The Great Indian Imbalance: How South India Grew At The Cost of North India

Twenty-four-year-old Ajay Kumar is in a state of quiet anticipation. His short-lived vacation at his native village in the Purnea district of Bihar is soon coming to an end. In a matter of days, he must leave his family behind and make an eight-hour bus journey to the state capital Patna. From there, the young labourer will board the Sanghamitra Superfast Express, which will take him to the southern metropolis of Bengaluru in Karnataka. The 44-hour-long train journey will move Kumar from an annual per capita differential of around Rs 1,33,692 when it takes him back to a city where he cannot speak the local language and will have to toil 12 hours every day at a tile factory. But, for the promise of a better tomorrow and supporting his family, he will have to make this long journey across what is India’s great divide.

He is not alone in this quest. In search of better employment opportunities, millions like Kumar migrate from the central and eastern hinterland—this includes the eastern region of Uttar Pradesh as well—of India towards the more developed states of the southern and western coast. “There is a substantial transfer of labour from the eastern region to southern states, because workers get better wages in the more developed states. These are mostly people who give up rain-fed subsistence farming to take up informal labour in richer states,” observes Benoy Peter, executive director of the Centre for Migration and Inclusive Development, an Ernakulam-based non-profit that works on migration.  

Kumar says that his wages double in the more developed southern state in comparison to what he gets in his home state. However, his relatively higher wages are creating a new, complex narrative of India’s uneven development. On one side of this narrative are southern states which feel that irrespective of where Kumar works, they have to bear the cost of upping his standard of living. In March 2018, Karnataka chief minister Siddaramaiah caused a minor quake when he noted, “Historically, the south has been subsidising the north. Six states south of the Vindhyas contribute more taxes and get less [from the Centre]. For example, for every one rupee of tax contributed by Uttar Pradesh, that state receives Rs 1.79. For every one rupee of tax contributed by Karnataka, the state receives Rs 0.47.”  

On the other side are poorer states that feel that the uneven course of India’s industrial development has taken place at their cost. To add to this labyrinth is the predicament of the likes of Kumar in guest states. After arriving at destination cities, such migrant labourers start facing adversities beyond the unfamiliarity of language. “They are often treated as second-class citizens, and most public services remain inaccessible to them,” says Peter. However, the economic compulsions behind migration outweigh all the difficulties faced by them in the big cities. “If we had better jobs in our states of domicile, we would not have to leave our homes. But the jobs are just not there, right?” a despondent Kumar poses a rhetorical question.  

While India proudly wears the badge of being the world’s fifth largest economy, it conceals a harsh reality—those dwelling in northern, central and eastern hinterlands endure living standards akin only to the desolation found in the sub-Saharan region. With per capita income ranging from one-third to less than half of the national average, states like Bihar and Uttar Pradesh house some of the country’s most impoverished districts. On the other hand, the more developed states in south India have achieved the standards of middle-income Asian countries in various socio-economic indicators. This stark disparity between Indian states casts a poignant pallor over the journey of individuals like Kumar who seek prosperity beyond the confines of their impoverished homelands.  

Southern Sentiments Singe 

Economists have noted that industrial concentration in India lies in western and southern states, while central, eastern and many parts of northern regions show sparse industrial activity. However, the contemporary disaffection has been phrased as a north-south divide, which underscores the dominance of southern states in this discourse. There is a tendency among the political elites to see India through this binary, even when their idea of the north and the south is geographically untenable and shows little homogeneity both in terms of social development and industrial progress. The politics of this divide is further accentuated by the fact that the south sees the north as a political space where the Bharatiya Janata Party (BJP) has maximised its political gains and through which has acquired the power at the Centre.  

In this context, it is not surprising that it is the southern states which have raised the bogey of the south subsidising the north, and not the equally rich western states of Maharashtra and Gujarat.  

