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Implications of Regional Disparity for Finance Commission Devolutions

An overview of the papers in this collection that look at different aspects of income disparities between and within states.


Implications of Regional Disparity for Finance Commission Devolutions

Chirashree Das Gupta

An overview of the papers in this collection that look at different aspects of income disparities between and within states.

Chirashree Das Gupta ( is at the Centre for Economic Policy and Public Finance, ADRI, Patna.

ifferentiating between equity and equality, the neoclassical mainstream of the discipline of economics and the public policy paradigm that derives from it has grappled with two defining questions: first, is it possible to have “equity” and “equality” in a system that prioritises efficiency in resource management over social justice, and second, is horizontal equity the most widely accepted principle of equity (Arrow 1971, Duclos 2006, Espinoza 2007). These questions have been central to the academic debates around the principles laid out by successive finance commissions in defining the “equalisation” exercise for central transfers to states. Over the years with the intensification of inter-state disparity since the 1960s, but especially since the time of the Eleventh Finance Commission, norm-based “equalisation” has been posited as the desirable end in the interest of both “equity” and “efficiency” and argued to be free of the problems associated with the earlier “gap-filling” approach of finance commissions. The objective of equalising basic services across states at an average level has been held as a desirable goal (Bagchi 2002). In the mainstream of the discipline, the Twelfth Finance Commission’s scheme of fiscal transfers was held to have served the objective of both equity and efficiency within a framework of fiscal consolidation (Rangarajan 2005).

However, an important critique within the mainstream has been focused on the inability of the Twelfth Finance Commission’s norm-based approach to distinguish itself from the previous raison d’être of gap-filling in ensuring a fair share of resources between the centre and states and the states inter se in the wake of increasing regional disparities on the one hand and fragmented political mandates at the centre and in the states on the other (Rao and Jena 2005). A more general criticism has stemmed from concerns around redistribution and the undermining of the equity principle since the Tenth Finance Commission, in discarding criteria that emphasise redistribution and the shift towards those like tax effort and fiscal discipline while regional disparity has been widening (Das and Mishra 2009).

In the last decade, the question of disparity between different regions within states has become politically important with the contradictions in centre-state relations exacerbated by neoliberalism even as the finance commission strictures based on fiscal discipline were being institutionalised. On the issue of finance commission transfers, this has led to differences of opinion on whether the commission’s constitutional mandate would be violated if it takes disparity within states into account while deciding the principles for vertical and horizontal transfers.

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Economic & Political Weekly


Two gaps in the academic debate must be noted here. First, in most of these debates in the domain of public policy and finance with regard to finance commission transfers, regional disparity understood as inter-state disparity is a ceteris paribus condition. The disciplinary expertise in the finance commission has been devoted to designing closest to optimal allocations in balancing the competing demands of low and high income states. In this exercise, the indices of regional disparity which only quantify symptoms have been the basis of the formula for horizontal devolution. Yet, the political expectations around finance commission transfers are towards reversing trends in widening regional d isparity and thus addressing the cause of widening regional d isparity. This encompasses issues around both vertical and h orizontal devolution and emphasis on equalisation (Kurian 2008) that demands a break from the ceteris paribus assumptions of not just the equity/efficiency paradigm but also a departure from the methodological approach of conceptualising r egional disparity as an ahistorical given. Second, intra-state d isparities still remain an under-researched area both in identifying trends and causal issues even as the social perception that inter-district disparity is increasing has been confirmed by a preliminary body of research. Yet, opinion is sharply divided on whether the finance commission should intervene on this dimension of disparity while designing centre-state transfers. Thus, there is a gap between the knowledge base that has informed opinion either way.

The set of papers in this volume, derived from multiple methodological approaches, are the outcome of a workshop on “Inter and Intra-State Disparities: Implications for the Thirteenth Finance Commission”, held in Patna in December 2008. The interventions are thematically organised around four dimensions of regional disparity that address the academic gaps mentioned earlier.

