While this overall trend of differential performance and disparity in economic growth patterns reflects a wide range of factors, many of which are state-specific, it is also clear that overall macroeconomic policies of the Central Government have contributed to this. Not only have they tended to widen existing differentials, they have also not made any obvious efforts to mitigate such tendencies through countervailing measures. Thus, there has been no attempt to ensure that the poorest states are able to grow at faster rates, either direct Central transfers or through planned public investment which could have generated more such growth directly and indirectly.
 
This means that the poorer states are caught in a vicious circle : low aggregate incomes means that the tax base is low and the concerned state government finds it difficult to raise resources. This in turn means that public expenditure is limited. This also curtails public investment which could have generated more private investment as well through demand linkages. Further, it keeps infrastructure development woefully inadequate, which creates further supply constraints on growth.
 
In a sense only a substantive regionally redistributive policy of the Central Government can break this vicious cycle. Market functioning tends to aggravate the problem because it directs private investment to those regions with the higher purchasing power, that is the already richer regions, and does not of its own provide either resources or increased productive assets to the underdeveloped regions. Therefore, the effective disappearance of the planning mechanism and the much greater reliance on market mechanisms would have added to the tendencies for greater regional inequality.
 
Further, greater public investment, especially on infrastructure is essential to reduce the gap between states and bring the poorer states put of backwardness. But the 1990s have witnessed a substantial decline in such public capital expenditure, to less than 2 per cent of GDP in the late 1990s, and even this pitiful amount has not been distributed across states in a manner which would reduce the existing inequalities. All this means that the persistence - and even accentuation - of regional inequality, must be counted as one of the important failures of the aggregate economic reform strategy of the 1990s.

This problem can be addressed not only through purposive public investment and expenditure which is designed to create and maintain much-needed infrastructure in the backward states, but also through fiscal transfers. Indeed, the successive Finance Commissions which decide on the formula or revenue sharing between the Central Government and the State Governments are meant to focus particularly on this issue.
 
Unfortunately, even here the strategy of successive Central Governments in the 1990s has been to reduce the amount of resources garnered which must necessarily be transferred to the states. This has been accomplished through various devices such as imposing surcharges on income tax (which need not be shared) rather than raising the basic rates. Further, the loss of revenue through a range of indirect taxes such as customs duties and the associated need to reduce domestic excise duties has also operated to reduce the share of taxes in GDP, which in turn affects the states.
 
This has further reduced the manoeuvrability of those state governments which cannot raise much resources through taxation. And the tendency of Central Governments to treat any transfers as political largesse being offered to the party in power at the state level, rather than as a developmental requirement, has reinforced the tendencies towards inequality.
 
Thus, a disaggregated look a the states’ economic performance indicates that actual relative growth has been quite different from the picture that is often presented in the media. All in all, it appears that the uneven development of states is something that has been accentuated over the 1990s, and this reflects the effect of the macroeconomic policies of the Central Government as well.