The southern grouse usually builds up around the terms of reference of finance commissions and consolidates itself around the recommendations of successive commissions. By the time the Modi government constituted the Fifteenth Finance Commission in November 2017 for evolving the tax devolution formula for FY21 to FY26, and appointed former bureaucrat N.K. Singh as its chairman, four distinct developments had taken place in the political economy of India: firstly, the impact of demonetisation had become visible in terms of downturn in the economy; secondly, the world seemed to be hurtling towards a slowdown and no one believed that it was possible for India to replicate the gross domestic product (GDP) growth numbers of the Manmohan Singh era; thirdly, the earlier fear of demographic dividend turning into a demographic nightmare was staring policymakers in their face with a burgeoning unemployment crisis; and, lastly, the uncertainty of a new centralised tax regime had made some states uncomfortable.  

The above-quoted remark of the Karnataka chief minister was made in this context of an impending slowdown and pressure of population that migrant workers like Kumar bring to the host state. Given this context, the Fifteenth Finance Commission rejigging the population criterion for devolution has not gone down well with the south.  

In the Fourteenth Finance Commission and earlier, the reference point for this criterion was fixed at the 1971 census, when the states had less divergence in their fertility rates. But the Fifteenth Finance Commission used the population of 2011. It tried to balance the concerns of southern states by introducing a new criterion of demographic performance with a weight of 12.5 points that sought to reward the states that had performed better in controlling population growth.   

The terms of reference for the Fifteenth Finance Commission had only mandated it to rely on the 2011 census in 2017, and the weights for individual criteria were not disclosed till February 1, 2021, when the finance commission’s final report was tabled in Parliament. But, by then, the politics around population growth had already played out and a feeling had set in that southern states were being made to pay for the low social indicators of and population explosion in other states.  

As a reference to the 2011 census figures upset the political class of southern states, it is not difficult to find supporters of this move in other parts of the country. Ashok Lahiri, an economist, member of the Fifteenth Finance Commission and current BJP member of the West Bengal Legislative Assembly, endorses the decision to use the 2011 figures for tax devolution and sees it in line with the fraternal principle of India’s federal structure. He says, “The government is for people: not people who existed 50 years ago, but people as they exist now. It is an open-and-shut case that the people now are better represented by the most recent census, rather than a census of the olden times.”  

Southern states have legitimate reasons to feel that their impressive achievement in controlling population growth has been punished. Instead of hailing their efforts, they have been handed a reduced share in the Central pool of taxes, as per capita devolution remains an important principle of this division. At the same time, this hurt tends to make other issues invisible in policies that have squarely put poorer states at a far greater disadvantage than the tax devolution regime has done to southern states. 

The Great Indian Divide

In India’s journey from the Nehruvian socialism to the present-day market-driven economy, if there is one clear winner, it is the clique of southern and western states, and, if there is one unfortunate loser, it is the group of eastern and central states. As India’s economy moved away from depending overwhelmingly on agriculture to a services-driven one, with manufacturing making its dominant appearance every now and then, it is no coincidence that it led to a great divergence in the industrial development of these two groups of states. The earlier reliance on agriculture was more broad-based and spread across the geography of India. In contrast, the industrial clusters, both for services and manufacturing sectors, are concentrated in southern and western states.  

India’s conscious, policy-driven transition from having a rigid industrial policy to a more free-market economy widened the income divide between states. “The interstate [income] divergence was relatively flat up till about the early 1990s, and the divergence really began to take off after the reforms which liberalised the economy,” says Vivek Dehejia, an economics professor at Carleton University. In his 2016 work with Praveen Chakravarty, currently the chairman of the data analytics department of the Congress party, Dehejia demonstrated how the economic divergence in India is worse off than other federal economic zones, like the US, the European Union and China. The worsening of this income divide goes against the economic theory of convergence, or the catch-up hypothesis, adds Dehejia.

