Making a better Indian Union

The idea that the southern states are being penalised for better performance overlooks the full costs and benefits of being part of the Union ILLUSTRATION: RINAV

T There is a growing clamour among some prominent politicians and commentators from South India, now labelled "The South Tax Movement", who argue that they are not receiving a fair deal as part of the Indian Union. They contend that their relative prosperity has resulted in them transferring resources to poorer northern states.

They submit that Karnataka gets only 15 paisa for every rupee of tax paid, and Tamil Nadu gets 29 paisa, whereas Uttar Pradesh gets 2.73, and Bihar gets ₹7.06. They assert that they are being penalised for better economic management, while the poorer northern states are being rewarded through fiscal transfers for not performing as well.

This resentment may increase as incomes across states diverge further. But it's not just a North-South issue, it's a rich vs poor state issue. States like Maharashtra, Gujarat, Haryana, and Delhi also contribute more than they get back, and net beneficiaries also include eastern states like Assam, Odisha, and West Bengal.

Similar complaints are also heard in other economic unions such as the the European Union (EU), where richer northern countries such as Germany, the Netherlands, Sweden, and Denmark feel they are overcontributing compared to, until recently, less well-managed countries in Southern Europe, such as Greece, Portugal, and Spain, and poorer East European countries that are converging but still need help. The large net fiscal contribution required by the UK may have been a factor, though not the only one, in its decision, which it now regrets, to leave the EU.

But fiscal transfers alone do not capture the full costs and benefits of a Union. The more industriILLUSTRATION. DINA SINHA alised, richer countries get a huge captive market in the EU in which they can sell their products.