Challenges in Achieving Balanced Regional Development in India

India’s economy has grown fast since the 1991 reforms, but that growth hasn’t landed evenly on the map. A handful of states pull in most of the investment, jobs, and per capita income, while others still struggle with basic infrastructure gaps. Understanding why this is happening, and what’s being done about it, is central to any serious study of the Indian economy.

The paradox of growth: why gaps widened after 1991 🔗

Liberalisation was supposed to lift all boats. Instead, capital and industry gravitated toward states that already had ports, power, skilled labour, and administrative efficiency. A working paper from the Economic Advisory Council to the Prime Minister tracking state performance from 1960-61 to 2023-24 shows this clearly. Before 1991, southern states weren’t exceptional performers. After liberalisation, Karnataka, Andhra Pradesh, Telangana, Kerala, and Tamil Nadu together grew into a bloc that now contributes over 30 percent of India’s GDP.

The flip side is equally stark. West Bengal’s share of national GDP fell from around 10.5 percent in 1960-61 to roughly 5.6 percent by 2023-24. Undivided Bihar’s relative per capita income dropped from about 70 percent of the national average in 1960-61 to under a third of that figure by the early 2000s. Meanwhile, Delhi’s per capita income has stayed at more than double the national average for decades, and Haryana climbed from roughly parity with the national average in the 1960s to nearly 177 percent of it today.

A divide with old roots 🔗

Regional imbalance in India isn’t a new problem created by liberalisation; it’s an old problem that liberalisation made more visible. Colonial-era investment concentrated around port cities like Mumbai, Kolkata, and Chennai, and the industrial base built there gave those regions a head start that independence-era planning never fully corrected. Public sector units were deliberately placed in backward areas during the early Five Year Plans, but the underlying gaps in infrastructure, education, and institutional capacity kept resurfacing. When the economy opened up in 1991 and investment decisions shifted from planners to private firms, those firms went where the ecosystem already worked.

What keeps some regions behind 🔗

Industrial and infrastructure concentration 🔗

Private investment tends to cluster. A state with reliable power, good roads, functioning ports, and an existing pool of skilled workers attracts more of the same, creating a self-reinforcing loop. States without this base find it harder to break in, even when land and labour are cheaper. This is why Gujarat and Maharashtra continue to draw manufacturing investment while landlocked, infrastructure-poor states are repeatedly left out of new industrial corridors.

Governance capacity and fund utilisation 🔗

Money allocated is not the same as money spent well. States and districts with weaker administrative capacity often struggle to design bankable projects, absorb central grants on time, or coordinate across departments. This is one reason the Aspirational Districts Programme was built around district-level ownership rather than just larger transfers from the centre; identifying backward districts is only useful if local administration can actually convert funds into outcomes.

NITI Aayog’s playbook: region-specific programs 🔗

NITI Aayog, the government’s policy think tank, has moved away from a one-size-fits-all approach to backwardness. Its flagship instrument is the Aspirational Districts Programme, launched in 2018 to rapidly uplift 112 of the country’s most underdeveloped districts. The programme tracks progress on 49 indicators across health, education, agriculture, financial inclusion, and basic infrastructure, and it is built on what NITI Aayog calls the three Cs: convergence of central and state schemes, collaboration between central and state-level officers, and competition among districts through a monthly ranking system.

That competitive element matters. Districts aren’t just handed funds; they’re ranked publicly on incremental improvement, which creates pressure and, more importantly, visibility for local officials who deliver results. A government feature on the programme’s impact describes how Himachal Pradesh’s Chamba district achieved full household coverage under a national financial inclusion scheme and saw measurable gains in health and nutrition indicators, driven by a mix of focused governance, corporate social responsibility investment, and community participation. The programme has since been extended downward to the block level through the Aspirational Blocks Programme, launched in January 2023, to reach areas even the district-level programme couldn’t fully address.

