How the South outpaced North India

Over the decades, there has been a remarkable change in the states driving India’s growth story. Once dominant states have seen a decline, while others have emerged as economic powerhouses. A new working paper from the Economic Advisory Council to the Prime Minister has examined these trends over the past six-odd decades. On the one hand are states like Uttar Pradesh, West Bengal and Punjab. As per the paper, in 1960-61, UP contributed 14.4 per cent to India’s GDP. By 1990-91, it had fallen to 12.6 per cent, and in the years after its bifurcation it has declined even further. Similarly, West Bengal has seen its share fall from 10.5 per cent to 5.6 per cent over the period. The state’s per capita income, once higher than the national average, is now lower than it. Punjab’s economy, which had benefited from the Green Revolution — its relative per capita income rose from 119.6 per cent of the national average in 1960-61 to 169 per cent in 1970-71 — has slumped thereafter. Its share in the GDP has fallen from 4.4 per cent in 1970-71 to 2.4 per cent in 2023-24.

In sharp contrast is the growth trajectory of the southern region. After the 1991 reforms, the southern states have seized the opportunities that opened up and emerged as “leading performers”. In fact, in 2023-24, these five states accounted for roughly 30 per cent of India’s GDP. Alongside, the western states of Gujarat and Maharashtra have also fared well during the period. These regions have a significant presence in the manufacturing and services sectors. For instance, the IT sector is largely concentrated in the southern region. These states also account for a fairly large share of factories in India as per the Annual Survey of Industries. And most of the major exporting districts are located in the southern and western states. However, even as the southern states have powered ahead, they have seen their share in the divisible tax pool fall — from 21.1 per cent during the award period of the 11th Finance Commission (2000 to 2005) to 15.8 per cent during the period of the 15th Finance Commission (2021-26). In lower income states like UP, Bihar and West Bengal, transfers from the Centre — which includes their share in central taxes and grants in aid — account for a significant share of revenue receipts. While fiscal transfers are meant to ensure uniformity of public services across regions, the dwindling share of the southern states in tax revenue has emerged as a major faultline in Centre-state relations in recent years.