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Could GST Aggravate India's Income Divergence?
Thu, 9 Feb Pre-Open

'The rich get richer and the poor get poorer' when it comes to Indian states, according to the economic survey data, which revealed that wealth disparity between Indian states is increasing.

This is quite the opposite of what is happening globally. While poor Chinese provinces, for example, are catching up with the rich ones, less-developed Indian states are doing the opposite - they are falling behind.

An average person in Tamil Nadu today earns four times more than an average person in Bihar. Just three decades ago, the average person in the then-richest large state, Maharashtra, earned less than twice the average person in the the-poorest large state, Bihar.

In 1960, as per an article in The Hindu, the top three States were 1.7 times richer than the bottom three. By 2014, this gap had almost doubled. This gap - four times between the richest and the poorest large state in India - is among the highest in the world. In other federal polities such as the US, European Union and China it is between two and three times.

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Until 1990, India was experiencing income convergence among its large states. But the income convergence became an income divergence come 1991 and with it, economic liberalization.

Now we're debating whether the Goods & Services Tax (GST) regime will exacerbate this divergence, or reverse the trend and hopefully lead us closer to income equality. The Livemint, for one, is skeptical, stating that a decade from now, it is likely that the per capita income of the richest state will be more than four times the per capita income of the poorest state.

For instance, in a pre-GST era, states would have competed to offer exemptions to a company setting up a manufacturing plant in India. In a GST regime, a poor state can't even use tax tools to attract industry from a rich state.

The economic outperformance of some of the rich Indian states is a result of decades of politics and policies. India's economic diversity is as much a reality as our cultural and political diversity. In fact, cultural diversity actually hinders free labour mobility across states. While average income in Tamil Nadu may be four times higher than in Bihar, it is not easy for a Hindi-speaking Bihari to just get up and move to Tamil-speaking Tamil Nadu for a job.

Bihar may need a more robust state-run social security mechanism, focus on primary education, flexible labour laws, inexpensive energy and public health system. While Tamil Nadu may need a focus on higher education, cleaner energy, and privatized health care. Amid such economic disparity among states with varying needs and priorities, there must be an appropriate distribution of revenues among states that does not leave any state lagging behind.

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