Growth Divergence between Indian States

The paper investigates the causes of rising inequality among Indian states in terms of per capita State Domestic Product (GDP) in recent decades by examining the convergence/divergence between 20 major Indian states from 2000 to 2019. The paper adds to the existing literature by including the newly created states of Jharkhand, Chhattisgarh, and Uttarakhand in the sample. The paper, like previous research, finds 'conditional' convergence between states per capita GDP; however, the literature cannot determine whether this is due solely to different steady states caused by state-specific characteristics or to differences in productivity growth rates. According to our findings, differences in productivity growth rates, as well as different steady states, are the drivers of states' increasing per capita GDP inequality. Factors such as population growth rate, bank credit/GDP ratio, and shares of agriculture and industry in the GDP explain the differences in steady states between states, which drive the disparity in per capita GDP between states. Therefore, to reduce inequality, the states with low per capita GDP may benefit from rebalancing these variables. Furthermore, we must also investigate the causes of variations in productivity growth rates to address growing regional inequality.