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The Political Economy of Federalism: Regional Inequality and Visions for a New Federal Bargain

Interview with Rathin Roy and Kalaiyarasan A.
Louise Tillin

Abstract

This interview assesses the political economy of federalism in contemporary India. It begins by discussing the idea of fiscal federalism in its historical context and what has changed in the last decade with the abolition of the Planning Commission, the introduction of the GST, the recent politicization of the Finance Commission, and their implications for vertical and horizontal devolution. In their discussion with Louise Tillin, Kalaiyarasan and Roy assess whether these changes have squeezed the fiscal autonomy of states. Roy argues that Centre-State fiscal tensions are driven by competition over the ability to finance, and thereby claim electoral credit for, compensatory welfarism. The interview moves on to offer insights into the reasons for stubborn and widening economic inequality which underpins the political need for compensatory welfarism. It considers the drivers of economic growth and the perverse migration of capital and labor from poor to rich regions.  Finally, it looks at how regions are integrated into a federal economy, and how migration, the failure of assimilation, and the limited portability of welfare have contributed to a low-equilibrium trap. It ends with reflections on why economic convergence among regions has failed in India and what this implies for the premature decline of the wage share and for the distribution of growth and productivity.

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Interview with Rathin Roy (Distinguished Professor, Kautilya School of Public Policy) and Kalaiyarasan A. (Associate Professor, Madras Institute of Development Studies) conducted by Louise Tillin.

Louise Tillin: I’ll begin the discussion where we begin the introductory essay of the special issue in which we note that the idea of federalism in India has become what W. B. Gallie once described as an essentially contested concept: a concept of which there is “no one clearly definable general use which can be set up as the correct or standard use” and hence an idea which is continually contested. Federalism of course doesn’t appear by name in India’s constitution. The term quasi federal has long been used both by scholars and lawyers to capture the idea that India’s approach to federalism is certainly sui generis and has placed so many restrictions on the autonomy of states or federal subunits that it might be difficult to consider it federal in a textbook sense.

Rathin, when you look at the fiscal domain, do you see a similar ambiguity about federalism both today and historically?

Rathin Roy: Let me start with an anecdote from my life. When I was chief economist of the 13th Finance Commission, part of my job was to write draft speeches for the chairperson, as we had to go to every state where he would have to give a speech. In one of these drafts—I think we were going to Kerala—I said that the Federation of India cannot be expected to cross-subsidize any of its constituents. And this draft goes to the law ministry for vetting, and it comes back saying India is not a federation. I’ve never used the word again! When I interrogated the law ministry further, they said, “Look, this is very important. India is a Union of States.” This does not mean it’s a Union like the United States. It’s a Union that is composed of States and these States, as we have seen in India’s contemporary history, can be created or destroyed at the stroke of a pen without democratic consent. And we can organize them along various lines as we have done, but that act of power rests with the Centre and only the Centre. Although once a State is created in the Union, it becomes a full constitutional entity with defined powers.

If you look at fiscal federalism, that is also true in three senses. The states have defined fiscal powers which are subordinated to two things: one microeconomic, and the other macro-political. The microeconomic subordination, which is what most economists latch onto because we are familiar with it from our textbooks, is that no Indian should be deprived of a basic level of service, irrespective of the locality in which he or she resides.

And the macro political is that there will be rules for vertical devolution of taxes that are collected by the Union of India, which are created after consultation with such States as exist at the time of the creation of those rules. These rules will be reviewed every five years by the constitutional body [Finance Commission] on which I served, instituted to frame these rules. The taxes collected by the Union of India are not the property of the Centre. Some taxes are the properties of the States, but other than cesses which are surcharges or taxes intended to be for a specific purpose, all taxes belong jointly to the States and the Centre—that is, taxes on income, taxes on consumption and taxes on international trade, which belong to the “divisible pool.” There are two different things to be done with the divisible pool: the first is to divide it between the Centre and the States and the second between the States themselves.

  • 1 Editor’s note: As the interview went to press, States are currently debating the horizontal formula (...)

