An inquiry into causes of regional disparities in economic growth across Indian states
This thesis documents some stylised facts of what sustains unequal economic growth across Indian states over the period 1965-1997. It documents the dynamics of the convergence of incomes across the Indian states by tracking the evolution of the entire income distribution over 1965-97, instead of using standard regression and time series analyses. This approach, known in the literature as the distribution dynamics approach, reveals patterns of catch-up, which remain obscured in standard parametric approaches. The findings document a decline in disparities in the late sixties, with a subsequent increase in inequality in the seventies, eighties, and nineties. This is accompanied by the polarisation of the income distribution into two convergence clubs, one at around 125% of the national average, and at 50% of the national average. The latter half of the thesis tries to explain these stylised facts using both non-parametric and parametric techniques. The distribution dynamics reveal that the disparate distribution of infrastructure - both economic and social - strongly explains the formation of the lower income club. Fiscal deficits seem to partially explain club formation at the higher income levels. Standard panel regression analyses reveal that education, especially primary education, is associated with better growth performances. Macroeconomic stability is also associated with higher growth., while political instability and the lack of political governance is found to be negatively associated with growth too. Such findings have interesting implications for economic policy. The distribution dynamics reveal that an all-encompassing "global" policy for all states may not be appropriate - cohesive forces governing the formation of the two convergence clubs are different, hence, states belonging to different clubs require specific policies to address unequal growth performances. In terms of policy content, basic infrastructure, such as health, education, transport, and political governance require the most attention in the lower income states, while for higher income states, macroeconomic stability and political governance, seem to be the more important.