Targeted assistance beyond the Aspirational Districts model 🔗

NITI Aayog also works directly with states to design region-specific strategies rather than uniform national schemes, recognising that a hill state with border security concerns and a drought-prone desert state need fundamentally different interventions. This is a shift from the earlier decades of planning, when backward-area policy often meant a single template applied across very different geographies.

Making states compete: the ease of doing business route 🔗

Alongside direct intervention in backward regions, the centre has tried to spur development by making states compete with each other for investment. The Department for Promotion of Industry and Internal Trade runs the Business Reforms Action Plan, an annual exercise that ranks states on how well they implement reforms like single-window clearances and faster construction approvals. As one policy analysis put it, investors don’t choose India in the abstract; they choose a specific state, industrial park, or city, and their experience of India’s investment climate is shaped by state-level pollution boards, power utilities, and land-record offices, not the central government.

The idea is that ranking states publicly nudges laggards to reform. In the 2020 assessment, states like Andhra Pradesh, Gujarat, Telangana, Haryana, Karnataka, Punjab, and Tamil Nadu were categorised as top achievers, and officials framed the exercise explicitly as a way to spread the culture of reform beyond a handful of cities into a wider set of states, as reported by Business Standard. In principle, this kind of competitive federalism can pull backward states up rather than simply funnelling money to them, though it only works if those states have the administrative bandwidth to compete in the first place.

Fiscal federalism: money alone won’t fix it 🔗

Direct fiscal transfers remain the backbone of regional support. The Finance Commission recommends how much of the central tax pool goes to states and in what proportion, and this share was raised to 42 percent under the 14th Finance Commission before settling at 41 percent under the 15th. Special Category Status, once used to funnel a larger share of central assistance to states with hilly terrain or difficult geography, has effectively been phased out for new claimants; the central government has repeatedly told states like Odisha that no fresh special category status will be granted, relying instead on higher overall tax devolution to fill resource gaps, as confirmed in comments reported by Deccan Herald.

This shift matters for balanced development because it moves the debate from who gets a special label to how efficiently every state uses the resources it already receives. A state that gets a bigger share of tax devolution but can’t execute projects on time doesn’t actually close the gap. Fiscal transfers are necessary, but they’re not sufficient on their own.

Why local leadership and governance matter most 🔗

Across nearly every successful case of regional catch-up, the common thread isn’t just money, it’s implementation capacity at the local level. The Aspirational Districts model works by assigning a senior central officer as a nodal point for each district and pushing accountability down to the district collector, rather than leaving execution entirely to state capitals far removed from ground realities. The Chamba story cited earlier is as much about district-level coordination and community buy-in as it is about scheme funding.

This is the real lesson for balanced regional development in India: policies for less prosperous regions, healthy inter-state competition, and fiscal devolution all create the conditions for growth, but none of them substitute for competent, accountable local governance that can actually convert resources into outcomes. Where that governance capacity is weak, even well-designed national schemes underperform. Where it’s strong, comparatively modest interventions can produce visible change within a few years.

What do you think? If competitive federalism pushes richer states to reform faster than poorer ones, does ranking states against each other risk widening the very gap it’s meant to close? And should India’s approach to backward regions rely more on district-level programmes like the Aspirational Districts Programme, or on larger fiscal transfers through the Finance Commission?

References

1. https://eacpm.gov.in/reports/relative-economic-performance-of-indian-states/
2. https://www.niti.gov.in/aspirational-districts-programme
3. https://www.pib.gov.in/FeaturesDeatils.aspx?NoteId=154503&reg=48&lang=2
4. https://www.policycircle.org/policy/ease-of-doing-business-states-capacity/
5. https://www.business-standard.com/article/current-affairs/seven-states-among-top-achievers-in-ease-of-doing-business-ranking-122063000644_1.html
6. https://www.deccanherald.com/amp/story/india%2Fno-special-category-status-for-odisha-says-sitharaman-1192485.html