November 23, 2016

India’s Curious Case of Economic Divergence

Economic theory suggests that we should observe convergence in income per capita among countries or within regions in a large federal country. While there is considerable evidence of convergence among the advanced economies, and of convergence within subnational regions of major economies such as the US, India is the one major economy bucking the trend, with a tendency toward divergence in income per capita among major states.

We report three major findings. 1: Levels of income disparity across the largest states of India is the widest of other similarly large federal economic zones. 2: Contrary to global experiences of income convergence across and within nations, India shows continuing trends of divergence among its large states. 3: 1990 seems to be the seminal year of a structural break in income disparity between the richer and poorer large states.

While it is tempting to immediately correlate this structural break post 1990 with the economic liberalisation of India in 1991 and imply causality, that would be mere conjecture in the absence of rigorous evidence. Nevertheless, the economic divergence of the different states raises the important political economy question of federalism and its discontents. At a minimum, we need to start having a serious conversation on whether a greater devolution of fiscal and legislative powers and not just financial resources from the centre to the states ought to be the way forward, given the political economy of large and widening intra­state economic disparities which are showing no signs of disappearing on their own anytime soon.

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