RIEB Seminar (Jointly supported by:Grant-in-Aid for Scientific Research (B))
Economic Reforms, Infrastructure and Regional Inequality in India
In the context of the Twelfth Five-Year Plan's (2012–17) central theme of "faster, sustainable and more inclusive growth", this paper investigates to what extent economic growth has been regionally 'inclusive' in India. Applying a novel approach proposed by Phillips and Sul (2007) to panel data relating to 15 major states of India for the period 1968/69 – 2008/09, it examines regional divergence in real per capita income across the states, and estimates convergence clubs endogenously. The results display significant divergence in per capita income across the states at the aggregate and sectoral levels. There is also evidence of convergence clubs and variations in the number and composition of cluster across sectors. While three clubs are identified at the aggregate level, two clusters are identified in both the agriculture and services sectors, and three in the industrial sector. The observed divergence in income and the existence of convergence clubs are explained in terms of regional variations in physical, social and financial infrastructures, state-level policy reforms, and FDI flows. The results have useful implications for policies for achieving regional balance in economic development. Policy measures improving physical, social and financial infrastructure can have significant effect on long-run growth of the states. Targeting investment in various infrastructures for the states with lower steady-state levels could improve the overall growth performance and reduce regional imbalance. The slower-reforming and poorly performing states can improve their relative economic position by speeding up the reform process, liberalizing their investment and infrastructure policies.