The former is done by oration. If you read any Finance Commission report, there are three or four pages. I loved writing them. They’re a masterpiece of a bureaucrat. Normally they start by saying, why should the division not be 50:50? And then you move to saying why the Centre should have a disproportionate share of resources, and why the States, which are unfortunately burdened with development responsibilities, cannot be given a 50:50 share and you justify it. It doesn’t make everyone happy, but the English is complicated enough for most states not to worry about it too much. And then it moves to horizontal devolution. Now that is interesting because that is strictly formula based. That formula is one of the rare examples of inter-state solidarity that I have seen. This has not previously been contested, but in this [Sixteenth Finance] Commission it’s going to be contested.1 The formula typically has area, population and one other thing, which is the most important and is typically between 45 and 55 % of the devolution in terms of weight, and that is what each chief economist designs—all are sort of close cousins of the inverse of the per capita income of a state. You see, so UP [Uttar Pradesh] does not get the maximum devolution because of its population alone. If you did it purely by population, then UP would be worse off because Maharashtra has a large population, you know, Tamil Nadu has a large population.

So the inverse of per capita income results in an extremely progressive horizontal transfer of the divisible pool where the poorer you are, the more money you get. So these are the three principles and then there is a fourth principle which has come into the fiscal federalism framework. This is which States are allowed to borrow and how much, and this is also formula based. So you’re given a formula which is based on the ideological fervor of the moment, and you see that due recognition is paid in a very interesting federal way to the concept that nobody should be deprived of basic access to basic services by virtue of the State being poor.

There’s one feature of this federalism which I would point out and that was the complete absence of any argument—until now—of States saying we are rich, we pay the taxes, why are we giving it to those poor guys in Bihar in UP? That is now being contested. There used to be a grand bargain that the southern and western regions would develop and have access to the labor and capital resources of the rest of India, but the other side of the bargain was there would be a reverse flow of resources using the public finances to the parts of the country that were not as developed as the south and west. That grand bargain now is under threat.

Louise: I wonder if I can bring us back to that bargain because I think the other reason—at the moment—that the bargain is under threat is, rightly or wrongly, that there is a perception that in addition to the question of horizontal redistribution, the last decade has also seen a pronounced centralization within fiscal federalism that has diminished the autonomy of the states. Can I ask both of you to reflect on this? We start with the 14th Finance Commission that increased vertical tax devolution to states from 32 % to 42 %, ostensibly a decentralizing move but then in the next 10 years we also see the abolition of the Planning Commission, which of course was another element of the architecture of bargaining between the Centre and state governments over fiscal resources as well as the introduction of the Goods and Services Tax (GST), which is a moment at which the center and states pool their fiscal sovereignty in pursuit of a wider collective goal. So I’m interested to hear what you make of the argument that this has been a period of fiscal centralization in which the autonomy of States has been compromised in the fiscal domain.

Kalaiyarasan A.: I think there is definitely a sense of centralization particularly if you think of cesses for instance, which are non-divisible. The share of this non-divisible pool has been continuously increasing. If you look at the fiscal condition of the Centre and the States, the Centre has been weak for a while. To compensate, I think the Centre has been violating the formula by bringing in cesses, which are increasing. The second issue is the way in which centrally sponsored schemes are imposed. If you look at centrally sponsored schemes, they come with certain conditionalities typically—the central government would say we give you 60 % to fund them, you bring the remaining 40 %. These schemes do two things. One, they encroach on subjects which are legitimately on the State list [of the Seventh Schedule of the constitution]. Second, the central government is involved in shaping the State priorities because in order to avail this central scheme, which is offering you 60 % of the money with the scheme, you end up compromising your own priorities. These schemes are a way of imposing some kind of uniformity in the course of development of the states.

I also would like to raise the question of whether the Finance Commission is an independent body like judiciary or other bodies such as the Election Commission. For the first time, the Finance Commission is actually being seen as an extension of the Centre rather than a Finance Commission for all, in the sense of both Union and the States.

