Balanced regional development has been one of the most important objectives
of development planning in India for the past half a century. But thinking
on what constitutes “balance” has evolved over the years.

First, the focus was exclusively on industrial development. The concern
was that the benefits of industrialization, particularly steel-based
industrialization should accrue to all states and not be monopolized
only by a few states. Policies, like those that equalized the price
of steel across the country and thereby eroded the natural comparative
advantage of the eastern region which had the coal and iron ore, were
adopted. This led to the growth of steel-based industries in the southern,
northern and western regions. The policy of industrial licensing that
was in vogue till 1991 was used heavily by the central government to
direct private industrial investments into industrially backward states
and districts.

In the early 1980s, came the realization that too narrow a focus on
industrial development alone would not alleviate the problem of regional
disparities. This is when agricultural growth came to recognized as
an essential element of regional planning. Special programmes were launched,
for example, to boost rice production in the eastern region by expanding
irrigation, credit and marketing facilities. These programmes have had
significant impact and the Green Revolution that was confined to the
north-west region of the country throughout the 1970s has spread to
newer and newer regions of the country.

In the 1990s with the onset of economic liberalization, the abolition
of industrial licensing and the gradual privatization of the public
sector, regional development came to be seen through the perspective
of social indicators-fertility rates, female literacy, access to water
to sanitation services, etc. It came to be appreciated that the states
that were industrially backward and agriculturally laggard were also
precisely the states that were doing poorly on social development and
that industrial and agricultural backwardness was really a symptom of
a more deep-rooted social malaise, reflected most strongly to the status
of women. In addition, with economic reforms and with the reduction
in the role of the central government specially in industrial development,
came the recognition that what will drive new private investment is
the “governance” factor, that is the administrative capacity of the
states themselves.

This is as far as the perspective as to what constitutes “balanced”
in balanced regional development is concerned. While this perspective
has evolved, the unit of concern has also changed. For decades, the
focus was on inter-state disparities in income and growth. While this
focus still remains, increasingly, balanced regional development is
also being seen in the context of intra-state disparities in economic
and social development. There are fast-growing states that have large
pockets of backwardness, while there are slow-growing states that have
some pockets of economic dynamism.

But while perspectives may have evolved, one basic feature of regional
development has remained constant and this relates to the transfer of
resources from the central to the state governments. There has been
an overwhelming consensus in the country for the past five decades that
all such transfers must be based on a system that cannot ignore equity
but which cannot abandon efficiency. The resource transfer system must
work to the advantage of the poorer states.

The Finance Commission

By far, the most important institutional provision made in the Indian
Constitution to ensure balanced regional development is in Articles
280 and 281 that provide for the appointment of an independent, expert,
Finance Commission once every five years to recommend the sharing of
tax resources between the Centre and states and the sharing of these
resources among the states themselves. In addition, the Finance Commission
also recommends specific grants-in-aid to various states. The Finance
Commission was modeled along the lines of the Australian Grants Commission.
So far, eleven Finance Commissions have been set up and have given their
reports. Barring a few instances, it would be far to say that successive
governments have accepted the recommendations of the various Commissions.

These Commissions have been sometimes chaired by retired judges, sometimes
by politicians and sometimes by economists. They have invariably been
regarded with great respect by the central and state governments and
it was only last year that for very first time, some richer states protested
the award of the eleventh finance commission on the grounds that poorly-administered,
more populous but economically laggard states were being compensated
at the cost of the states that were doing well and taking tough economic
decisions. But other than this episode, the institution of the Finance
Commission has never come under attack and has been a lynchpin of the
structure of fiscal federalism in India.

Equity considerations have played a very important role in the awards
of the Finance Commission. In the process of vertical sharing-that is
sharing of resources between the central and state governments-the concern
has been to ensure that the states get a due share. Thus, the tenth
Finance Commission (1995-2000) recommended that there be a single divisible
pool of taxes to ensure that the share of what the states get is increased.
Traditionally, only a portion of the personal income tax and union excise
duties were shareable. This recommendation has since been accepted and
now all taxes-income tax, corporate tax, excise duty and customs duty-that
are collected by the union government are shared with the states giving
them a share of about 29% in gross tax collections. As far as horizontal
sharing is concerned-that is, the sharing of resources among the states
themselves-the approach of successive Finance Commissions has been to
give the largest weight to population and per capita income. The relative
weights adopted by the eleventh Finance Commission (2000-2005) for determining
the inter se shares of states is 10% for population, 62.5% for per capita
income (distance method), 7.5% for area, 7.5% depending on an index
of infrastructure, 5% for tax effort and 7.5% for fiscal discipline.
Poorer states are not disadvantaged by such a formula. On the contrary,
the criticism is that the formula does not reward performance enough.

Planning Commission

The Finance Commission is the route for statutory transfers. The other
route is that of “discretionary” transfers via the Planning Commission
that, unlike the Finance Commission is not a Constitutional body. Within
the Planning Commission route, there are both formula-based and non-formula-based
transfers. The formula-based transfers are meant to bringing about equity
in resource-sharing and to ensure that the poorer states get their “due”
share.