Club Convergence in Growth and Financial Development: Evidence from Indian States

The paper revisits the issues of convergence in the context of economic growth across Indian states. Unlike existing body of literature on convergence in Indian context, we investigate the possibility of club convergence among Indian states. Using state level data of a sample of 33 states during 1985–2018, we first test whether Indian states converge in terms of per capita income. Subsequently, we examine, among few other channels of convergence of growth, the role of financial development across Indian states. Unlike most of the existing studies in India, we apply (Phillips & Sul, 2007) methodology to detect converging subgroups of states in terms of growth as well as various alternative indicators of financial development. Findings reveal that for the aggregate sample of states, there is no evidence of convergence, which implies that sample states are not converging to a single steady. However, we find evidence of the existence of club convergence. In particular, Indian states are found to diverge in terms of state level per capita growth as well as alternative indicators of financial development. Our empirical findings, however, reveal the formation of clubs in terms of both state level growth as well as various indicators of financial development such as branch density, different composition of sectoral credit and also indicators of credit inflow and credit outflow across states. Findings point to the prevalence of uneven growth and financial development across Indian states, despite several measures taken during the last few decades. Findings also call for concerted policy actions for achieving regional balance in growth and financial development through appropriate reform measures in investment, infrastructure and financial development.