Social Diversity, Fiscal Policy, and Economic Growth An Empirical Study with State Wise Data in India
It is well-known that, in India there exist huge differences of income level across states. Explaining such interstate differences requires not only an understanding of the link between growth and public policies, but also an understanding of why growth-retarding public policies are chosen. In this study we examine the effect of social diversity on the pattern of state government expenditure, as well as the effect of state government expenditure on growth. From the regression results, we find that the development expenditure by state government has positive impact on growth, while social diversity, measured by the share of scheduled caste population and religious fractionalization index that we construct from Census India, is negatively related to the development expenditure. These results imply that social diversity retards economic performance through the channel of the expenditure policy of the Indian state government.
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