Dehejia’s claim on growth divergence among states can be easily verified in the net state domestic product (NSDP) figures pre- and post-liberalisation. The average NSDP of the poorer states in central and eastern India, comprising Bihar, Uttar Pradesh, Odisha, Madhya Pradesh and West Bengal, between 1961 and 1991, the year when economic liberalisation started in India, was 3.27%, while the NSDP average for the richer states in the west and south, comprising Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu, in the same period was 4.40%. Though the difference in the states’ growth rates was evidently present even before 1991 at 1.13%, this margin increased from 1992 onwards. The poorer states improved their performance in the 1992–2022 period to hit the average of 5.41%, while the richer ones achieved the average of 7.06%, which is 1.64% higher than the poorer states.  

Yamini Aiyar, president of the Delhi-based policy think tank Centre for Policy Research, feels that the reason behind the lack of catch-up among poorer states is India’s mode of economic progress. She says, “The divergence is on account of the unique structural transformation that India underwent after 1991. The fact that we, more or less, skipped low-scale manufacturing and went straight to high-end services is where growth was fuelled, is really at the heart of why this has happened.”  

Also, infrastructure built over the first 40 years of independence to support industries of the south and west became a point of attraction for the foreign investors in 90s to set up their shops in India. Ford, Toyota, Honda, Microsoft, Nokia and Panasonic chose the southern and western states over states like Bihar, West Bengal, Uttar Pradesh and Jharkhand. 

An Unequal Beginning  

While services is largely a post-1991 phenomenon in India, in which southern states have benefitted the most and central and eastern states have lost the most, in the early years of independent India many now-poor states showed significant growth in mining, which is counted as industrial growth in NSDP and shored up their overall growth figures. This economic activity could have given the poorer states an advantage had a well-intentioned policy not played spoilsport for them.  

In an effort to provide balanced growth across all regions in the country, the Union government implemented the freight equalisation policy in 1952 that provided transport subsidy for moving many input materials such as minerals, across states. But far from achieving its objective, the policy resulted in industries being set up in coastal states of the west and south, while the mineral-rich eastern states were left behind in their industrialisation trajectory. In 2017, the then president Pranab Mukherjee acknowledged that this policy seriously hurt development in eastern states.  

Seeing how the regional gap in industrial growth was widening, the Union government tried to incentivise investments in backward regions in 1971 through the Central Investment Subsidy Scheme. This, along with concessional financing measures, was expected to bridge the industrial gap among regions. However, the government chose to implement this scheme in the backward regions of all states, instead of just industrially backward states, as was recommended by two working groups that studied the regional imbalances in the economy.  

The Sivaraman Committee, which submitted a report on India’s industrial dispersal in 1980, noted that “the benefits of the Central Investment Subsidy and concessional finance have accrued to a small number of districts, mostly in the west and south”. In fact, out of the 15 districts that bagged most subsidies, 14 were in the southern and western states of India.  

Unsung Partners of Progress

India is a country of migrants. Historians use this statement to describe the waves of ethnic and racial migrations into the Indian subcontinent. This statement, though, can be used to describe the state of the economy in the country, whose impact has not been studied in great depth. And, just as the historians’ interpretation of this statement creates ideological fissures, the sociologists and economists’ interpretation also creates disaffection in many groups.  

Unfortunately, the role of migrant labour workforce has not become part of the discourse on industrialisation or ‘just development’ in the country. For the poorer states, the improved levels of development in richer states seem like a bittersweet product of their labour. After all, the migrant labourers from the poorer states play an important role in creating wealth in richer states. “When you have excess labour [in poorer states], that goes out in search of better wages and jobs. Richer states employ this labour for competitive wages. In return, when the labour productivity increases, it accrues to the employer’s profits, making them richer again,” says R. Nagaraj, a former economics professor at the Indira Gandhi Institute of Development Research, Mumbai.  

Southern states acknowledge the presence and use of large inflow of migrant workers but stop short of viewing them as equal stakeholders who should be party to the growth bounty. Siddaramaiah tells Outlook Business, “Urbanisation is placing growing demands on the upkeep of the infrastructure and provision of basic services in city centres. The problem is compounded by an increased pressure on civic amenities on account of growing migration from the rest of the country.”   

