Center for Research on Economic Development and Policy Reform

Macroeconomic data for the 14 major Indian states reveal the extent of inter-state differences in the pace of economic growth in the past decade. Rising regional inequality, as measured by an increase in the Gini-coefficient from 1986-87 to 1997-98, has important implications for poverty reduction. Because of state specific characteristics, the divergent patterns of economic growth witnessed in the 1990s do not necessarily imply that the economic reforms at the national level were biased. But to mitigate such regional differences in the future requires deepening reforms and addressing the specific deficiencies that have decelerated growth in some states. This paper finds that variations in the private investment ratio are positively and significantly correlated with variations in growth, while public investment and plan expenditure seem to have had little direct impact. It also finds that provision of certain infrastructure, and to some extent also literacy, are associated with variations in growth. Based on the results from cross-sectional analysis, this paper points to strengthening finances and governance of the state governments as key factors in supplying economic and social infrastructure, thereby promoting private investment, productivity growth and, in turn, economic development. The role of the central government in supporting the developmental activities of the states and funding large-scale infrastructure development is also considered.