The Political Economy of Regionalism: India’s Changing Landscape

For nearly two decades after Independence, one party governed almost everywhere in the country-at the Centre and in most states. That arrangement no longer exists. Today, chief ministers bargain hard with the Centre over money, states compete openly to attract factories and investors, and a single party rarely sweeps every region. To understand how the country reached this point, we need to look at the political economy of regionalism: the way economic forces and political power have reshaped each other over time. This is a story of how a centralised system slowly gave way to a more contested, regionally driven order, and why that shift still matters for development.

From one-party dominance to a fragmented landscape 🔗

In the early decades after 1947, the Indian National Congress was the natural party of government. Political scientists often call this period the “Congress system,” roughly from 1952 to 1967, when the party dominated politics at both the national and state levels. The Congress functioned as an umbrella, accommodating diverse interests, castes, and regions under a single banner.

That dominance began to crack. The party’s vote share declined from around 45% in the early years to roughly 30% by 2014. A series of crises eroded its hold region by region. As one analysis notes, the Emergency of 1975-77, the anti-foreigner agitation in Assam, demands for Telugu pride, and rising militancy in Punjab each chipped away at the party’s ability to hold its national coalition together. By the 1989 general election, the era of coalition politics had truly arrived.

Why regional parties filled the gap 🔗

The decline of one party does not by itself explain the rise of so many others. Several deeper forces were at work. Many regional parties were born out of opposition to powerful Congress governments in the states, channelling local grievances into a distinct political identity. The linguistic reorganisation of states in the 1950s gave regions a framework to assert their language and culture, which directly fed the growth of parties built around regional identity.

The classic example is Tamil Nadu. The DMK decisively displaced the Congress in the state by 1967, and the AIADMK later emerged from the same Dravidian movement-a textbook case of a cultural movement becoming durable political power. The implementation of the Mandal Commission recommendations in 1990, extending reservations to Other Backward Classes, gave a further boost to parties rooted in caste and community.

It would be a mistake to treat regional parties as mere by-products of Congress’s collapse. As political scientist Sudha Pai argues, they are a phenomenon in their own right, rooted in regional soil and shaped by linguistic reorganisation, uneven development, and the decline of the Congress system together.

How over-centralisation created its own opposition 🔗

There is a paradox at the heart of this story. The system that eventually produced strong regional players was itself highly centralised. The country adopted a centralised planned economy at the outset, intended to ensure growth and reduce regional economic disparities across a vast and diverse territory. Industrial development and import-substitution policy were directed largely from the top.

Under the Licence Raj, this concentration of power had real consequences for the regions. The licensing system left states with little freedom to direct their own industrial growth and limited genuine competition between them for development. Decisions about where a factory could be set up were taken in distant ministries, not by the states that would host them.

The Green Revolution and the making of regional elites 🔗

Economic change in the countryside also reshaped political power. The Green Revolution, which raised agricultural productivity from the late 1960s in regions like Punjab, Haryana, and western Uttar Pradesh, did more than grow more wheat. It generated economic affluence that allowed intermediate castes to assert their power, including in the political sphere.

These newly prosperous farming groups became a confident class of regional elites. They had money, numbers, and grievances about how surplus and resources were distributed. When the Congress umbrella could no longer accommodate them, they backed parties that spoke directly to their interests. The Green Revolution, in other words, helped create the social base that regional and caste-based parties would later mobilise. The same scholarship that links the decline of the Congress system to the rise of regional parties also points to the Green Revolution and state reorganisation as key causes.

1991: economic reforms and the new competition between states 🔗

The balance-of-payments crisis of 1991 triggered a decisive turn. The New Industrial Policy of that year ended most industrial licensing, reduced the role of the public sector, and opened the door to foreign investment and greater competition. Crucially, these reforms removed central controls and granted states far more autonomy over their own industrial growth.

This was a structural shift in how power worked. Once the Centre stopped deciding where investment would go, states had to attract it themselves. The result was a new competitive federalism: states competing against one another to woo investors, factories, and capital with tax breaks, land, and infrastructure promises.

