Rewarding non-performance: Can’t keep raising central transfers to poor states

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Updated: January 23, 2019 7:16:03 AM

According to a Crisil study of the performance of various states, for instance, Bihar’s per capita income was Rs 11,955 lower than the all-India average in FY03, but this rose to Rs 73,975 in FY18; the gap rose from Rs 7,050 to Rs 49,081 in the case of Jharkhand.

Can’t keep raising central transfers to poorer states

With as many as 9 of India’s 17 non-special category states growing at a slower pace than the average for the country in the FY13-17 period—it was five for FY18—and the gap in per capita incomes rising dramatically in this period, it is clear that business-as-usual is no longer an option. According to a Crisil study of the performance of various states, for instance, Bihar’s per capita income was Rs 11,955 lower than the all-India average in FY03, but this rose to Rs 73,975 in FY18; the gap rose from Rs 7,050 to Rs 49,081 in the case of Jharkhand. On the other hand, Haryana’s per capita income was Rs 11,458 higher than the all-India average in FY03 and this rose to `76,304 in FY18; the same numbers for Gujarat were Rs 3,798 and Rs 52,567.

Though it appears so at first glance, it is not an unalloyed rich-are-getting-richer and poor-are-getting poorer story. While Bihar and Jharkhand were undoubtedly poor states that got poorer in relative terms, Punjab is a rich state with a per capita income that was `10,424 higher than the national average in FY03, but at an average GDP growth of 5.7% in FY13-17, the state was the poorest performer in non-special category states save for Jharkhand that grew at 5.4%. Indeed, while Tamil Nadu saw its extra per capita income—over the all-India average—rise by 18.4 times between FY03 and FY18, that for Punjab rose a mere 2.4 times.

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Nor was the reason for the higher growth the same across states. So, in the case of Gujarat and Karnataka, manufacturing was the main driver of growth, while in Madhya Pradesh, it was agriculture that ensured it was the second-highest growing state in FY13-17, with an 8.1% annual growth versus Gujarat’s 9.9%. Another agricultural state, Punjab, on the other hand was one of the slowest-growing, primarily due to the fact that there was little diversification in its crops from wheat and rice into crops that had higher value addition, nor was there any move towards food processing or promoting industry in the manner Haryana did. While data for FY18 suggests that states who have spent more have managed to raise their growth rates, this, too, does not hold true across states. So, Bihar had a high GDP growth and a high deficit in FY18, but Gujarat had a high growth with a low fiscal deficit and Punjab and Kerala had a low growth with a high deficit in FY18. As Crisil found, for all states, central transfers were 9 bps higher than the target in FY18—as a percent of GDP—while the states’ own-tax revenues were 33 bps lower; states that grew slowly had lower own-tax revenues.

In the past, such lower growth would have been countered by higher central transfers but, while poorer states get a higher share of central transfers than richer ones, there is increasingly a backlash against this. Last year, both Andhra chief minister Chandrababu Naidu and Karnataka CM Siddaramaiah raised the issue of southern states subsidising the northern ones. More important, higher central support in itself cannot raise GDP growth beyond a point. In other words, if states want to reverse the trend, both the Centre and the states need to embark upon big reforms. Reducing farm subsidies could, for instance, shift agriculture production to the eastern states and lower imposts on minerals along with quicker clearances—both the Centre and the states are to blame (goo.gl/oghs6D)—will boost both growth and employment in many eastern states as well. More liberal labour laws, similarly, are responsible for higher industrial growth in states like Maharashtra and Gujarat. Theoretically, if there aren’t enough opportunities in a state like Bihar, the population can migrate to a Gujarat or a Maharashtra, but there are limits to this since a large-enough migration will trigger a sons-of-the-soil backlash. How fast the laggard states take to figure this out is not clear, but the electorates aren’t going to wait forever.

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