The Normative and the Political

Two papers analyse the normative and political implications respectively of regional disparity. Achin Chakraborty in the p aper on normative implications of inter-state and intra-state disparity intervenes in the debate on equity and equality straddling the “normative” through both the conceptual and the empirical and argues that the implications are not the same across evaluative spaces. The paper then demonstrates that the actual resource a llocation for human development in India studied through the distribution of primary school infrastructure is highly perverse even after several years of massive intervention through the Sarva Siksha Abhiyan.

Prabhat Prasad Ghosh and Chirashree Das Gupta assess the disciplinary divide that has led to an occlusion in the assessment of political implications of regional disparity. In a political economy framework, it is argued that the very basis of means and ends of policies that led to economic growth both in the pre- and post-liberalisation period after independence have also been the basis of increasing regional disparity. The regional has been subsumed in the sectoral and the social in the treatment of disparity in economic policy. The changing political basis of federalism and democratisation that has emerged subsequently has not led

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to concomitant economic policy within which finance commission allocations have been designed to bridge the resulting disparity, calling into question the very basis of the means and ends of such policy.

Diverse Methodological Perspectives

Two papers provide comparative perspectives on inter-district variations in disparity within and between states.

The papers are located within the debate around the conceptual paradigm of the Kuznet’s inverted-U hypothesis of economic inequality. Suryanarayana’s study of disparities within Karnataka and Maharashtra is located within the Kuznets’ framework both in terms of sectoral disparities in per capita net domestic product and inequalities in personal distribution of income/ consumption. Given the limited structural changes in sectoral distribution of employment but substantial changes in sectoral origin of income, it is argued that India continues to be in the first phase of the inverted-U stages, which is the phase of increasing income inequality. The two comparatively well-off states show pronounced inter-regional disparities, inter-personal i nequalities and intra-regional deprivations. Broad-based and inclusion measures are generally higher in poor backward regions and vice versa implying broad based backwardness, and inclusion in deprivation. Such a scenario sets limits on the potential for resource mobilisation and makes an explicit case for investment strategies for broad based inclusive growth across regions at the state level. The study calls for revisiting the “canons”, for r esource mobilisation.

Amaresh Dubey’s point of departure from the Kuznet hypothesis is based on the importance of sociocultural and religious heterogeneity in the later literature to examine disparities within five states

– Gujarat, Haryana, Kerala, Orissa and Punjab – l ocating intra-regional disparities within the studied patterns of inter-regional disparity, based on consumption, inequality and poverty incidence indicators – three measures of well-being that are the result of the inter-play of a large number of economic and policy variables. While each indicator reflects specific trends and the extent of d isparity within states are different for the different indicators pointing to multiple underlying socio-political issues over a long period of history, overall the intra-state disparities which were modest in 1993-94 have increased along with increase in gross state domestic product (GSDP). The highest increase in disparity is found in case of consumption. Inter-district disparity in real mean per capita total expenditure (PCTE) in 2004-05 has also increased signi ficantly in each one of the states under c onsideration.

Comparative Perspectives on Inter-District Disparity

Three papers provide comparative perspectives on inter-district variations in disparity within and between states in the Hindi heartland region and the eastern region.

Govind Bhattacharya, using a “core-periphery” framework to conceptualise disparity traces the skewness of distribution of

EPW is grateful to Chirashree Das Gupta for help in organising this collection of papers.


public expenditure across districts within a state. The inter-district disparities in government expenditure in six states – Bihar, UP, Jharkhand, Chhattisgarh, MP and West Bengal – based on the actual treasury data on government expenditure in the social sectors of education, health and supply of drinking water, is analysed using the databases of the accountants general of these states. Overall Chhattisgarh emerges as the only state that has spent its resources in the social sectors in the most equitable manner, followed by West Bengal. Bihar, UP and MP are the most inequitable states in social sector expenditure disparity among districts.

Ajitava Raychaudhuri and Sushil Kr Haldar analyse the correlation between income inequality and inter-district disparity in physical and social infrastructure in West Bengal from 1991 to 2005. The findings show a rising disparity among districts in the first half of the present decade after a continuous decline in the last decade of the last century. A similar and concurrent movement is noted for the composite physical infrastructure index for the district. Social infrastructure index over the districts does not show a similar movement.

