Interstate Inequalities—Scope and Limits of Public Policy

Per capita income gaps have been widening across the States of India. Capacity to raise funds and the mechanisms that enable the States to raise funds for development accentuate these gaps. Gaps in development widen with the State’s ability to bargain for funds and then use the funds efficiently. Unequal access to funds is also a result of low absorbing capacity of the States. States deserve certain basic public services, irrespective of their per capita income generation. Finance commissions have played some role in equalising the access to finances across the States based on the needs. The other institutions such as the Planning Commission have, in the past, allotted more funds to richer States than the poorer ones. Subsequently, National Institution for Transforming India (NITI Ayog) allocated more funds to the federal government than the regional governments. Matching funds by the State is mandatory to access funding for central government schemes, putting poorer States at a disadvantage. Market borrowing from both domestic and external sources has been the source of finance for many State governments in recent years. After imposing the gaps on domestic borrowing at 3% of the gross State domestic product to inculcate financial discipline, the richer States could borrow more. External borrowing mostly went to the southern States. Federal government tax concessions, food and fuel subsidies have been higher in the richer States. Credit flows from the nationalised banks also favoured the richer States.  In brief, empirical evidence shows that the institutions and instruments of public policy are not structurally and operationally oriented to reducing inequalities between States.