Regional Balance in Indian Planning by Montek Singh Ahluwalia Introduction

Balanced Regional Development has long been a declared objective of national policy in India, as it is only natural for a large and diverse country with wide differences across states in levels of per capita income and other indicators of socio economic development. However, while this has been an avowed objective of policy, and many initiatives have been taken to this end, the objective itself has never been formulated in a quantitatively measurable manner. In fact, until recently, growth targets were set only for the country as a whole, with no targets for growth or poverty reduction in individual states, which might give some idea of the extent to which redressal of imbalances was being targeted.

The issue came into sharper focus after the liberalization of the economy in the early 1990s, when industrial licensing, which had been used in the past to direct private investment to backward areas, was abolished and the economy was opened up to competition from abroad, putting pressure on domestic firms to reduce costs. Inevitably, this raised fears that in the new competitive environment, investment might flow to the states that were more favourably placed, to the disadvantage of backward states. The concern that economic disparities across states may be widening was first explicitly noted in the Mid-term Appraisal of the Ninth Plan (1997-2001) published in 2000. Following this, the Tenth Five Year Plan (2002-07), for the first time, set state-specific targets for growth and poverty reduction in individual states, and this practice continued in both the Eleventh and also the Twelfth Plan. The establishment of state-specific targets, endorsed by the states, means that performance against these targets can now be monitored, and the implications for the changes in regional balance they entail can be measured.

This paper provides a brief overview of the issues involved in achieving a more balanced regional development. Section I provides brief statement of the different dimensions in which regional balance is now viewed. Section II provides an overview of the policies followed by the Central Government to promote regional balance. Section III assesses the adequacy of these policies and Section IV provides an assessment of what has happened to inter regional inequality in recent years, especially in the Eleventh Plan period. It then closes with some concluding remarks.

Traditionally, regional balance has been viewed in terms of the balance between different states, but more recently it has also been viewed as referring to balance within states. Both are important and it is useful to document the scale of the problem in each dimension.

Table 1 presents a list of states indicating their per capita Net State Domestic Product (NSDP) and also the level of the Human Development Index (HDI) ¹ which is a composite measure of socio-economic development. It is evident that states vary widely as far as per capita NSDP is concerned. Bihar, which is the poorest state, has a per capita NSDP which is about one-fifth of the richest states, Haryana and Maharashtra. Uttar Pradesh (UP) which has the largest population is only a little better, at 30 per cent of the level of Haryana or Maharashtra. Differences in per capita NSDP are not necessarily an indicator of differences in the income levels of the population since NSDP includes income accruing to capital, which may accrue to owners of capital outside the state; and where there is a net outflow on this account, NSDP may exaggerate the average income level of the residents of the state. Equally, NSDP does not include remittances from other states, which can be a substantial source of support for households in poorer states where there is net out migration, and in this respect NSDP may understate the level of living.

The HDI which is based on measured consumption levels plus education and health standards, also shows substantial variation across states though less than in per capita Net State Domestic Product (NSDP) since the index is bounded, varying from 0 to 1.0. Chhattisgarh has the lowest score at 0.36 with Odisha, Bihar and UP only slightly better at 0.36, 0.37 and 0.38 respectively. All these states obviously lag far behind the more advanced states such as Kerala (0.79), Punjab (0.61), or even Maharashtra (0.57) and Tamil Nadu (0.57).

The regional balance issue also surfaces in the form of differences within states. Table 2 presents a picture of intra-state differences based on the coefficient of variation in intra-state domestic product per capita across districts within each state. The highest intra-state variations (coefficient of variation > 0.4) are in Bihar, Haryana, Karnataka, Chhattisgarh, Odisha, and UP. The lowest intra-state differences (coefficient of variation < 0.25) are Andhra Pradesh, Kerala, Punjab, Rajasthan, Tamil Nadu and Uttarakhand. Table 2 also provides information on how intra-state differences have changed since 1999-2000. There is no uniform pattern: the extent of variation has increased sharply in Haryana, Karnataka, Bihar and West Bengal whereas it has declined in Assam and Chhattisgarh.

Differences within states can be as important for state-level politics, as variation across states is for national politics. The need for special steps to address the issue is even recognised in the Constitution. Article 371 makes provision for the Governor to establish separate Development Boards for Vidarbha, Marathwada and the Rest of Maharashtra, and also for Saurashtra, Kutch and the Rest of Gujarat, and to ensure equitable allocation of funds from the state budget for these regions. In the North East, some states have established autonomous district councils to give a special focus to development of particular tribal areas. The underdevelopment of north Karnataka relative to the rest of the state is another well known problem, as also the problem of the Telengana region of Andhra. The Bundelkhand region, which straddles UP and Madhya Pradesh, is another area which presents problems of relative backwardness in these states.