I think these are the signals which say some kind of centralization has been taking place since 2014.

Louise: I’d like to bring in Rathin, but I’ll also interject myself briefly. I think this is a period in which there have been real institutional changes in fiscal federalism. I would however though caution against assuming that centrally sponsored schemes are a good metric of centralization in the more recent period because these schemes go back to the 1970s. They were an invention of Indira Gandhi. They’ve actually been subjected to quite a lot of reform pressure, especially with the increased tax devolution since the 14th Finance Commission. Rathin what is your take on those dynamics of centralization in the last decade or so?

Rathin: I can be fairly brief by framing the problem as follows: what is the game that every government in India, all the governments of India, play on the fiscal front? What is the purpose for which fiscal resources are desired? I think their purpose today, unlike in the Nehruvian period or even in Indira Gandhi’s period, is compensation. I think about it in this way: there’s growth happening and that growth is happening autonomously of the actions or otherwise of the governments of India. Governments don’t get involved in the decisions of private investors about where they build factories. The main business of governments of India has basically become compensating people for their failure to be included in what is becoming an increasingly exclusive growth process. That’s been the politics, I think, since 1995 at least. If that politics is correct, then it becomes logical for the Government of India, the central government, to play the following game. One, the central government is the fiscally big party here. Very simply, if you look at the proportion of borrowing they devote to consumption expenditure, which we call revenue expenditure, as opposed to the states, the Centre now is the biggest it has been in years at about 40 % of borrowing. Most States are two or three percent. So the states are doing the heavy lifting in terms of investment, not the Centre. The Centre’s borrowing is largely used for consumption, i.e., compensatory spending feeding 800 million people, etc.

The fundamental duty of a government is to provide for regrettable necessities. I love that phrase. It just sort of pays homage to Hobbes: they’re necessities because human nature is what it is. Foreign Affairs, defense, army, police. Regrettable but necessities. That’s the fundamental duty of the central government. Then you have social services, which comes to the next step, which are merit goods. And there’s an all-India justification for this that, you know, you should spend on health, education, social services, sanitation, famine relief, water supply. The Centre needs to have a role there and then because of Nehru, we have economic services, agriculture, industry, transportation, in which the public sector and the Centre had a large role. Now the compensation idea does not fit any of these categories neatly.

Both the Centre and the States want to do compensation expenditure because if India had been a successful economic experiment, which it is not I believe, then the Centre could have run the railways—a very important public good and provided for regrettable necessities and gone to the voters saying, look, “I give you a fantastic railway, I run a great balance of payments, have provided macro-economic stability, and we have defeated Pakistan, we have lovely missiles and we are shooting them down.” Governments can’t do that because no one’s going to vote for you. People will vote for you on the basis of another promise. Now, the Modi government is most certainly not being elected on the grounds of its economic performance or even bigotry. Even this government cannot go without a value proposition on social and economic services to people. So there is competitive bidding for compensatory expenditures happening between the Centre and the States. Whether it’s Tamil Nadu or Kerala, everybody requires compensatory spending because the prosperity has been highly exclusive. Therefore the battle between the central government and the States, as I see it, is not about more or less centralization, it’s about who gets to spend money on compensation because the compensation is essentially a zero-sum game. If you spend it, you take credit for it.

We have to look at this terribly worrying unity of purpose from the state government of Bihar to the state government of Tamil Nadu to the Delhi Sultanate, which is what I call Delhi, that their fiscal battle is really about compensation.

  • 2 Editor’s note: India is due to revisit the allocation of parliamentary seats per state when a const (...)