Police personnel outside the Maruti Suzuki facility in Manesar, Haryana, in 2012, following violence at the plant that killed an HR official. Photo: Getty Images

The chief minister is worried that the cities in his state, which are its major growth engines, especially Bengaluru, need further fillip to their infrastructure, for which he may not have enough funds. He adds, “GST being a destination-based tax, the remittances by migrants residing in Bengaluru to their states of origin deprive our state from realising the potential of taxation from increasing disposable incomes. While I am not arguing for going back to the earlier tax regime, I would like to emphasise that these peculiar anomalies which are adversely affecting certain states should be addressed by allocating state-specific grants.”  

Siddaramaiah’s comments need to be analysed in the background of Karnataka demanding that the Sixteenth Finance Commision should compensate the state for the large number of migrants it hosts from other states. This feeling is gathering steam. However, since the Union cabinet has approved the terms of reference for the 16th commission and there is no word on migration-related allocation, it is unlikely that the commission will grant Karnataka its wish on the issue.  

A protestor raises a banner against the sale of agricultural land to Tata Motors for a car factory in Singur, West Bengal, in 2006. Photo: AP

The argument of post-1991 divergence among states that is propounded by Aiyar and other economists tends to be lost in the din of high-ticket policy decisions and their associated events in different phases of India’s economic development. Be it the P.V. Narasimha Rao era that saw the emergence of Bengaluru as an IT services hub; the Atal Bihari Vajpayee era when IT exports took wings, Bill Gates came to India and the Western press started using the word Bangalored; or the Modi era when high-tech manufacturing became the policy buzzword; there are two constants. One, India consciously chasing exports markets aggressively for its services and goods, and, second, the new economy had its preferred centres of production all in western and southern India. Central and eastern states stayed what they were before 1991: suppliers of low-wage industrial workforce that built and rebuilt the new power centres of the Indian economy.  

Foreign direct investment (FDI) into India, a dominant feature of the post-liberalisation economy in the country that propelled exports, buttresses the above notion. The National Investment Promotion and Facilitation Agency claims that in the last 23 years between April 2000 and September 2023, India received $953.143 billion in FDI, out of which  $70.97 billion were received in FY23. Not surprisingly, the top five sectors in FY23 were services at 16%, computer software and hardware at 15%, trading and telecommunications at 6% each and automobiles at 5%. This is no one’s guess which parts of the country have maximum units in these sectors.  

Groundbreaking ceremony of Micron Technology’s $2.75 billion chip assembly and testing plant in Sanand, Gujarat, in 2023. Photo: Getty Images

Moreover, Maharashtra, Karnataka and Gujarat alone have cornered 69% of all FDI between October 2019 and September 2023, and, no Central government has made a serious attempt at devising a scheme that can push FDI to the poorer regions.  

Even in manufacturing, the government’s recent support measures like the Production-Linked Incentive (PLI) Scheme invariably support the already fortified states. “PLIs are not for greenfield projects. The states that already have functioning projects are certainly at an advantage because their industries are already working. Incentives help in modernising or expanding their projects, which furthers the existing skewness [among states],” says Ajay Dua, a former secretary at the Union Ministry of Industries and Commerce. On this scale, the performance of Tamil Nadu, Gujarat and Karnataka, which accounted for 72% of all PLI investments till the end of FY23, proves Dua’s assertion.  

A Political Spin to Economy

A lot has been said about the political cultures in different regions of the country that aid or discourage economic growth, especially when it is led by private capital of Indian and foreign origin. Observers tend to argue that West Bengal and Uttar Pradesh had burgeoning industrial centres in the early decades of the independent India and lost out to western and southern regions subsequently on account of trade unionism, socialist outlook of their leadership and violent street culture.    

“The failure of Kolkata to create a similar dynamic [a growth hub] is an important part of the problem,” says Sanjeev Sanyal, a member of the Economic Advisory Council to the Prime Minister.  “Unfortunately, the politics and ideology of that city turned in such a way that it destroyed the work culture, industrial zone and ultimately led to economic fossilisation from which Kolkata, and more generally eastern India, has never recovered.” 

