Increasing economic inequality in India

• The Economic Advisory Council to the Prime Minister (EAC-PM) released a paper titled “Relative Economic Performance of Indian States: 1960-61 to 2023-24”.
• The report reveals the economic importance of each state and the average welfare of citizens compared to the all-India average.
• Maharashtra, the highest contributor to the nation’s economy, has a per capita income of about 150% of the national average.
• The report points to better performance in the western and southern regions of India, and weaker performance in the eastern States.
• The growing divide in the country is leading to questions of federalism, with richer states arguing they are not receiving their fair share of resources from the Centre.
• The report lists liberalisation (1991) as a marker of when southern States began to perform better.
• The report also points to better performance in coastal areas, including Odisha in the east.

Investment and Economic Performance in India
Investment Determinants
• Investment is a key determinant of output, with higher levels indicating larger economies.
• Investment comes from both public and private sectors, with the former based on policy decisions and the latter on profitability.
• Private investment is typically concentrated in developed areas with large markets, such as urban conglomerates like Mumbai, Delhi, Chennai, Bengaluru, and Hyderabad.

Governance and Infrastructure
• Infrastructure availability and quality of governance are key determinants of profits.
• Richer states have better infrastructure and governance, leading to more investments.
• Better governance also leads to better quality of education and health, leading to more productive labour.

Private Investment and the New Economic Policies (NEP)
• The NEP has led to a growing divide across states, with more investment going to richer states with higher profits.
• The financial sector, which guides investments, has become more important after 1991.
• The poorer States have a larger share of the unorganised sector, which has grown at the expense of the unorganised sector, fuelling the faster growth of the richer States.

Threat to Federalism
• Persistent differentials in economic performance threaten federalism.
• Policy needs to reverse this trend, reversing the trend of private investment, weak governance, and poor infrastructure.
• Both the Centre and the States need to improve governance, reduce corruption, and raise public expenditures on social sectors.
• Shifting focus to the unorganised sector would boost demand and production in the poorer States, attracting more private investment.
• More government concessions are not needed as they have enough resources to increase their investment.