The redressal of imbalance within states can be viewed as primarily a state government responsibility. If the total resources available to a state including the transfers from the Centre are appropriate for the per capita income of the state, the provision of adequate resources to a particular region is a matter of allocation within the state, which can be left to the state government.² However, the Central Government has recognised that the problem may require Central intervention and, at different times, has taken initiatives to address various manifestations of the problem. At the sub-district level, there has long been a Border Areas Development Programme (BADP) and the Hill Areas Development Programme (HADP). The Drought Prone Areas Programme (DPAP) is another example of the Central Government directing resources to help specific areas affected by chronic drought conditions. However, the scale of these programmes is small. In recent years, much more substantial resources have flowed to selected districts, groups of districts and states, through the vehicle of the Backward Regions Grant Fund (BRGF), which is discussed in greater detail later in the paper.

2. Policies for Promoting Regional Balance

Demands for promoting regional balance typically focus on the need for the Central Government to provide additional resources to the backward states to accelerate their development. Such transfers have an important role to play in a federal structure, where the resource mobilising power of the states is limited, and the poorer states are especially constrained in this respect. However, it is important to recognise that backwardness is caused by several factors and a sustained effort to promote development of a backward area requires action on all the many determinants of development in that area. The most basic prerequisite for development is the establishment of personal security, law and order, and good governance. Some of the so-called backward areas lack this basic requirement. Remedying this situation must have top priority, and this is primarily the responsibility of the state government. The next important determinant is investment. India is a predominantly private sector economy in which private investment, which includes investment by households (including farmers), informal sector enterprises and the private corporate sector, accounts for three-fourths of fixed capital formation. The ability to stimulate private investment, which will in turn generate income and employment, is obviously critical for development.

A major factor which stimulates private investment is the quality of infrastructure, including especially good quality power and road connectivity. Provision of infrastructure to backward states and regions should therefore have high priority in any strategy for accelerating the pace of development, and in these areas the provisions of infrastructure will have to be ensured largely through public investments. Other areas where the state must act include provision of extension services for agriculture, access to clean drinking water and sanitation, health and education services. Skill development aimed at providing employable skills given the likely demand for skills in the region concerned, combined with programmes of livelihood support, is another critical area for action.

Remedial action on the above lines requires resources, and since the poorer states are resource constrained, fiscal transfers are obviously relevant in this context. However, while transfers may be necessary, they do not by themselves guarantee a solution since much depends upon how efficiently the additional resources provided, are used. Nevertheless, it is certainly relevant to ask whether the Central Government is doing enough to support poorer states. To answer this question satisfactorily, it is necessary to take a holistic view of all transfers. In the Indian context, we need to consider two channels for transfers: those made on the basis of Finance Commission awards, and those through the Planning Commission. The magnitude of the transfers in each category in recent years is presented in Table 3. The total transfer from all categories is about 5.92 per cent of GDP in 2012-13 (RE).

Finance Commission transfers are constitutionally mandated and are made on the basis of recommendations of the Finance Commission which must be appointed every five years. The Commission recommends the share of the central taxes to be transferred to the states and also the formula on the basis of which the total states share is distributed among states. The formula for distribution of the states share across states has varied from Finance Commission to Finance Commission. The formula used by Thirteenth Finance Commission, with weightage indicated in parenthesis, was: Population 1971 (25.0 percent); Area (10.0 percent); Fiscal Capacity Distance, which effectively favours poorer states (47.5 percent); Fiscal Discipline (17.5 percent). In addition, the Finance Commission recommends grants-in-aid of revenues to be given to different states to (a) make up the revenue deficit which remains in many states even after the distribution of the states’ share of taxes, and (b) for some other purposes, e.g., grants to urban and rural local bodies, and for certain specified sectoral objectives.³ The Finance Commission transfers are meant to meet non-plan expenditure needs, but since these include the running cost of providing essential economic and social services, especially health and education, they are clearly relevant for any sustained effort at accelerating the pace of development activity in the states.

The Finance Commission transfers account for 60 per cent of the total transfers. The formula for distribution of the states’ share of taxes to different states contains a progressive element which favours poorer states. Since the grants-in-aid of revenues recommended by the Finance Commission are given to states that would otherwise have difficulty in meeting their normative levels of non-plan expenditures and since these are typically also the poorer states, these transfers improve the degree of progressiveness of the Finance Commission transfers as a whole.