Louise: It seems to me that this takes us back, or I’m going to suggest that it should take us back, to the prior question around regional inequality and its persistence. One of the key reasons that the central government started to get more involved in what you describe as compensatory welfarism is that you have not seen a regionally even expansion of a welfare state. You’ve seen a patchwork of commitments to social welfare take shape across different states—from Kerala, Maharashtra to Tamil Nadu—but nothing like a national welfare state. So can I take us back therefore to the origins and the reasons for the persistence of that degree of regional inequality which is at the heart of the bigger political debate at the moment around fiscal redistribution in the run up to the delimitation exercise?2

Kalai: I think we need to think of this question through the lens of some basic economic textbook arguments of what drives growth. If you look at the period 1950 to 1980, the main driver of growth was the public sector. Of course, there was an infant industry argument and a select few private industries were there, but largely it was a story of public investment driving economic growth. The Union government had a degree of say in allocating that investment and there was an understanding that public investment could help to resolve the problem of inequality between states. But by the 1990s that had not actually happened. In fact, there was stagnant or maybe marginally increased inequality. But it was the period after the 1990s that was the watershed movement with respect to inequality among the states.

This is particularly because the driver of growth today is no longer public investment but private capital.

So then the question is what actually attracts private investment, not only domestic, but also foreign capital? Investment went to the regions where you had what can be called an ecosystem of agglomeration. The southern and the western States had a certain advantage and they could directly negotiate with private capital to establish factories and investment both in whatever the limited manufacturing they had and also the service sector. The flow of capital that went to the southern and the western states continued to build and over a period of time we saw that inequality was widening. Today the difference in per capita income between Gujarat and Bihar is 6 times, and between Karnataka and Bihar, it is 5.6 times. This was not the case in the 1990s. So I think the single biggest reason for regional inequality is the uneven ability of States to negotiate or attract capital. Then the question arises as to what made certain States able to attract that capital and there is an endogeneity problem because the States that already had an advantage could build state capacity, and that state capacity could provide the required social and the physical infrastructure to attract capital.

Louise: Let me bring Rathin in here because I think there’s a really important puzzle to understand better. The picture that you’ve just described is one whereby we do see some capital mobility in India, but it’s from poor states to rich states. The question I’d like to ask you is why don’t we see more of the reverse phenomenon, i.e., what in the East Asian context is often described as the flying geese phenomena, where capital moves to areas where it has an advantage in labor costs. Why aren’t we seeing capital migrating in reverse from the richest states to the poorer north and eastern states in India?

Rathin: There is no logical economic answer to this. To answer it we need to understand one question for which I’m willing to pay for a student to do a PhD on and I’ve been begging people to look at: why did UP deindustrialize?

In the early 1960s, if you drove from Ghaziabad to Mirzapur, you drove through an industrial belt. Modinagar, now a ghost town, Meerut, Kanpur, Lucknow, Allahabad was home to India’s largest indigenous battery factory, Mirzapur (carpets), Gorakhpur (sugar processing). Right? India’s first major FDI project, Maruti Suzuki, came up in the cow belt. It did not come up in Tamil Nadu. What caused the deindustrialization of the Great Indian Plain is an answer I’m lacking, and in that I would include Bengal. I would include Odisha. I would include South Bihar. The Tatas built Jamshedpur there and then “poof”! And there was no lack of public investment. Bharat Heavy Electricals were started there. But what happens? It collapses in Ranchi [presently in Jharkhand] and the unit in seconds takes off in Andhra Pradesh, right? This is a story that needs an economic historian to actually study very, very carefully.

Let’s ask ourselves, which are the manufacturing states in India and the answers will be three states, Gujarat, Maharashtra, Tamil Nadu. So I would reframe the question a little bit and say which states were best placed to take advantage of India’s deliberate rejection of manufacturing, accompanied by the deindustrialization of the north, and the promotion of services? And the answer to that is very stark.

You know, it’s my theory, that Western elites make their money out of intellectual property capital. Now that’s the main capital that makes money for people in Boston, people in London, people in Paris. It’s not manufacturing or making things. It’s rents on intellectual property. That has required for years for these guys to have a bunch of what I call coolie labor in the grand tradition of India. So the South of India became part of this game. Bombay provided the financial incentives for that and then it went into Gujarat and Tamil Nadu as the industrializing states. The north could not compete, Bengal could not compete with Andhra Pradesh. There were consequences. These places prosper, they become good at providing services, services for export and then services for the Indian economy. So all the food delivery platforms—the Zomatos, the Olas they start headquartering in the South. Bangalore is where I buy my fish from. There’s a company that sells fish all over India and meat. And you get it there, all the major pork producers are in the South.

