Monday, January 30

Determinants of Economic Growth across States in India

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By Manoj Panda & Samraj Sahay

Working Paper No- 399

Economic performance has been widely different across states in India. This paper attempts to examine some possible determinants of growth across 17 major states in India during 2004-05 to 2016-17. While investment data at the state level are not available to examine its influence on growth at the state level, the growth literature over the years has focused on several other variables such as infrastructure, social sector expenditure, urbanisation, and financial inclusion for which state level data are available. We examine these possible determinants in our analysis in this paper using a fixed effect panel regression model. In this context, a well-recognised point is that social sector expenditure by the government has a bidirectional relationship with economic growth in the sense that it influences growth as well as it is influenced by growth. A two stage least square approach using instrument variables has been used to treat the endogeneity problem. Second, an infrastructure index has been constructed at the state level using principal component analysis to combine several infrastructure related variables. The results indicate that infrastructure development, social sector expenditure, and financial inclusion have positive and significant effects on GSDP and per capita GSDP across states and seem to be important drivers of growth across states in India. Urbanisation by itself seems to be having a negative effect on growth, though it has a positive effect on per capita GSDP.

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