Federalism

Economic fault lines between rich and poor states threaten unity

Praveen Chakravarty
October 1, 2022

Praveen Chakravarty. Credit: DH Illustration

Last month, I highlighted the wide economic, demographic and political disparity among India’s states and argued why the Narendra Modi government’s penchant for a ‘one nation one policy’ framework is deeply flawed and dangerous for the unity of our nation. Many readers agreed that India should not be governed as a ‘uniform’ nation, but they also asked what the Union government should do to reduce the alarming divide among India’s states. Let me illustrate with an example.

One of the world’s largest electronics manufacturers, Foxconn, in partnership with Indian conglomerate Vedanta Group, wishes to set up a semiconductor manufacturing plant in India. In a country with hundreds of millions of unemployed youth, a project such as this that can generate jobs is greatly welcome. But the question is, where in India should Foxconn set it up?

On average, 30 per cent of youth in Bihar and Uttar Pradesh are unemployed, compared to 12 per cent in Maharashtra and Gujarat, as per the latest government data. It is then only logical that the Foxconn project, which can generate a large number of jobs, be in Bihar or UP than in Maharashtra or Gujarat, to reduce disparities among India’s states.
But Bihar and UP are not conducive to foreign investments or large-scale manufacturing. In the last decade, Maharashtra and Gujarat received 150 times more foreign investment than Bihar and UP. On average, manufacturing constitutes less than 10 per cent of Bihar’s and UP’s economies, compared to 25 per cent for Maharashtra and Gujarat. So, clearly, the poorer states of Bihar and UP, with far greater youth unemployment, need the Foxconn project more. But the bulk of India’s foreign investment or manufacturing projects seem to go only to the richer states of Maharashtra or Gujarat.

As a nation, it is ideal for the Foxconn-Vedanta project to be located in Bihar or UP. But as a business, Foxconn-Vedanta will be lured more to Maharashtra or Gujarat for their superior infrastructure, an established manufacturing ecosystem, and attractive tax incentives offered by these richer states.

This is where the Union government must step in and balance, since the poorer states will never be able to compete on their own with the richer states to attract new investments. While businesses will be justifiably hesitant to locate new projects in lesser developed states, the onus is on the Union government to attract such new projects to the poorer states through a combination of aggressive capital incentives, heavy infrastructure support, and other sops that can convince businesses to move to the poorer states. In the absence of strong backing from the Union government to attract new investment, the poorer states will continue to lose out to the richer states and be stuck in a cycle of poverty, thereby widening the gap between the richer and the poorer states over time.

In 1960, the average person in the then richest large state (Maharashtra) earned twice the amount of the person in the then poorest large state (Bihar). This gap should have reduced over time but today, the average person in Maharashtra earns four times that of the person in Bihar. In other words, the economic gap between rich states and poor states has doubled, not narrowed, as one would expect. For context, in 1970, the average person in the richest large state in America earned thrice that of the person in the poorest state but today, that gap has halved. India is the only large federal country in the world that is experiencing economic divergence where the gap between rich and poor states is widening and not closing.

It is not because adequate funds have not been redistributed from the richer states to the poorer states for their development. For every Rs 100 that the Union government collects from Maharashtra, Gujarat and Tamil Nadu, Rs 70 is sent to the poorer states. So, the few rich states continue to provide all the development funds the poor states need, but it does not seem to have helped close the gap over the last six decades. The richer states cannot be burdened with this responsibility forever. There will soon come a time when they will start to question the efficiency of such redistribution when it is not yielding the desired results, and cracks will emerge in the idea of India as a Union of States.

Only the Union government can resolve this dangerous dilemma facing India’s federalism through heavy intervention in enabling new projects and investments in the poorer states. Alas, the Modi government has shown no signs of understanding the gravity of this problem, let alone take steps to resolve it.

Foxconn-Vedanta chose Maharashtra as its desired location initially but were allegedly directed by the Modi government to go to Gujarat, ostensibly to help in the upcoming state elections. If the Modi government did intervene in deciding the location of the Foxconn project, then should it not have directed it to Bihar or UP, rather than Gujarat for myopic electoral gains?

The poorer states will not be the favoured destination for such large foreign investment, and businesses will resist any push to go to these states. This is where the Union government should have made the necessary overtures to lure Foxconn to the poorer states, in the larger interest of the nation and its federalism. But there is no evidence of any such attempt by the Modi government, except to coax, cajole or coerce Foxconn at the last minute to locate in Gujarat for petty immediate gains.

Forcing Hindi on Karnataka or a ‘one nation one exam’ on UP in the garb of national unity is dangerous and destructive. Instead, the Modi government will do well to focus on productive interventions to reduce the economic divide across India’s states that will foster much greater unity than hollow symbolic gestures.

(Praveen Chakravarty is a Congressman curious about correlations, causes & consequences)

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