Why the South keeps pulling ahead: Growth, demographics and development

Beyond the increasing complaints about their falling share of central tax revenues, the experience of southern states holds a lesson for the poorer regions wishing to bridge the gap

Kerala’s Finance Minister K N Balagopal recently argued that successive Finance Commissions have chipped away at the state’s share of central tax devolution and grants, a complaint echoed across southern states. The headline figures lend weight to that grievance: The combined share of the five southern states in the total central tax pool — or devolution — slipped from 19 per cent in financial year 2010-11 (FY11) to 16 per cent in FY26; Kerala’s share fell from 2.4 per cent to 1.9 per cent over this period. 

To be sure, the total pool of devolution itself came down in proportion to central taxes as the Union government resorted to cess and surcharge. 

Politically, states in general also argued that they lost sovereignty on revenue matters due to the introduction of the goods and services tax (GST). This complaint was shriller in southern states since GST favours poor states — the tax is ‘destination based’, meaning revenue from it goes to the consuming state rather than the producing one. 

But the grievances cannot be read in isolation from ‘per-person fiscal capacity’. On a per capita basis, the South remains far better resourced. In FY26 (Budget Estimates), the total tax revenue generated by each individual is projected at roughly ₹42,202 for Kerala, ₹42,893 for Tamil Nadu, and ₹42,697 for Karnataka, compared with ₹19,987 for Bihar and ₹27,554 for Uttar Pradesh. (This article takes Bihar and UP into account for purposes of comparison because they are the poorest states in terms of per capita income.)

 

This gap widens more when it comes to expenditure per capita: Kerala is at ₹86,854, Karnataka ₹59,788, Tamil Nadu ₹62,914, versus Bihar Rs 24,301 and UP ₹33,627. Kerala’s ‘own-tax’ revenue share — the amount of tax it pays into the central kitty — is around 60 per cent of what it receives in revenue; the southern average is roughly 62 per cent, while several poorer states report their own-tax shares in the range of 20-40 per cent. 

In short, while the southern states’ share of central devolution has fallen, they retain a consistent per-person fiscal advantage. 

Regional imbalance 

This fiscal comparison intersects with a long-standing intellectual debate. 

The post-Independence expectation that poorer states would gradually catch up with richer ones — that is, achieve ‘convergence’ — has not happened uniformly. Decades of empirical work shows that different states tend to catch up at different times, rather than uniformly. 

For instance, the average per capita income of the five southern states was 2.1 times that of the poorest five in 2009-10. This rose to 2.8 times in 2024-25. In this context, the Finance Commissions would ordinarily be expected to try and reduce regional imbalances. 

After all, distance from income — the poorer you are, the more tax revenue you will get from the central pool — is one of the parameters of successive Finance Commissions to make recommendations on central tax devolution. 

What is important is that these transfers can alter the room state governments have to spend — the money does not, on its own, reconfigure the institutional, human-capital, and investment foundations that determine economic development. 

Govinda Rao, a member of the 14th Finance Commission, explaining the reasons behind regional imbalances in development, told Business Standard: “In per-capita terms, southern states will always spend more. They are higher-performing economies with larger tax bases. The Finance Commission can only equalise public expenditure — it cannot equalise income or wealth.” 

Data backs up Rao’s observations. Between FY11 and FY26, the South’s combined share of central devolution fell, but southern states’ own-tax share in their revenues sits in the 60–71 per cent band. At the same time, many poorer states record own-tax shares closer to 22-38 per cent. 

GST as a share of revenue receipts is also skewed: Southern states average about 25 per cent, while several poorer large states average 12-14 per cent despite the supposed inherent ability of the indirect tax system to correct regional imbalance. Put together, these differences imply that even when transfers are not generous, the per capita revenue and expenditure of southern states remain far higher than those of other states. Kerala is projected to spend ₹86,800 per person, dwarfing Bihar’s ₹24,300. And that gap is not a one-off — it has persisted over recent years. 

Southern strides 

The practical consequence of fiscal differences is visible in public services and infrastructure: Higher per-person fiscal space in the South buys more schools, better health facilities, and well-maintained roads. Northern states may devote larger shares of their smaller budgets to social spending, but their per capita outlays remain low. That is the fiscal context that complicates the South’s complaint: Shares of central devolution have fallen, but per-person capacity has not. 

Rao cites state responsibility and ecosystem-building to explain the process: “Education and infrastructure are the responsibility of states. The Finance Commission cannot equalise public expenditure — it cannot create the right ecosystem for private investment. Poorer states must build schools, colleges, and infrastructure to improve human capital; cash transfers alone will not close the gap.” 

The situation in states like Bihar and UP underscores Rao’s observation. Even though these states allocate significant Budget shares to education — Bihar about 21 per cent, UP 13-15 per cent — per-student spending remains very low because of massive school-age populations and administrative overheads. In fact, these states don’t even have absorptive capacities. CAG audits highlight underutilisation: in Bihar, over 25 per cent of education funds went unspent in recent years, and in UP, large shares of central schemes like Sarva Shiksha Abhiyan remain delayed or underutilised. 

The Annual Status of Education Report (ASER) 2024 shows that pre-primary enrolment among three-year-olds rose nationally to 77.4 per cent, but coverage is uneven. States such as Karnataka, Kerala, Gujarat, and Maharashtra have near universal enrolment, whereas UP and Meghalaya still report that more than half of three-year-olds are not enrolled. 

Dropout rates and foundational skills follow similar patterns: Class III dropout is about 13 per cent in UP and 8.6 per cent in Bihar, while in southern states, it is markedly lower. 

Complementing this, a study by PRS Legislative Research shows per capita education spending in 2024-25 at ₹3,205 in UP, ₹3,245 in Bihar, and ₹3,626 in Jharkhand, compared with an average of ₹5,300 in larger states. In Kerala, it is close to ₹28,000–30,000 per school student. 

Rao added that the system has been completely politicised. “Take Bihar, for example. During the state elections, cash transfers are offered to gain votes rather than investing in schools, colleges, or infrastructure." 

And if states do not spend well on education, he added, people will migrate to places with better opportunities. “Look at Bengaluru — it attracts talent and investment because it has strong colleges and a skilled workforce. Private investment will only flow where there is a functioning ecosystem, law and order, and infrastructure, which many poorer states currently lack.” 

Pronab Sen, former chief statistician in the central government, links these human-capital differences to investment patterns. 

“Growth does not come from public expenditure alone but also from private activities. Southern states are more encouraging to private enterprise. It’s not just how much a state spends, but how that expenditure is used, ” he said. 

The flows of private capital confirm this. Maharashtra, Karnataka, and Tamil Nadu together capture over half of India’s foreign direct investment (FDI) inflows, while Bihar and UP attract only a small fraction. Firms locate where skills, infrastructure, and institutional predictability exist — conditions more commonly met in southern states because of higher per-person investment in human capital and services. 

One big reason the South maintains higher per capita resources is population size: As projected by the 2011 Census for 2025, Uttar Pradesh has 241 million people and Bihar 131 million, while the southern states are far smaller — roughly 53.6 million in Andhra Pradesh, 68.7 million in Karnataka, 36.1 million in Kerala, 77.4 million in Tamil Nadu, and 38.5 million in Telangana — again giving them a per-person advantage. 

The policy implication is clear: Financial transfers improve states’ nominal fiscal space but do not automatically create ecosystems that convert spending into growth. Central devolution, however skewed, is insufficient for long-term convergence. Bridging the gap requires targeted, state-level investments in foundational learning, infrastructure, and institutional capacity — the instruments that raise per-capita productivity and attract private capital. 

Mapping the states’ fiscal performance