Saturday, July 30

EXPLORING THE CONVERGENCE PUZZLE IN INDIA: Combining neoclassical and endogenous models to understand growth experience of Indian states

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By Anshuman Kamila & Meeta Keswani Mehra

Working Paper No- 421

The study of economic growth across countries is highly rewarding. Understanding the varied patterns of growth across countries is crucial because disparities in growth rates have, in due course of time, led to gaps in living standards and ‘welfare’. The Economic Survey 2016-17 (2017)conducts an empirical exercise for the ß-convergence for i) countries of the world; ii) provinces of China and iii) states of India. It depicts poorer countries are closing the per capita income gap with richer countries, the poorer Chinese provinces with the richer ones, but in India, the less developed states are not converging to their richer counterparts; instead they are, on average, going further from the richer states. Against the above backdrop, this study is an attempt to scrutinise existing literature on the subject of convergence and infer the gaps in literature pertaining to GSDP per capita growth experience of Indian states. Then, an attempt is made to test for applicability of neoclassical and endogenous growth models. Following this, is an inquiry into whether difference in growth of per capita GSDP across states is on account of difference in inputs in the production process or the difference in efficiency in utilising such inputs in the process of production. We discover that while neo-classical growth model broadly applies to Indian states, only 20% of variation in per capita GSDP across Indian states is explained by dispersion of values of rates of investment, population growth, depreciation and TFP growth – as opposed to nearly 60% dispersion of GDP across world economies being accounted for by such differences. In addition, 8 and 11 states show evidence for AK model and R&D model respectively. Finally, states that were initially ‘rich’ or ‘poor’ have shown similar growth rates for the past two decades, on account of similarity in investment in physical and human capital across these. Therefore, more progressive redistribution of physical and human capital is necessary for convergence in per capita GSDP levels.

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