States, Not Just Budget, Hold Key To GDP Growth

Shankkar Aiyar
4 min readJan 16, 2022


75 years after Independence the Budget continues to harbours a colonial aura even as it charms and courts centralised hope. Growth depends on reforms by states. The Centre can at best be the incubator of change.

By Shankkar Aiyar |Published: 16th January 2022 07:34 AM |

This year India celebrates 75 years of Independence from Britain. Yet, the Union Budget continues to harbour a colonial aura even as it charms and courts centralised hope. Budget day continues to symbolise an annual event, a hit or miss opportunity for transformation.

On February 1, Finance Minister Nirmala Sitharaman will present the Union Budget for the fifth time. Typically, the event is preceded by speculation and suggestions on how to propel GDP growth, and followed by analysis and criticism of met and unmet expectations.

The New Indian Express

The fundamental truth about India’s economic growth is embedded in the structure of the nation. Article 1 of the Constitution states “India, that is Bharat, shall be a Union of States” and the gross domestic product of the political economy is effectively the sum of the output of all the states, essentially an outcome of what states manage to do with the resources garnered and allocated.

Indeed, the resources for enabling the virtuous cycle of economic output — generating jobs, income, consumption, investment and growth — are largely vested with the state governments.

Between them, the central and state governments spent (in developmental and non-developmental expenditure) over Rs 64.70 lakh crore. Of this, over Rs 42.11 lakh crore was by state governments and even the balance is largely spent by state governments at the direction of the central government.

Effectively, the magnitude of the bang for every buck of national resources depends on the state governments — on what is the level of financial freedom the states bestow on residents and what is the absorption capacity they create for investments.

The quantum of quantitative and qualitative change for individual and institutional transformation depends on the enlightened policies on the ground. Take the headline grabbing event of the past week and the debate about the exit of nearly a dozen MLAs and ministers from the BJP in the run up to the Uttar Pradesh polls.

The exodus has acquired a ring of enquiring enigma given the fact that those exiting are from the socially backward classes. Arguably, one of the causes for the disaffection among the disadvantaged classes stems unevenness of economic opportunities.

The cause of real and perceived grievances can only be addressed by the policies designed by the state government — on social justice or job reservations. There February 1 speech of the Finance Minister can do very little to alleviate the angst and anxiety.

The arteries and capillaries which fuel economic activity are vested with the state governments who govern virtually every square yard of the country and determine the velocity and magnitude of economic multipliers. The realisation of the promise of prosperity depends on how well state governments are able to deploy capital and available land resources to leverage labour for output.

For instance, one of the issues haunting investment is the availability of land — and states like Tamil Nadu have harnessed provisions in the Constitution (Article 254) to fine-tune provisions to make land available. Rigidities in labour laws have constrained job creation and expansion of industrialisation.

India’s statute books host over three dozen labour laws and the states many more — Maharashtra, for instance, has over 50 labour laws. The central government has compressed and codified the labour laws. Change is stalled as few states have shown the inclination to adopt them.

India is on the global radar as an emerging start-up economy with over 40 billion dollar unicorns. The question states must ask is why only Pune or Bengaluru carry the halo of start-up hubs. Urbanisation is known to be a force multiplier for economic growth. Jobs in the real estate and construction sectors are located squarely at the intersection of urban and rural economies and create an opportunity for seasonal and permanent employment.

The opportunity in urbanisation is not unknown yet state governments have balked at converting Census Towns into urban metros to create new smart cities. The BJP currently runs double-engine governments in 18 states and could have led by example in states it is in power.

One of the shibboleths entrenched in the narrative of economic reforms is that India’s transformation depends on what is designed in Delhi. But, history validates that some of the major transformations were conceived in the states. The White Revolution, which catapulted India to the top rank as a milk producer, came from Gujarat. The mid-day meals scheme, which accelerated enrolment and literacy, was born in Tamil Nadu. The MGNREGS was derived from the 1970s employment guarantee scheme of Maharashtra. States can engineer and the Union government can facilitate real change.

In India’s continental economy, the central government through the union budget has a critical role to play. It can design the budget to create the incentives — through investment, taxation and subvention. It could conceivably assume the role of the incubator to facilitate growth. In 2015, Prime Minister Narendra Modi had articulated the idea of Team India for economic prosperity. The idea deserves renewal.

Shankkar Aiyar, political economy analyst, is author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.



Shankkar Aiyar

Journalist-Analyst. Author of ‘Accidental India, ‘Áadhaar: A Biometric History’ and ‘The Gated Republic’. Studying how politics rules the economics of people!