'Freight policy punished East, favoured South': Economist counters southern states' fiscal charge

Economist Devesh Kapur has reminded that regional imbalances in India are not new, citing how post-Independence policy choices once favoured southern and western states at the expense of the eastern region. Referring to the freight equalisation policy introduced in the early decades after independence, Kapur said it penalised the eastern states - especially Bengal, Bihar, undivided Bihar, and Orissa.

"In the early decades, the freight equalisation policy penalised the eastern states - especially Bengal, Bihar, undivided Bihar, and Orissa - and benefited the western and southern states," he said during a Carnegie Endowment discussion on his new book A Sixth of Humanity: Independent India's Development Odyssey, co-authored with former Chief Economic Adviser Arvind Subramanian. The two scholars discussed the evolution of India’s fiscal federalism, particularly the current discontent among southern states that argue they contribute more to the central tax pool but receive proportionally less in return.

The Freight Equalisation Policy was introduced by the Centre in 1952 to promote balanced industrial development across regions. Under this policy, the central government subsidised the cost of transporting minerals and key industrial raw materials-including coal, iron ore, and steel-so that factories could be set up anywhere in the country at uniform input costs. The idea was to remove the geographic disadvantage faced by regions far from natural resources.

Subramanian, addressing the same issue, said the idea of redistribution must be understood as a core feature of nation-building, not merely as fiscal imbalance. "Some amount of redistribution is inevitable in any fiscal polity," he said. "What is becoming more and more problematic in India is that the identity of donors and beneficiaries is kind of fixed and the magnitudes are rising. At some point, they become politically unsustainable."

He added that while richer states - especially in the South - do transfer more fiscal resources, other economic flows offset this imbalance. "For example, Bihar could turn around and say, 'Tamil Nadu, we provide you a cheap labour. Therefore, while you may be transferring fiscal resources, we are transferring human resources,'" Subramanian said.

Kapur, a professor of South Asia Studies at Johns Hopkins University, underscored that even today, Jammu and Kashmir and the Northeast receive the highest per-capita fiscal transfers. "These are the regions where India’s nation-building has had its greatest challenges," he said, calling redistribution both an economic and political necessity in a federal country.

Southern states such as Tamil Nadu, Kerala, Karnataka, Andhra Pradesh, and Telangana together contribute 30–35 per cent of India's GDP but receive only about 15 per cent of the central tax devolution, according to the 15th Finance Commission.