Diwakar reviews regional disparity in UP in a political economy approach to development, poverty and inequality. Neglect of plan expenditure in agriculture and irrigation amidst stagnating revenue, declining central transfer, and intermittent change of guards account for the fact that all districts of Bundelkhand and eastern regions are lagging behind in development compared to western and central regions. As a result vertical disparities in terms of consumption deficiencies were reflected at higher intensities in these two regions. Although disparities among the districts in terms of distribution of per capita income were reduced except for the central region, incidence of poverty was highest in the eastern region. Agricultural and casual labourers, marginal and small farmers, scheduled castes and scheduled tribes were the poorest across the regions. The real challenges are thus to address the intra-regional horizontal and vertical disparities at the district level which are hardly explicit in macro level data for the state as a whole.

Contrasting Equitable Development: The Case of Kerala

The sectoral and social features of Kerala’s social development has been the subject of a large body of work. A less discussed feature is the high level of equitable development among districts compared to other Indian states. Pinaki Chakraborty investigates inter-district disparity in Kerala in the backdrop of its success story of high human development with low level of per capita income and the recent increases in inequality with higher growth rates. Compared to earlier years, consumption inequality has accentuated in recent years in Kerala in the recent high growth regime, though the development in social sector has been relatively equitable across districts in spite of persistence of pockets of deprivation. However, the high priority to social sector spending has posed serious challenges to the state and decentralisation through people’s planning incorporating local needs and preferences has been the alternative approach to address disparity.

Together, this collection of papers provides an overview of multiple dimensions of regional disparity, endogenising the “region” in social and sectoral disparity and point to the historical neglect of regional disparity by the state in public expenditure decisions to address disparity. The formulae driving finance commission transfers so far have not been able to address the chasm between either the absolute gap in vertical transfers to address regional disparity nor a departure from the convention of compensating for disparity rather than designing transfers to reverse the process. The eclectic methods and the different approaches in the set of papers in this volume converge on the structural constraints of the post-1991 growth process that have led to accentuation of regional disparity. Adding to the existing debate on rising social and sectoral disparity in India, the different dimensions of regional disparity explored in the papers open up the endemic question about the extent of efficacy of finance commission transfers within an overall limit imposed on the role of the state in designing interventions to reverse the trend of increasing disparity, both between and within Indian states under the post-1991 economic policy paradigm.


Arrow, K J (1971): “A Utilitarian Approach to the Concept of Equality in Public Expenditures”, The Quarterly Journal of Economics, Vol 85, No 3, August, pp 409-15.

Bagchi, A (2002): “‘Equalisation’ as Goal of Centre-State Tranfers: Iqbal Gulati’s Golden Legacy”, Economic & Political Weekly, Vol 37, No 27, 6 July, pp 2679-82.

Das, K and A K Mishra (2009): “Ensuring Horizontal Equity: Challenge before the Thirteenth Finance Commission”, Economic & Political Weekly Vol 44, No 5, 31 January, pp 14-17.

Duclos, J (2006): “Innis Lecture: Equity and Equality”, Canadian Journal of Economics, Vol 39, Issue 4, pp 1073-1104, November.

Espinoza, O (2007): “Solving the Equity-Equality Conceptual Dilemma: A New Model for Analysis of the Educational Process”, Educational Research, Vol 49, No 4, pp 343-63, December.

Govinda Rao, M and P R Jena (2005): “Balancing Stability, Equity and Efficiency”, Economic & Political Weekly, Vol 40, No 31, 30 July, pp 3405-12.

Kurian, N J (2008): “Equalising Transfers through the Finance Commission”, Economic & Political W eekly, Vol 42, No 29, pp 38-43.

Rangarajan, C (2005): “Approach and Recommendations”, Economic & Political Weekly, Vol 40, No 31, 30 July, pp 3396-98.

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