Comment: Economic liberalisation and uneven development among Indian States. (2010, 20 Marks)
Before 1991 the Centre decided where much of India’s industry went: it issued licences, sited public plants and spread plan assistance by the Gadgil formula. Liberalisation handed that decision to private capital and to state governments competing for it. The argument here is that liberalisation amplified inherited differences rather than creating them, and that state capacity and politics decided who gained.
The evidence of divergence
- Montek Singh Ahluwalia, “Economic Performance of States in Post-Reforms Period” (EPW, 6 May 2000), found state growth rates spreading much further apart in the 1990s. Gujarat and Maharashtra grew at over 8% a year while Bihar and Odisha grew at under 4%. By his extended estimates, the Gini coefficient of per capita state income rose from about 0.16 (1986-87) to 0.23 (1997-98). Growth tracked private investment, not plan spending.
- The Economic Survey 2016-17 found Indian states diverging even as poorer countries were catching up with richer ones worldwide.
- An EAC-PM paper by Sanjeev Sanyal and Aakanksha Arora (2024) puts per capita income in 2023-24 at 193.6% of the national average in Telangana, 180.7% in Karnataka and 171.1% in Tamil Nadu, against 50.8% in Uttar Pradesh and 32.8% in Bihar. The five southern states produce 30.6% of GDP. West Bengal, the third-largest state economy in 1960-61, is now below the national average.
Mechanisms
- Capital follows capacity. Private and foreign investment goes where ports, power, skills and fast clearances already exist, so opening up paid most in states already equipped.
- Competitive federalism. Once licensing ended, the things that decide where investment goes — land, electricity, water, labour administration, law and order — were state subjects, so delicensing decentralised economic policy.
- Sub-national states differ. Aseema Sinha (The Regional Roots of Developmental Politics in India, 2005) shows that even under licensing, Gujarat’s bureaucracy lobbied Delhi for its industrialists while West Bengal’s did not. Those earlier state–business links decided who could use the new freedom.
- Kohli’s class lens. Atul Kohli (Poverty amid Plenty in the New India, 2012) argues that a pro-business state allied with established capital favours regions where that capital is already concentrated.
- Fiscal capacity. Richer states fund capital spending from their own revenue; poorer states depend on transfers, and discretionary plan assistance ended with the Planning Commission in 2015.
- Human capital. Tamil Nadu and Kerala invested early in schooling and health; Uttar Pradesh and Bihar entered the market era without it.
Political fallout
Unequal development is now a federal conflict. Southern states object that they are “penalised for performance”: they get less from the divisible pool than they contribute, and delimitation on current population would cut their share of Lok Sabha seats. The Sixteenth Finance Commission (2026-31) kept devolution at 41%, lowered the weight on income distance to 42.5% and added a “contribution to GDP” criterion (10%). The 131st Amendment Bill, which would have reopened delimitation, failed in the Lok Sabha on 17 April 2026.
Counter-evidence
- Divergence predates 1991. Colonial investment and the 1980s growth spurt already favoured the western and southern coasts.
- Laggards have grown too. Bihar, Odisha and Madhya Pradesh posted high growth after the mid-2000s. The largest absolute exits from multidimensional poverty were in Uttar Pradesh, Bihar and Madhya Pradesh (NITI Aayog, 2024).
- Consumption gaps are narrowing. The 2023-24 consumption survey shows lower Gini coefficients and a smaller urban–rural gap.
Conclusion
Liberalisation did not create India’s regional inequality; it removed the central brakes on it, widening output gaps even as consumption gaps narrowed. The remedy is not a return to licensing but capacity-building in lagging states and a federal bargain that pays for equalisation without penalising the states that performed well.