But the role of politics in industrial decisions is a hotly contested debate. “It is astonishing that in recent times, investment commitments to even Maharashtra have been shifted to Gujarat at the last minute as per media reports. Are those coincidences?” asks Amit Mitra, special advisor to chief minister of West Bengal. Even now, 30 years past the liberalisation reforms, political reasons continue to influence location of industries, says Dua, the former industry and commerce secretary.  

Of late, there has been a lot of buzz around the industrial pick-up in Uttar Pradesh. This has much to do with the ‘double engine’ rhetoric used by the BJP-led Union government. On the one hand, if the presence of a single party at the state and Union-level governments can be a reason for growth or industrial interest, it only points to a weakness in India’s federal structure. On the other, many Opposition-ruled states allege that the BJP-led Union government has been treating them unfairly. “Let alone pushing new projects to eastern India, it is unfortunate that even central funds which are due to say [West] Bengal are being held up by the Centre for what in my opinion are untenable arguments. This is causing hardship, not only to the exchequer of the states but to millions of common people,” says Mitra. Other Opposition-ruled states like Karnataka and Tamil Nadu too have raised similar allegations. 

The present Union government’s vision for growth is driven by capital expenditure (capex) and infrastructure creation. In Uttar Pradesh, the Centre’s assistance towards capex has seen a multifold rise in the past few years. Subsequently, between FY19 and FY23, it has become the leader among all states when it comes to infrastructure development, leaving behind way richer states like Maharashtra, Karnataka, Gujarat and Tamil Nadu.  

But Uttar Pradesh’s industrial growth has shown a clear skew so far. “Much of the development that gets talked about in Uttar Pradesh is in the western region of the state, closer to Delhi-NCR. Law and order issues and other problems persist in the remaining regions of the state” says Santosh Mehrotra, a developmental economist and former advisor to the erstwhile Planning Commission. Even in the recent investor summits held in Uttar Pradesh, there is a clear preference for districts in its western areas that are either part of the Delhi-NCR growth hub or close to it. 

As a result of this intrastate imbalance, the eastern region of the state, which sees a high amount of out-migration of workers, remains far from being developed. In district development product (DDP) per capita, seven out of the top 10 districts in the state are in the western region. Only one district from its eastern region makes it to the list while central Uttar Pradesh and Bundelkhand regions make up for the rest. Regarding the bottom 10 districts, all are from the eastern region of the state, closer to Bihar. 

The eastern hinterland of India, that includes districts across Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Odisha, West Bengal and Madhya Pradesh, have consistently lagged on developmental parameters. The lack of change in this status quo has led to Bihar even demanding special status for itself within the Union. As the region remains backward, financial capital too has been aloof from this region for too long and is instead concentrated in southern and western states. At present, the gross fixed capital formation (GFCF) in the coastal states of Tamil Nadu, Karnataka, Maharashtra and Gujarat is two to five times larger than the average GFCF in eastern and central states.   

Memoranda of understanding worth Rs 26.33 lakh crore and Rs 6.64 lakh crore, respectively, were signed at two recently concluded investors’ summits in Gujarat and Tamil Nadu. More than the size of the investment, it is the sectors of investment that spell doom for the eastern region; they are the future-relevant sectors like semiconductors, electric vehicles and green energy. These are also witnessing concentration among western and southern states.  

Proximity to large pools of talent, easy access to financing and better social and physical infrastructure are the oft-quoted rationale behind the rise of these regional growth centres. With the eastern region lagging on all these factors, the management of inter-state divergence poses tough questions to the Centre, with no simple answers.

In March 1997, Bill Gates, then chairman of Microsoft, visited India and met then prime minister H.D. Deve Gowda. Gates has made multiple visits to Indian cities since then. Photo: Getty Images

Cost of Divide

By and large, observers are at a loss of words about how and by whom the decisions to start greenfield and other industrial projects are taken, and if there is an economic philosophy at work here. Unlike the transparent decisions made by finance commissions as per a set methodology which is declared to all stakeholders and the public, no such transparent mechanism exists in public domain in which different states can stake their claims to industrialisation.  

