Stats Of The Union – Economic gap between regions in India is growing. It will have consequences in other areas

Source: The post is based on the article “Stats Of The Union – Economic gap between regions in India is growing. It will have consequences in other areas” published in The Times of India on 1^st November 2022.

Syllabus: GS 3 – Inclusive growth and issues arising from it.

Relevance: About subnational economic convergence.

News: According to an economic theory, the incomes of countries and regions tend to converge over time. This is because areas with low-hanging fruit tend to attract capital and other resources that allow them to catch up. But India’s regions might be an exception to this trend.

How India is an exception to the subnational economic convergence theory?

A national survey on incomes by an economic think tank shows that the gap between states in southern and western India and many of those in the north, central and east is wide. A 2016 paper by IDFC Institute observed that India is the only major economy going against the trend of subnational convergence.

Instead of convergence, there is a divergence in the incomes of Indian states. For instance, Karnataka’s per capita income was at Rs 2,055 a year in 1989-90. This was almost two times that of Bihar. In 2019-20, the gap had widened to over five times with Bihar’s annual per capita income at Rs 29,794 and that of Karnataka at Rs 1,55,869. This trend generally holds across states.

Why India is an exception to the subnational economic convergence theory?

India’s fiscal architecture and related institutions such as the finance commission are designed to mitigate the fallout of economic convergence. This is done by allocating the divisible pool of taxes in a manner that brings about a degree of equity between states.

But the combination of economic and fertility divergences makes India an exception to economic divergence. For example, India’s national population will increase to 311 million between 2011 and 2036. Of this increase, only 9% will come from the five southern states. On the other hand, these southern states currently contribute 30% of national income with just 20% of the population.

How India can ensure a subnational economic convergence?

India’s subnational economic divergence is a trend that deserves more study and policy attention. This is because an uneven economic structure usually has consequences that ripple out into other areas. So, India should focus on attaining economic convergence.