Why competition deepened regional disparities 🔗

Competition sounds healthy, but it produced uneven results. Investment did not flow evenly. States that already had better infrastructure and a skilled workforce won the contest. As studies of the period show, Karnataka, Tamil Nadu, and Maharashtra benefited significantly from the reforms because of their existing advantages.

The contrast with poorer regions was sharp. Urban states like Maharashtra and Karnataka attracted significant foreign direct investment, while rural and eastern states such as Bihar lagged behind, widening regional disparities. The benefits of integration with global markets concentrated in particular cities and sectors, producing a dual economy: globally connected industries on one side, and large populations in low-productivity traditional work on the other.

The Industrial Policy of 1991 was also criticised for what it left untouched. Among its notable limitations was that it did not address regional disparities in industrial development. Liberalisation gave states the freedom to compete, but freedom rewarded those already ahead. This is the central tension of the post-reform political economy: the same policies that accelerated national growth also sharpened the gap between leading and lagging regions, giving regional politics fresh grievances to mobilise around.

The problem of fiscal centralisation 🔗

Money lies at the core of regional bargaining. Even as political power fragmented, the financial architecture remained tilted towards the Centre. States raise only a portion of what they spend. Economist M. Govinda Rao notes that states raise about 35% of total revenues but finance roughly 51% of their expenditure, leaving them dependent on transfers from the Centre to close the gap.

These transfers are not all equal in effect. The major instrument that actually narrows differences between states is the Finance Commission. Rao’s analysis finds that central transfers are generally equalising, with the Finance Commission being the major contributor to that equalisation. Other channels, such as discretionary and scheme-based assistance, have historically done less to level the field.

Why decentralisation has been slow 🔗

Despite constitutional recognition, local governments remain financially weak. As Rao observes, local governments in India do not raise significant revenues of their own and depend heavily on higher levels of government. The 73rd and 74th Constitutional Amendments of 1992 created panchayats and municipalities, but devolution of real financial power has lagged.

Decentralisation is also not a guaranteed cure. The academic literature cautions that handing power downward can sometimes empower local elites to capture a larger share of public resources at the cost of the poor. Without genuine devolution of funds and capacity, decentralisation risks becoming a transfer of authority on paper rather than a tool that reaches underdeveloped regions in practice.

Institutions for balanced regional development 🔗

If competition alone widens gaps, the answer lies partly in institutions that can pool effort and steer investment towards regions that markets ignore. The country has several such inter-jurisdictional bodies, though their effectiveness is debated.

NITI Aayog, which replaced the Planning Commission in 2015, was designed to foster cooperative federalism. It runs the Aspirational Districts Programme for the development of backward districts and supports area-specific interventions for the North-Eastern and Himalayan states. Yet it has a key limitation. Unlike the old Planning Commission, NITI Aayog cannot allocate funds, which keeps states dependent on Finance Commission recommendations for their resources.

Other mechanisms exist on paper. The Inter-State Council, established under Article 263, is meant to be a forum for coordination between states and the Union, but it has been underutilised in practice. Zonal Councils and the GST Council also bring states together, the latter representing a genuine milestone in cooperative fiscal federalism.

The unresolved demand for special help 🔗

The friction between leading and lagging regions surfaces most visibly in debates over Special Category Status. States such as Andhra Pradesh and Bihar have demanded this status for additional financial aid. In 2018, Andhra Pradesh threatened protests after the Centre refused Special Category Status, with the government citing NITI Aayog’s role in rationalising financial distribution. These disputes show that the political economy of regionalism is far from settled. The core challenge remains: building institutions that can direct investment and resources towards underdeveloped regions while genuinely devolving financial power to states and local bodies.

The transition, then, is ongoing. The country moved from a centralised one-party order to a fragmented, competitive landscape, and the reforms that unleashed growth also deepened the very disparities that regional politics feeds on. Whether the next phase narrows those gaps depends on how seriously the system takes cooperative federalism and meaningful decentralisation.

What do you think? Should states compete freely for investment even if it widens the gap between rich and poor regions, or should the Centre intervene more actively to balance development? And can institutions like NITI Aayog truly promote balanced growth without the power to allocate funds?

References

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