Regional Economic Growth and Inequality in India during the Pre- and Post-reform Periods

Abstract

This paper evaluates the economic performance of 15 major states in India, and examines whether initially disparate states displayed any tendency towards convergence in real per capita income during the period 1960/61–2006/07. Though the growth performance of the states has improved in the post-reform period, since 1991 the states have diverged in per capita income. The states following different steady-state paths are classified into three clubs—one convergent and two non-convergent. The regional divergence and club convergence are explained in terms of interstate variations in physical and social infrastructures, state-level policy reforms, foreign direct investment flows and economic structure. The poorly performing states could improve their relative economic position by undertaking investments in physical and social infrastructures, and speeding up the reform process by liberalizing investment and infrastructure policies. As industry and services are the major sources of regional divergence, any effort to reduce regional imbalance must focus primarily on these two sectors.