So that was, in my view, a highly unequalizing process. But notice the government’s role in this is entirely absent. Government has nothing to do with this. This is happening to the people of India, often by the people of India. What government is left with is the waste collection. Not to put too fine a point upon it and yet again, therefore the so-called prosperous states, the only business of government becomes compensation starting with Maharashtra in the 1970s, including Gujarat in the 1980s and 1990s and now increasingly prominent in Tamil Nadu, Kerala, Telangana and Andhra Pradesh. So the inequalities that you see, the logic of those, are not necessarily treatable by asking questions like why didn’t capital flow? I know why capital didn’t flow if I know why UP deindustrialized. I know why capital didn’t flow if I know why service industries give such high rents in the South as compared to the north.

Kalai: I just want to add one aspect. There’s definitely no direct industrial policy the way we see in Southeast Asia. I mean in the East Asian context, there was a clear well organized top-down approach towards what capital has to do, what the state has to do, you know, clear industrial policy. We did not have such policy in India, at least at the subnational level. But having said that, there was definitely some intervention I would say of the southern state experience from Tamil Nadu or Karnataka or even in Gujarat for that matter. As Aseema Sinha’s (2005) book The Regional Roots of Development and my own work show, the state actively intervened in provision of land acquisition or you know negotiating with Delhi over certain licenses, or supporting small scale industries in Tirupur and other aspects. This could be electoral compulsion—not necessarily well planned, industrial policy as we think of with the East Asian states, but there are certain active roles for the state and again the question is why that kind of intervention did not take place in states like UP or even Bengal.

Louise: I’d like to dig a little deeper into the redistributive question, which I think is also key politically. First to ask what the picture that you’ve just described, which is a rather inverted pattern of capital mobility and of labor mobility from north to south means for inequality within regions. We know that this pattern is producing and perpetuating a high level of inequality between regions. But what does this then do to inequality within regions? Kalai, I know you’ve been doing some research recently into wage disparities across states. Could you just throw a little light on what those look like in this context?

  • 3 This ratio measures the credit disbursed by banks as a share of the deposits mobilised within a sta (...)

Kalai: So as you know, we discussed why we have perverse or inverted capital mobility, which instead of moving from richer to poorer regions is moving from poorer regions to richer regions. This is clearly well established, if you look at the credit-deposit ratio.3 Most of the southern states have more than 100 %, whereas in Bihar or UP, it’s less than 30 % or 40 %—less than 50 %. So in a way what we are witnessing here is Patna or Bhopal or Lucknow financing the industrialization of Bangalore, Chennai or Hyderabad.

The assumption is then that income disparities between states would bring in more labor mobility, which is a textbook logic of economics, that when you have differences in per capita income or earnings, obviously if the capital doesn’t move to poor regions, labor will move from poorer regions to the richer regions. But it is not just income alone that matters, it is also wages. And the wage difference between states is not as much as the income difference. To give an example, the per capita income in Karnataka is six times higher than in Bihar, but that does not directly translate into a similar wage difference. No. Actually the wage differential is just 1.5 or less than two times between southern and northern states.

So in that sense, the issue of wages is in fact worsening in the southern states. Then the question is why labor from poorer states is still moving when the difference in wages is less than the difference in average per capita income.

The reason for migrant labor to come to Chennai is obviously still to get some more money than they would otherwise earn. Also, they go to Chennai since they don’t get jobs in their home state even if the wage difference is not much. But more importantly I think it is not just a wage difference alone, there is something deeper here which links to the federal question. The cheap labor offered by migrants allows southern and western states to keep wages low, as a result, the ratio of wage level to their per capita income in these prosperous states has been falling much faster vis-à-vis poorer northern states, benefiting the elites.

