One economic India: For goods, for people, in the eyes of the Constitution

Economic Survey: Chief Economic Advisor <b>Arvind Subramanian </b>writes exclusively for BS

When, several decades ago, Raj Kapoor famously sang “Phir bhi  dil hai Hindustani,” (“Still, my heart is Indian”), he was expressing what in hindsight appears to be a deep insight on comparative national development. To the Bismarckian sequence (and paraphrasing the Italian statesman Massimo d’Azeglio), “We have created Europe. Now we must create Europeans,” the Raj Kapoor counter seems to be that India’s founders favoured creating Indians in spirit and political consciousness first. The current difficulties of European integration reflected in the Brexit vote and in the acrimonious debates on the design of the Euro seem to suggest that perhaps the Indian sequencing was not only appropriate but prescient.  

The open question is whether the founders created one economic India, one market place for the free, unimpeded movement of goods, services, capital, and people. A cautious reading of the Constitution and the Constitutional Assembly debates intimates uncertainty; a less cautious reading indicates that the needs of creating one economic India were actually subordinated to the imperatives of preserving sovereignty for the states.

Two chapters in this year’s Economic Survey (Chapters 11 and 12), assess the extent to which India, which for nearly seventy years has affirmed and re-affirmed the political “idea of India,” is de facto and de jure one economic India. At a time when international integration is under siege and when India is on the cusp of implementing transformational reforms to create “One India, One Market, One Tax,” via the Goods and Services Tax (GST), it seems appropriate to ask how much internal integration India has achieved.

The Economic Survey’s analysis is based on two novel “Big Data” sets available, respectively from the Goods and Services Tax Network (GSTN), which has transactions level data on inter-state movement of goods, and the Ministry of Railways which provided monthly data on unreserved passenger traffic for every pair of stations over the last six years. The Survey describes in detail how these data have been processed and analysed but here we summarise the main findings.  

Contrary to perception and to some current estimates, it seems that India is highly integrated internally in relation to the flow of people and goods.

India, or rather Indians, are on the move. A new methodology that analyses cohorts of Indians across Censuses suggests an annual migrant flow of about 5-6 million in the period 2001-2011. The first-ever estimates of internal work-related migration using railways data for the period 2011-2016 indicate an annual average flow of close to 9 million people, significantly greater than the number of about 4 million suggested by successive Censuses (see Figure 1 below). If these trends continue, India may not be far off from reaching the magnitude of migrant flows within China.

Figure 1:- Estimates of annual migrant flows based on railway traffic data (millions)

Interstate trade is relatively high. The first ever estimates for inter-state trade flows indicate a trade-GDP ratio of about 54 percent, a number that is comparable to other large jurisdictions and that contradicts the caricature of India as a barrier-riddled economy (see Figure 2); the ratio of India’s internal and international trade also compares favourably with others. De facto at least, India seems well integrated internally. A more technical analysis confirms this: trade costs reduce trade by roughly the same extent in India as in other countries. So both India’s international trade to GDP ratio (now greater than China’s) and India’s internal trade appear quite robust.

Figure 2:- India’s Internal Trade Compared to Other Large Countries (as percent of GDP)



Language may not be a barrier to flow of goods and people. A potentially exciting finding for which we have tentative not conclusive evidence is that while political borders impede the flow of people, language does not seem to be a demonstrable barrier to either the flow of goods or people across state. For example, political borders depress the flows of people reflected in the fact that migrant flows within states are 300 per cent greater than migrant flows across states. However, not sharing Hindi as a common language appears not to create comparable frictions to the movement of goods and people across states. If true, the founders of India may have been vindicated in allowing the organic evolution of a lingua franca rather than dictating it. This prescient permissiveness, not to mention Bollywood, appears to have succeeded in making language less salient an axis of cleavage across India, a remarkable achievement given the early anxieties about language documented in Ramachandra Guha’s India After Gandhi.  

Sensible and surprising patterns. The patterns of flows of people and goods are broadly consistent with priors but also throw up some surprises:

• On migration, the poorer states such as Uttar Pradesh, Bihar and Madhya Pradesh witness the greatest out migration while the richer states such as Delhi, Tamil Nadu, Maharashtra and, surprisingly, Goa are the largest recipients of migrants.;
• Smaller states like Uttarakhand, Himachal Pradesh and Goa trade more; the net exporters are the manufacturing powerhouses of Tamil Nadu, Gujarat, and Maharashtra.;
• Otherwise agricultural Haryana and Uttar Pradesh are also trading powerhouses because Gurugram and NOIDA, respectively, have become part of the great Delhi urban agglomeration;
• The costs of moving are about twice as great for people as they are for goods; and
• There is a surprisingly large ratio (68 percent) of intra-firm trade across states to inter-firm trade (or arms-length sales). Intra-firm trade also faces more trading frictions than inter-firm trade.

Unlikely cause. There is a potential dampener on our finding that trade in goods is high within India. This may be a consequence of the current system of indirect taxes which in some important cases perversely favours inter-state trade over intra-state trade. If true, the GST by ironing out these oddities might ironically reduce trade in some cases, and yet have a positive impact on tax compliance and revenue collection.

Deep puzzle. Of course, all these exciting findings throw up a deep puzzle as to why greater internal integration has not led to a narrowing of income gaps across states as we document elsewhere in the Economic Survey. The co-existence of diverging incomes and rapidly integrating markets for goods, services, people, and capital is a mystery waiting to be deciphered.

A final question is this: given that the forces of economics and technology have surged ahead in creating de facto one economic India, does the Constitution need to catch up to legally codify this economic reality?

---

Arvind Subramanian wrote this article with the Economic Survey team, which also includes G. Gayathri, Parth Khare, Kapil Patidar, Sutirtha Roy, NavNeeraj Sharma, Chinmay Tumbe, and Tejaswi Velayudhan