Regional inequalities and resource transfer

State governments are largely responsible for the development of backward areas. However, the allocation of resources from the Center was an important tool in this process.

While India has lower spatial income disparities than countries such as Brazil, China and Indonesia, these disparities have actually increased since the reform. Spatial differences and the presence of backward areas, even within and between countries, are a unique feature of India.

Adjacent corridors in the poor areas of Andhra Pradesh, Odisha, Chhattisgarh, Jharkhand and Bihar can be mentioned. Income discrepancies are compared, even exceeded, by differences in non-income indicators. Sharply growing disparities coincided with economic reforms and the opening up of the Indian economy. Growing income disparities between more developed and relatively poorer countries are a matter of serious concern.

Regardless of the SDG indicators, per capita income is the most important surrogate measure for convergence and equality between countries, as it determines both the accessibility and the accessibility of services. The total per capita income in the states averaged 5,920 rupees in 1991-92, immediately after the economic reforms.

Increasing income

Average income is gradually increasing to reach ₹ 18,118 in 2001-02, a decade later, and further to ₹ 68,845 in 2011-12 and 1,742,024 ₹ in 2021-22. of the population doubles every six years or so, growing by 11.9% annually in the last 30 years since the reform.

Although overall growth was relatively strong, interstate inequality not only continued to persist but widened. The coefficient of variation of per capita income of the countries increased from 37% in 1991-92 to 76% in 2011-12, before slowing slightly to 67% in 2021-2022.

The average per capita income ratio of the state continues to show a similar pattern over the 30-year period, with Sikkim and Goa leading the group with more than 3, indicating that the average per capita income of these states has been more than three times the average income of all states combined. There is remarkable consistency in the ranking of countries in terms of per capita income, at the highest, middle and lowest levels.

BIMARU etiquette

The decline in the rank of Punjab, at number 2 in 1991-92 with per capita income, almost twice the national average to almost average in 2021-22, was truly astonishing and surprising. It has one of the lowest CAGRs of 9.9% over the 30-year period. Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh and Rajasthan remain at the bottom, indicating that the BIMARU label is yet to shake them off.

Not that the problem is not recognized. Both in terms of resource transfer and in terms of facilitating infrastructure and industrial development, the concerns of backward countries were proactively addressed. Institutional transfers through the Finance Committee and the former Planning Committee are based on both fairness and efficiency.

The relative importance given to each of these parameters differs in the different successive commissions (see chart), but almost half of the total tax transfers are based on equity, with the efficiency parameters being recognized only symbolically.

Transfers from the former planning committee, based on Hajil-Mukherjee’s formulas, also add more weight to backwardness. The lending component in discretionary transfers or project-specific transfers is also biased in favor of a particular category of country.

Total transfers to the states by the Union government increased from ₹ 30,923 rupees in 1991-92 to ₹ 14,996,035 rupees in 2021-22 (BE), an annual increase of 13.8 percent. Per capita transfers increased from ₹ 369 in 1991-92 to ₹ 1 122 in 2021-2022, registering an annual growth of 12.1 percent, a shadow lower with an adjustment for population growth.

The interstate distribution of these transfers is highly distorted and biased in favor of geographically smaller countries and economically weaker countries.

Contrary to the GSDP per capita, the distortion shows a moderate trend, as the coefficient of variation in transfers of resources from the Center decreased from 418 percent in 1991-92 to 230 percent in 2021-22.

Three factors appear to have contributed to this distortion.

First, the introduction of area as a separate factor in the distribution between sectors with a minimum weight of 2 percent for each country, in favor of smaller countries with smaller geographical area at the expense of larger countries; secondly, the abolition of the special category status for the north-eastern countries, which saw a sharp decline in their relative share in 2021-22 compared to 1991-92, and; third, due to a reduction in the burden attributed to poverty or the income gap and some burden attributed to demographic change and fiscal effort / fiscal discipline.

Despite slight changes in the criteria, Hariana, Maharashtra, Tamil Nadu, Karnataka and Gujarat continue to have transfers per capita, almost half of the national average.

There has been a decline in the relative share of the northeastern states as a group with an average annual rate of growth transfers in some cases even falling below 10 percent with an average CAGR of 12.05 percent.

The growth rate of most other states has almost converged, with the exception of Punjab, where the relative share has almost doubled and an annual growth rate of 14.8 percent.

Moral risk

Although high burdens are attributed to poverty or the related component, the relative share of poorer states such as Uttar Pradesh, Bihar, Odisha, Rajasthan and others remains sticky with narrow movements on both sides.

The transfers to some extent confirm what the Thirteenth Finance Committee mentioned – that excessive use of remuneration for equity participation can create a risk of moral hazard to make countries relax in improving their revenue efforts and manage their finances wisely and therefore “the principle of The effectiveness that addresses this issue should not be overlooked.

In addition, the horizontal distribution that makes these transfers equalizing may also not be fair for middle- and high-income countries, as they contribute much more to central taxes.

(In conclusion)

Gopalan is a former finance minister and Singhi is a former senior economic adviser at the finance ministry

Posted on

June 21, 2022

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