The Political Economy of Federalism: Regional Inequality and Visions for a New Federal Bargain

This interview assesses the political economy of federalism in contemporary India. It begins by discussing the idea of fiscal federalism in its historical context and what has changed in the last decade with the abolition of the Planning Commission, the introduction of the GST, the recent politicization of the Finance Commission, and their implications for vertical and horizontal devolution. In their discussion with Louise Tillin, Kalaiyarasan and Roy assess whether these changes have squeezed the fiscal autonomy of states. Roy argues that Centre-State fiscal tensions are driven by competition over the ability to finance, and thereby claim electoral credit for, compensatory welfarism. The interview moves on to offer insights into the reasons for stubborn and widening economic inequality which underpins the political need for compensatory welfarism. It considers the drivers of economic growth and the perverse migration of capital and labor from poor to rich regions. Finally, it looks at how regions are integrated into a federal economy, and how migration, the failure of assimilation, and the limited portability of welfare have contributed to a low-equilibrium trap. It ends with reflections on why economic convergence among regions has failed in India and what this implies for the premature decline of the wage share and for the distribution of growth and productivity.