty's recent briefing paper on the topic. 

 

"The per capita incomes of the 12 largest states of India, the paper shows, have been diverging instead of converging, as would be predicted by the neoclassical models of economic growth... 

 

...the level of divergence, the authors find, remained static between 1960 and 1990 and only began to increase after the economic liberalization of 1991. The two, however, do not blame the liberalization and justifiably so, as more evidence would be required to make a tenable claim...

 

India’s inter-state disparity is not just confined to income levels. The states diverge on several other economic, social and demographic indicators... [especially] total fertility rate (TFR)—or the average number of children a woman bears during her entire reproductive period...

 

The most obvious implication is on patterns of labour migration. Since the states with higher TFR are also struggling to provide better livelihoods, they will be natural exporters of labour to more prosperous states. This can create a social and political backlash against migrants in the recipient states...

 

Then there is the problem of redrawing the boundaries of Lok Sabha constituencies. The delimitation of constituencies has been postponed till the first census after 2026. A major reason behind the postponement was to avoid penalizing the states which do well on family planning effort. But this cannot be postponed till eternity...

 

Then there will be inevitable contestation over distribution of resources. As it is, the goods and services tax (GST) will centralize the setting of indirect tax rates, reducing the room for states to extract resources. Also, as Dehejia and Chakravarty point out, the opportunity to use tax policy to attract investment to the state will also reduce. While GST is undoubtedly a net positive for the Indian economy, the interstate disparities may set the stage for some clashes in the GST council...

 

The inter-state disparity in the milieu of increased fiscal devolution post the Fourteenth Finance Commission awards and the centralization of indirect taxation are going to produce a struggle between centrifugal and centripetal forces. More financial and political devolution will certainly help. And so will increasing female literacy and labour participation. Female literacy is the best antidote to rising TFR and female labour participation an effective way to boost per capita incomes."

 

Read the full article here

 

Read the briefing paper here

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