At a time when politicians from both the ruling and Opposition parties are busy stitching together a cross-country alliance of regional partners, it is worth examining the prospects for inter-state unity in the years to come. Most analyses of inter-state relations in the country tend to focus on the centrifugal tendencies within the country. Given India’s diversity, differences between Indian states tend to get more attention than inter-state dependencies. However, two important centripetal forces could reshape India’s federal ties in
At a time when politicians from both the ruling and Opposition parties are busy stitching together a cross-country alliance of regional partners, it is worth examining the prospects for inter-state unity in the years to come. Most analyses of inter-state relations in the country tend to focus on the centrifugal tendencies within the country. Given India’s diversity, differences between Indian states tend to get more attention than inter-state dependencies. However, two important centripetal forces could reshape India’s federal ties in the coming years: The growing integration of the Indian market, and a two-speed demographic transition.
The project of building a common national market took shape during India’s freedom struggle. India’s leading businessmen, trade unionists, and nationalist leaders advocated a strong centralised State that would be able to harmonise labour laws and economic regulations across the country, a 2021 research paper by the political scientist Louise Tillin shows. Such advocacy contributed to the unique design of India’s Constitution, which provided overarching powers to the Union government in a quasi-federal set-up, Tillin argued. Yet, the Constitution allowed state governments considerable powers to restrict internal trade. The long era of statist economic planning curbed several business freedoms, including the freedom to move goods freely across the country. Inter-state taxes made it difficult to run enterprises spread across states. Nativist activism and attacks on migrants in some of India’s leading industrial clusters thwarted inter-state migration. As India’s economy liberalised, things changed. Large firms that spread their wings across states began demanding uniformity in tax laws and economic regulations. In the 1980s and 1990s, policymakers began advocating a harmonised value-added tax to remove inter-state tax distortions, a recent Centre for Policy Research (CPR) working paper by the economists Niranjan Rajadhyaksha and Prakhar Misra suggests.
The introduction of the value-added tax (VAT) in 2005 helped lower barriers to internal trade. The introduction of the goods and services tax (GST) in 2017 virtually eliminated tax distortions in the inter-state movement of goods and services. An early analysis of the GST data by former chief economic adviser Arvind Subramanian showed that India’s internal trade was higher than in several other major economies. A more recent analysis by Bibek Debroy (chairman of the Prime Minister’s Economic Advisory Council) and Devi Prasad Misra (of the Central Board of Indirect Taxes and Customs) suggests that India’s internal trade has grown sharply in the post-GST period.
However, the introduction of GST has diminished the fiscal powers of states, raising discomfort and uncertainty in some state capitals. “With delays in payments, tense negotiations during the Covid-19 pandemic over the transfer of cess, and hasty decisions made by the GST implementation committee, the jury is still out on the GST’s effects on federalism,” Rajadhyaksha and Misra argue. The economist R Srinivasan of the Tamil Nadu state planning commission has suggested a new structure of decision-making in the GST council in which states have a greater say and the Union government no longer enjoys a veto. The demand for such changes might grow in the coming years. Nonetheless, it is unlikely that the GST experiment will be undone, given the strong support it has received from large businesses across the country. A uniform system of inter-state taxes allows an industrial firm in Tamil Nadu easy access to the large North Indian market just as it allows a factory in Maharashtra easy and cheap access to raw materials from Chhattisgarh. Business houses will lobby hard against any move that limits inter-state exchange of goods and industrial inputs. No politician can afford to ignore them. As India’s economic integration deepens, the flows of people and ideas across state borders are likely to grow.
The second centripetal force that could help in India’s national integration is the two-speed demographic transition in the country. Data from large-scale surveys and official population projections suggest that states such as Kerala and Tamil Nadu will age rapidly in the coming years even as states such as Bihar and Uttar Pradesh remain young.
Just as ageing societies in the West are willing to accept high rates of immigration today, ageing states in the South may be more willing to accommodate migrants from the North in the coming years. Whether or not this process unfolds smoothly depends on the evolution of India’s political system and institutional framework. Demographic changes have always been contentious in most parts of the world. When such changes threaten to upset the local power structures and socio-cultural mores, they can ignite conflicts. But proactive policy steps to help assimilate migrants and assuage local sentiments can prevent such conflicts. If locals do not fear loss of autonomy over cultural and language policies, they may not be hostile to new migrants.
We need a mature conversation around these issues to ensure that inter-dependencies among states become avenues for cooperation instead of driving conflict. Several commentators have suggested that the Inter-State Council should be empowered to frame policy guidelines on contentious inter-state issues. Such a mechanism would ensure that internal trade and migration policies work for all states of the Indian Union, and are perceived to be fair. India’s founding fathers preferred a strong centralised State to unite the country politically and economically. Today, we need a new model of cooperative federalism to deepen India’s economic and social integration.
Pramit Bhattacharya is a Chennai-based journalist. The views expressed are personal
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