North-South divide at a crossroads

As the Finance Commission deliberates on the terms of reference, it is crucial that it acknowledges the existential threat facing India

I am concerned that discussions about the terms of reference of the 16th Finance Commission are happening without regard to the existential importance of the topic at this current juncture. The exercise is being viewed as a business-as-usual technocratic process.

The task before the 16th finance commission will not be business as usual. In my previous column (16th Finance Commission’s Political Challenge, October 12, 2023), I explained that there were three substantive issues that would centrally impact the commission’s recommendations. The overarching challenge that underpins these issues is the vastly increased tension between the Centre and the states, which in turn reflects tensions between the states in the great Indian plain (GIP, which includes all Hindi-speaking states) and those in the Indian peninsula. Typically, denizens in the first group of states are poor, experience low human development, and manifest stark gender inequalities. They compete for government jobs and handouts, and have received little benefit from the post-1991 India growth story.

The peninsular states have largely eliminated extreme poverty and have medium to high human development indicators. The bulk of Indian manufacturing and high-end services are produced in these states, and, therefore, they contribute most to India’s economic prosperity. Their denizens aspire to white-collar jobs abroad, but also secure reasonably well-paid jobs where they live. Unlike those in the GIP, they are not “migrant “or “guest” workers in their own country.

These socio-economic fault lines have exacerbated over time. Uttar Pradesh has de-industrialised. Agra, Kanpur, Moradabad, Allahabad, once significant industrial centres, have terminally declined, as have Patna, Lucknow, and Allahabad universities, once as good if not better than their peninsular counterparts.

So, the prosperous rise of the peninsula has been accompanied by social and economic decline in the GIP, the only escape from which is a government job or migration to the peninsula. As a result, the politics of the GIP is only about zero-sum games among castes, ethnicities, and religious groups. Here, bigotry attracts votes. The political issues that resonate in the peninsular states have much more to do with opportunity and prosperity than with ethnic or religious differentiation. Thus, the common ground for political solidarity between the GIP and the peninsula has continuously diminished as the India story has diverged. Such divergences occur in other large geographies as well. However, it is rarely the case that the regions in which the majority live are significantly poorer and more backward than those in which the minority live. A successful development story confronts lagging regions where a minority of the population lives. Active social and economic interventions, redistributive fiscal policy, and affirmative action are then deployed to equalise things. Political safeguards are also instituted to protect the less prosperous and socially backward minority geographies. This is the story of Germany after unification, the European Union, with its Greek, Portuguese and Irish socio-economic laggards, and the United States with its heavily-populated and prosperous coastal regions, and poor, sparsely-populated hinterland.

The India story is more tense. The minority of the population in the peninsula has prospered while the majority in the GIP has not. But the same instruments that are deployed to equalise the minority in the countries I refer to above, have been used to compensate the majority. Obviously, this compensation must be repeated in ever-increasing measure unless the story changes. In the Indian case, fiscal instruments have been used to effect this compensation, with the poorest states receiving the largest share of Central taxes and grants.

This arrangement has been accompanied by an uneasy implicit political bargain. Limits have been imposed on fair electoral representation. Parliament reflects the population distribution as it was in 1971. If political representation matches the current population, then the GIP will have a permanent majority over the most prosperous, progressive, and better-developed peninsular states. But the political parties and political issues that are popular in the GIP are increasingly different from those that concern the peninsula. This creates a fault-line in political solidarity that assumes menacing proportions when the spectre of delimitation is raised, and when the party that is popular in the GIP is repeatedly defeated in the peninsula as it brings no value proposition there.

In such a situation, for the peninsular states, continuing with the highly progressive and fraternal arrangement of fiscal redistribution is no longer a matter of national consensus.

It is, therefore, with great concern that I put it to the political authorities and the policy ecosystem that this is not a business-as-usual scenario. It is not going to be enough to design terms of reference for the finance commission as a technocratic exercise without extensive consultation and political dialogue between those in power in Delhi and in the GIP, and those in the Peninsula. It also requires sensitivity in the constitution of this finance commission. Things that would be considered regrettable in the past — for instance, that the 15th Finance Commission did not have a single member from the peninsula — would be treated as egregious injustices in the present climate.

The finance commission represents the first formal theatre where the story of the great Indian divergence will play out. It is, therefore, vital to the unity and integrity of India that this task be handled with the political seriousness and sensitivity that it deserves.

The writer is managing director, ODI, London. r.roy@odi.org. The views are personal