Convergence of incomes across Indian states - A divergent view

This article examines the trends in interstate inequalities in the levels of income in India over the last three and a half decades. Contrary to the predictions of neoclassical growth theory that interstate differences in income levels tend to reduce as they approach the steady state equilibrium, our analysis shows widening interstate disparities. To understand the causes of this divergence, the article examines the determinants of interstate differences in growth rates and analyses the role of interstate transfers - explicit and invisible - in determining the geographical spread of investment and incomes. It finds that divergence in income levels has been mainly caused by the allocation of private investments which in turn, has been influenced by the inequitable spread of infrastructure. The inequitable nature of public expenditure spread across states is attributed to the inability of the intergovernmental transfer mechanism to adequately offset the fiscal disabilities of the poorer states as well as regressive nature of the invisible interstate transfers.