Regional Imbalance under Federal Structure: A Comparison of Canada and India
Authors: Dholakia Ravindra H 
Published: June 2019

The problem of regional disparity in economic development in geographically large democratic countries gets inseparably linked with macro public policies and the economic philosophies behind them. Two such countries, India and Canada, are considered in this paper. Although the two countries share several common features, they differ considerably in the size of the population, nature of the federation, constitutional provisions defining property rights on minerals and revenue sharing arrangements between the centre and the states, and the economic philosophy behind the macro policies of the governments.

This paper addresses the issue of regional imbalance under federal structure in a comparative perspective. The following variables are used to analyse the regional problem: worker rate capital productivity capital intensity industrial structure.

The paper argues that free and barrier-less mobility of population and goods across the states in Canada has resulted in the regional problem getting diluted and less intense. In India, on the other hand, the economic philosophy behind macro policies has throughout been of direct intervention with emphasis on ensuring equity across regions. As a result, the problem of fiscal transfers from the centre to the states has become more complicated and less manageable in India than in Canada. The degree of autonomy and economic independence of provinces is far more in Canada than the states in India. Studies of regional disparity in the levels and rates of economic development in the two countries revealed that: capital intensity or capital-labour ratio was the major determinant of the regional disparity in the level of economic development technology or capital productivity was the main factor behind the disparity in regional growth rates.

The government policies have to consider these findings while investing or encouraging investments in the lagging regions. The other revelations of the study are as follows: In India, the federal-fiscal transfers are used as a mechanism to address the regional problem through direct governmental intervention. In Canada, most tax-bases are directly shared by the centre and provinces with the rates differing. In India, the tax-bases are allocated to the centre and states by the constitution. The horizontal and vertical equity concepts are more relevant for Canada where both the layers of governments run in surplus and are not compelled to borrow in order to meet expenditures. In India, on the other hand, a majority of the states depend on the central government for borrowing due to their perennial deficits. In Canada, the provinces and the centre directly borrow from the market as per their credibility which is not the case in India where most states lack credibility in the market.

Confusion regarding the notion of horizontal balance and regional equity leads the Indian political system to focus on the direct governmental intervention rather than market orientation. The Canadian experience suggests an urgent need to change the attitude, mindset, and philosophy behind the macro policies to achieve better and faster results on regional disparity reduction.