Observers speculate the cause of uneven industrial development and their guesses swing between the politics of the day and plain indifference.   

A significant point to note here is that the issue of tax devolution in the economy is an important discussion on the principle of federalism, which, when seen in a silo, creates a moral order that brushes under the carpet the bigger issues of a fair distribution of fruits of national economic development. Sudipto Mundle, who was a member of the Fourteenth Finance Commission, says, “There is nothing in the Constitution requiring the finance commissions to give incentives to states for equal growth. While finance commissions play an equalising role in sharing revenue among states, the fact is that states are still diverging. This divergence is not because of the finance commission, but despite it.”  

Lahiri also agrees that to prevent the economic divergence among states from worsening, the present redistribution mechanism will require the support of dedicated policy moves. He says, “I do not think that the finance commission recommendations can be a one-shot panacea for all the problems faced by states. Transfer of funds and policy interventions by the Centre are both essential.”  

Dehejia suspects that the GST regime has worsened the divergence among states, since the tax reform reduced the states’ capacity to generate revenue on their own. Though southern states are more vocal about the GST regime impacting them adversely, it can also come in the way of creating industrial equity in the country in the absence of a fair national industrial policy. Dehejia says, “The industrial policy roadmap of the Modi government, or whichever government comes next, must pay careful attention to interstate inequalities. There must be room in this mechanism for place-based policies that incentivise, through subsidies or tax breaks and concessions, locating industry in deprived regions. You also, then, must provide the necessary infrastructure.”  

Some lessons from early industrial policies of the Nehruvian era might be helpful. While many lay the blame for the current regional divergence at Nehru’s door, his idea of the public sector undertaking (PSU) spread across the length and breadth of the nation addressed two crucial issues: job creation and state-led development of ignored regions. But in India’s economic development trajectory, there has been no such direction or incentive to private capital. 

The wide industrial divergence among states, apart from being unethical, can potentially throw up a challenge to the stability of the Indian polity. Aiyar spots this trend when she says, “We are now seeing the impact of this divergence on politics to the extent to which a kind of north-south canard has emerged in the political discourse. Even though the [southern] states welcome guest workers and all that, the latter find themselves increasingly under the appeal of an anti-outsider, more local, deeply subnational type of politics, which is challenging to the overarching fabric of the country. We do face very real risks of the emergence of a politics that is extremely parochial.”  

Curiously, the policy and political elite of the country have not yet considered developing a principle in which the likes of Ajay Kumar either do not have to board the Sanghamitra Superfast Express to make up for wage deficit or can claim to be equal stakeholders in the industrialisation of the country.  

Dehejia, too, reckons the whole situation can turn into a “huge political economy problem”. “When the gap is so wide, several things happen. One, taxes of the richer states like Karnataka, Maharashtra, and so on, are used in part to subsidise or provide transfers to the poorer states. As those transfers increase, citizens of the richer states may become unhappy with how their own money is being transferred to other regions,” says Dehejia. “If you are a resident of a poorer state, you look at the huge difference in the standard of living between your life, let us say in the Hindi heartland, versus the lifestyle being enjoyed in Mumbai and Bengaluru, that is sure to create some resentment and anger.” 

The Sanghamitra Superfast Express begins its journey from the east central railway zone and ends at the south western zone. Kumar might not be aware that his journey aboard the train is a symbol of crossing an impoverished India to arrive at a relatively prosperous one. Millions like him, from eastern and central hinterland, continue their search for better wages as they slowly lose hope for any similar opportunities in their home states. They silently yearn for an agitation around equitable growth. After all, everyone in a democracy deserves equal opportunities at growth. 

Till the political weight of Kumar improves, the discourse of the political economy in the country will be dominated by the richer states that will not recognise the rights of less-industrialised states to partake in the riches of industrialisation.  

This, unfortunately, is the logic of colonisation!