March 23, 2017

India’s Income Divergence: Governance or Development Model?

India is an outlier in the global development story, experiencing increasing economic divergence within its borders. This paper is a follow-up to previous research (“India’s curious case of economic divergence”, IDFC Institute, Briefing Paper #3, October 2016) by Praveen Chakravarty and Vivek Dehejia, which highlights the puzzling issue of economic divergence among India’s large states.

 

This paper aims to extend this study by looking at divergence within states, by testing convergence between districts of a given state. In the absence of district-level GDP figures, it introduces the Night time Lights (NTL) “luminosity” dataset, to be used as a proxy for economic activity . To start with, the paper tests this hypothesis by correlating state luminosity data with state GDP figures (which illustrates positive results, as expected) and the Barro and Sala-i-Martin tests show comparable divergence patterns across states using the luminosity dataset, as they do with state GDP figures. Further, using luminosity data, it is apparent that intra-state divergence across districts is as significant as inter-state economic divergence. The analysis reveals that the districts of ten out of the twelve largest states exhibit divergence within the state.

 

To understand this pattern further, this paper tests the relationship between GDP growth and inequality: as states get richer, divergence increases. The Economic Survey proffers quality of governance as a plausible explanation for economic divergence; however, this research suggests that perhaps the nature of economic development better explains regional disparity than quality of governance. In conclusion, this paper revisits the political economy of economic divergence, questioning whether India can ward off regional inequality before it endangers the political union of India.

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