To that extent, it is not only a question of north-south or interstate inequality, there’s also intra-state inequality partly caused by the flow of cheap migrant labor.

In other words, the lack of opportunities in the poorest states drives the poor to move to richer states even at low wages.

In this way, the low-wage laborers from the poorest states are subsidizing the elites within richer regions in order to continue the kind of equilibrium that we have. Otherwise, assuming there was no flow of labor from the poorer regions, perhaps the wage rate would not have to be that low in the southern states because the reserve rate would have been much higher.

We can also think the elites have a lower incentive even to make the poorer regions grow faster because they are happy to get cheaper labor.

So I think we need to think of a federal solution where poorer regions grow or, you know, develop in the interest of the poor in the other part of the world, which is the richer regions. So it is not the question of just north-south or, you know, poor regions or richer regions, it is also intra-state inequalities that matter.

Louise: I want to give the final word to Rathin to ask whether this situation is politically sustainable and thinking ahead to the pending delimitation exercise: do you think this is a moment where India needs a new federal bargain?

Rathin: It depends on who you’re asking. Let me just say that I have looked very carefully at examples of the Indian situation existing elsewhere in the world: where political power and the majority of the population live in economically deprived areas. It’s not true of Europe. It’s not true of the UK. It’s not true of the US. It’s not true of Australia. It’s not true of Japan. Not even close. I have only two historical instances where this has been the case and both have the word former attached to them: the former Yugoslavia and the former Soviet Union. And the only live case I’ve seen, which is peanuts compared to what we’re seeing in India in terms of differences, is the Catalonia issue in Spain. The Catalans have a different language, a different culture and the Catalans are richer. But the majority population lives in Spanish-speaking areas outside Catalonia, but those have also developed so it’s not as clear cut. So at that level, I’d say that there is a political settlement that we need to rework in India, not a federal settlement, a political settlement.

I’ve written about this, so let me outline the three options I give, from the vantage point of where I sit in the South. All three are difficult.

Grand Bargain number one that could be proposed by the South, and this is the easiest one, is for Biharis to become Tamilians. For Punjabis, for Rajasthanis to become Telugus, and this is indeed the process that India has already seen, historically, where India has assimilated people from other regions, and they have become of that region. I think the big barrier we have in this country now is caste. Take a UP Yadav and an Andhra Yadav. They have nothing culturally in common. So for a Bihari to assimilate, you would really need to have a socialist government. You cannot have a government propagating Telugu Pride or Dravidian culture. So assimilation, which is logical when you walk with your feet, is not going to happen because we have these ”primordial problems” all the southern states have created to, in a sense, alleviate the caste problem. They have not done what Ambedkar wanted them to do, which is annihilate caste.

The second option would be for the North to grow and prosper and for the South to invest in that prosperity. And I don’t see that happening. Because the South simply does not seem to have the incentive to think about this as a solution, you know where Tirupur [industrial area in Tamil Nadu] moves to Bihar in substantial measure, that is not going to happen. So when you move, you move capital. The asset class of problems is well known to economists. This is what I was telling people when I was working globally: old and rich people live in the West; young and poor people live in the global South. So what the old people need to do is either put capital in the global South or take these young people to the West because they need their services. Now if you don’t want to do either, you get a suboptimal equilibrium, which is exactly what is happening now in India.

The third solution, which is my rocket solution for the South, is for the South to become ten times more prosperous than the North. In 10 years, you know, grow like the Chinese and the Koreans, just invest in prosperity, get so much economic clout that there’s nothing the North can do. They have a parliament which is packed with Biharis and UP people. Can you do this? You can’t do it for the reasons Kalai was saying. Wage rates in southern India have been suppressed. Let me give you an example. The best job you can get in South India is to work for Samsung or Apple, right? That’s what we celebrate, right? Or a GCC [global capability centers] like Accenture. None of them get wages that require them to pay income tax. So the best job that you’re giving a South Indian worker in Samsung, the median wage is ₹30,000 the median wage at Accenture is ₹45,000. You start paying income tax at ₹100,000 a month. This is nuts. So that is all the aspiration you can provide. Where is that bounce in prosperity then going to come from?

