Guest Column| Accommodate regional aspirations for federal equilibrium in Union budget
The Union finance minister has many policy instruments at her disposal to lay the foundation for correcting regional imbalances and accommodating aspirations. The major ones include special financial packages, fiscal transfers, centrally sponsored schemes, public investment, infrastructure projects, digital connectivity, industrial corridors, SEZs, tax holidays and subsidies.
The Union Budget 3.0 is likely to be a combination of continuity and change. In continuity, the budget will be guided by the vision of the budgets since 2014, including fiscal prudence, high growth trajectory, world-class infrastructure and welfarism. The change will be necessitated by two factors, namely, India’s goal to become a developed nation by 2047 and rising regional aspirations reflected in the Lok Sabha election results.
In the pre-budget meeting with Union finance minister Nirmala Sitharaman, state finance ministers demanded a higher share in goods and services tax (GST), share in cess and surcharges and increased funds for infrastructural projects. Some states also sought special packages. Two coalition partners in the government, namely the Telugu Desam Party and the Janata Dal (United) are also in the process of seeking substantial central funds for Andhra Pradesh and Bihar, respectively. In his speech after getting elected as leader of the parliamentary party by NDA allies, Prime Minister Narendra Modi said that regional aspirations and national interests should be so closely interwoven that even air does not pass through them. In this backdrop, the finance minister while allocating resources needs to accommodate growing regional aspirations for the betterment of federal equilibrium.
Viksit Bharat and Viksit States
Different agencies have estimated different rates of growth of the Indian economy, averaging 7% per annum. However, for attaining the status of a developed economy, India needs to sustain a higher rate of growth. According the Reserve Bank of India’s “India @ 100” study for achieving the International Monetary Fund (IMF) benchmark of an advanced economy ($49,069 billion GDP), the Indian economy needs to grow at a rate of growth of 9.1% from 2023-24 to 2047-48. The rate of growth as per the World Bank benchmark of a developed country ($35,025 billion GDP) works out to be 7.6%. Keeping both benchmarks in view, an average required growth rate works out to be 8.35%. The goal of Viksit Bharat by 2047 can only be achieved by developing all states simultaneously, thereby setting another goal, Viksit States, by 2047.
Disparities in development
The present disparities in development across states do not augur well for achieving the target of Viksit Bharat by 2047. Some states have grown faster than others and one can find a huge gap in the highest and lowest state per capita incomes. For example, major states such as Gujarat (8.36%), Karnataka (7.46%), Andhra Pradesh (6.72%), Telangana (6.53%), Odisha (6.53%), Madhya Pradesh (6.46%), Haryana (6.4%) Tamil Nadu (6.02%) and Chhattisgarh (6%) have grown faster than the Indian economy (5.66%) from 2011-12 to 2021-22. The remaining states have registered a rate of growth below the national average. West Bengal with 4.34% (almost half of Gujarat) has experienced the lowest rate of growth.
Regional variations in terms of per capita state income are also huge. Goa had the highest triennium average per capita Net State Domestic Product worth ₹3,05,200 for the period 2019-20 to 2021-22. On the other hand, Bihar had the lowest average per capita income of ₹28,432, which was 10 times less than Goa. Further, the difference ( ₹2,76,768) was more than any developed state’s per capita NSDP, such as Gujarat ( ₹1,63,595).
Convergence vs divergence
Regional disparities have been studied by testing convergence hypothesis across India states. In economics, the convergence hypothesis, also known as catch-up effect, enunciates that less developed countries’ per capita income under certain conditions has potential to grow faster than that of developed countries. This hypothesis has been tested at the sub-national level, including India. A number of studies, which have been conducted covering Indian states, have rejected the convergence hypothesis and found divergences in the levels of development across states. Further, studies reveal that the process of divergence has become more pronounced after the economic reforms of the 1990s. The tendencies of growing gap between developed and backward states during the post-reform period suggest that only effective government intervention can reverse the process as market forces exacerbate regional disparities.
The forthcoming budget is the most appropriate opportunity to initiate the process of convergence among states. For identifying backward states along with the level of per capita income, indicators like people below poverty line, percentage of SC and ST population, human resource development index, industrial development, infrastructural development, investment as percentage of gross state domestic product, distance from main market and landlocked states can also be considered.
Policy instruments
The Union finance minister has many policy instruments at her disposal to lay the foundation for correcting regional imbalances and accommodating aspirations for fostering federal equilibrium. The major ones include special financial packages, fiscal transfers, central sector schemes fully funded by the Union government, centrally sponsored schemes having joint funding of central and state governments, public investment, dedicated infrastructure projects, such as the Bharatmala Pariyojana, railway corridors and extension of the Sagarmala project to landlocked states for the development of dry ports, UDAN-RCS (a regional airport development programme), digital connectivity, industrial corridors, special economic zones (SEZs), tax holidays and subsidies, investment in social sectors, like health, education including skill development, and aspirational district programme to develop the most underdeveloped districts.
India’s aspiration to become a developed country by 2047 necessitates inclusive participation from all states. The Lok Sabha election mandate underscores accommodating regional aspirations. Empirical evidence, however, suggests that the achievement of the twin objectives of Viksit Bharat and Viksit States cannot be left exclusively to the market as it perpetuates regional disparities. Effective public policy intervention, thus, is the most appropriate prescription. The Union Budget 3.0 is the first policy opportunity available with the Government of India to steer the Indian economy along with the states to become a developed economy by 2047. It is suggested that the finance minister should leverage policy instruments at her command to promote balanced regional development on long-term basis. ghumanbs54@gmail.com
The writer is a former vice-chancellor of Punjabi University, Patiala.Views expressed are personal.