The fact that the Finance Commission transfers have a degree of progressivity can be seen from Figure 1, which plots the per capita Finance Commission transfer to each state against per capita GSDP. The downward slope of the fitted regression line indicates that there is an element of progressiveness in the transfer since states with low per capita GSDP receive a higher per capita transfer whereas high income states receive a lower per capita transfer. The negative slope coefficient is highly significant and the regression explains 74 per cent of the variation. Since per capita GSDP is not the only criterion in the Finance Commission formula some states are above the fitted line while others are below. Odisha, Chhattisgarh, Andhra Pradesh, Kerala and Tamil Nadu are above the fitted line while Bihar, Uttar Pradesh, West Bengal and Jharkhand are below it.

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Figure 1: Per Capita Thirteenth Finance Commission Transfers and Per Capita GSDP

*** indicates significance at the one percent level

lanning Commission Transfers

Transfers to the states via the Planning Commission are of two kinds: the first is in the form of untied assistance to support state plans. In this context, the Commission distinguishes between two types of states, general category states and special category states. General category states receive normal central assistance which is distributed across states on the basis of the Gadgil-­Mukherjee formula, which, like the Finance Commission formula includes an element of progressivity favouring states with a lower per capita income.⁴ A second category of states is the ‘Special Category States’. These states face special constraints because of a predominance of hilly and mountainous terrain, sparse population and a strategic location along an international border, economic and infrastructural backwardness and non-viable nature of state finances. The states identified in this category are Jammu and Kashmir, Himachal Pradesh, Uttarakhand and the North Eastern states of Assam, Sikkim, Meghalaya, Mizoram, Arunachal Pradesh, Manipur, Nagaland and Tripura. These states receive need based central assistance in the form of Special Plan Assistance (SPA) and Special Central Assistance (SCA) to fill the gap between what is needed in terms of Plan size and what these states can afford after receiving the Normal Central Assistance.

It is important to note that special category states are not necessarily low-income states. As shown in Table 1, five of the eleven special category states have per capita NSDP levels, which are above the all-India average and two are only marginally lower. The case for extra support for special category states derives from the fact that their geographical disadvantages increase their cost of governance far beyond what their internal resources can match. In fact, most of these states are not able to generate even a positive balance from current revenues over non-plan expenditure, and their Plan is therefore almost entirely financed by Central Government funding plus permissible borrowing.

T

*** indicates significance at the one percent level

As shown in Table 3, the volume of assistance flowing through Centrally Sponsored Schemes (CSS) is about 5 times the volume through Normal Central Assistance, SPA and SCA. The relative share of these two transfer mechanisms has also not changed significantly in recent years.

State governments have consistently argued that CSS should be wound up and the funds so released transferred as a block grant to state governments, as in the case of Normal Central Assistance. The main complaints of the states against CSS are the following:

(i) The CSS are subject to guidelines determined by the Central Government, which act as implicit conditionalities which are often too rigid, failing to take account of local conditions. This ‘one-size-fits-all’ problem makes it difficult to implement the schemes on the ground.

(ii) The inter-state allocation of CSS is not based on a transparent formula, but varies from scheme to scheme, which could be to the disadvantage of poorer states.

(iii) Resources provided via CSS are subject to the states picking up a share in the project expenditure. States complain that this ties up limited state resources in schemes that are effectively designed at the national level.

The demand from the states that central funding should be transferred as untied assistance for the State Plan is understandable from a purely federal perspective. It can be argued that State governments are democratically elected, and as such should be allowed to take their own decisions on the use of funds with accountability to the state legislature, and ultimately, to the state electorate. However, strong arguments can also be made on the other side. First, the CSS mechanism ensures that the funds are directed into sectors such as health, education, nutrition, clean drinking water, sanitation, housing for the poor, rural road connectivity, agricultural productivity enhancement, rural electrification, etc., all of which are national priorities endorsed in the Five-Year Plan which is approved by the National Development Council. Transferring the same volume of funds to the states as block grants may lead to a different sectoral allocation. If the sectoral allocation achieved by making the transfers conditional actually helps address the critical development gaps it can be argued that they help achieve the underlying purpose of the transfers. Second, the CSS mechanism provides a degree of independent oversight by Central ministries over the performance of the state governments, which helps improve accountability. Finally, the insistence that the states share in the expenditure in each CSS can be said to be a desirable feature to ensure ownership.

The extent to which the CSS transfers are progressive across the states is shown in Fig. 3. The negative slope of the line shows an element of progressivity, though much less than in the case of other two transfers. Part of the problem here is that poorer states have a lower absorption capacity so they are not able to implement CSS schemes as effectively as other states, leading to lower levels of transfers. Efforts to improve absorptive capacity in these states would obviously make these transfers more progressive and it can be argued that if the objective is to improve progressivity of total transfers, we should focus on absorptive capacity of these transfers rather than simply increase relative size of the unconditional transfers.