So I believe that on this we do two things. We have a political conversation that recognizes that these three options exist. They’re not going to happen unless we have a two-tone policy and this is what I would like southern Chief Ministers to propose as a value proposition to Delhi. You do politics in the north, but what we want you to do is to devise a jobs policy for the north. Let’s get jobs in the north and let’s have an incomes policy in the South. The South’s problem is not jobs. The South’s problem is the jobs that they’re attracting are paying abysmally and unnecessarily low wages. So an incomes policy which aims to increase the wage share is what will make the South prosperous and a policy like that will also hopefully increase incentives for jobs to be created in the North and for economic activities to be created in the North: the reindustrialization of the North. But there are problems there. For example, when you know India imports its ₹200 shirts from Bangladesh and Vietnam, you make ₹3000 shirts which you send to Marks and Spencer and people like me wear in India. So I was like man, why can’t you make ₹200 shirts? I went to Tirupur and talked to businesses and to Vapi, South Gujarat. Both of them said that, you know, wage rates are too high. I said “OK, so go to Bihar.” They said “they don’t have skills.” I said, “No they have skills—25–50 % of the shop floor is Bihari and Jharkhandi.” Then they got sort of edgy and said “we don’t like their nature.” So I said, why do you employ them here? “Because we can control them. That’s why we employ them here. But we won’t go there.” So this is the kind of conversation we have to have. We have to create a win-win. And that win-win is where we keep political capital applied, jointly by Delhi and the State capitals, but that political capital is conspicuously absent. So Stalin is doing Dravidian, Telangana is doing Telugu pride. Kerala is doing like “I’m unique and different. I have great Ayurveda”.

And you know, Maharashtra is doing that: “I don’t care about anybody. I just want finance capital to grow.” Nobody is having a national conversation.

So I’m proposing you have a two-tone policy. A jobs policy for the north and an incomes policy for the peninsula. As an economist it’s the best I can offer given the socio-political barriers to the other three solutions mentioned above.

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Bibliography

Raghavendra, V. 2025. “Devolution of Shares: A. P. Wants ‘Income Distance’ Weightage to Be Reduced to 30 %, Says Finance Commission Chairman. The Hindu, April 16. https://www.thehindu.com/news/national/andhra-pradesh/devolution-of-shares-ap-wants-income-distance-weightage-to-be-reduced-to-30-says-finance-commission-chairman/article69456991.ece

Sinha, Aseema. 2005. The Regional Roots of Developmental Politics in India: A Divided Leviathan. Indiana University Press.

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Notes

1 Editor’s note: As the interview went to press, States are currently debating the horizontal formula as part of consultations with the Sixteenth Finance Commission. See, for instance, Raghavendra (2025).

2 Editor’s note: India is due to revisit the allocation of parliamentary seats per state when a constitutional amendment expires in 2026 and following a new census. The constitutional amendment had frozen parliamentary seat allocation since the 1970s. If a fresh delimitation is carried out purely on a per capita basis, southern states will lose seats relative to more populous northern states. At the time of publication, it is not known how India will approach the delimitation exercise.

3 This ratio measures the credit disbursed by banks as a share of the deposits mobilised within a state. For instance, in 2024–25, Bihar’s credit-deposit ratio was 50 %, meaning that for every rupee deposited by Biharis in banks within the state, only 50 paise was disbursed as credit locally. In contrast, for every rupee of deposits, ₹1.57 was disbursed in Andhra Pradesh, and ₹1.21 in Tamil Nadu and Telangana.

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References

Electronic reference

Louise Tillin, The Political Economy of Federalism: Regional Inequality and Visions for a New Federal BargainSouth Asia Multidisciplinary Academic Journal [Online], 34 | 2025, Online since 05 November 2025, connection on 22 January 2026. URL: http://journals.openedition.org/samaj/10467; DOI: https://doi.org/10.4000/15afk

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About the author

Louise Tillin

King’s College London

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