Dangerous divergence

Source: The post is based on an article “Dangerous divergence” published in The Business Standard on 6^th September 2022.

Syllabus: GS 3 – Inequality in India

News: This article discusses the measures that can be taken to address the regional inequality in India.

Economists have been arguing for a long time that there will be a convergence “convergence”, in which similar economic units such as states will eventually converge in output and related indicators, removing inequality.

However, in recent times Indian states have provided little evidence of convergence.

There is a need to address the degree of regional inequality in India else this inequality will pose a major challenge to India’s unitary and federal structure.

Data suggests that the richer states, such as those in the south of India, are between 3 to 4 times as wealthy in terms of per capita income compared to populated states of north and east-central India.

Inflation also hits the citizens of poorer states more than it does those in richer states.

How can this inequality be reduced?

There can be fiscal transfers from the richer states to the poorer ones but there are political issues related to it.

There is a hope that dynamic leadership in the poorer states will bring a business-led change but the problem is that there are other states available to investors for investing.

Public spending might focus on building up human capital in the poorer regions rather than on consumption subsidies. But this too will not work unless the returns to human capital in these regions are clear and demonstrable.

Another solution is to enable and protect internal migration.

Internal migration acts as a safety valve and equalizes the returns to labor and human capital allocation across regions.