Convergence of incomes across Indian states - A divergent view

This article examines the trends in interstate inequalities in the levels o f income in India over the last three and a half decades. Contrary to the p redictions of neoclassical growth theory that interstate differences in inc ome levels tend to reduce as they approach the steady state equilibrium, ou r analysis shows widening interstate disparities. To understand the causes of this divergence, the article examines the determinants of interstate dif ferences in growth rates and analyses the role of interstate transfers - ex plicit and invisible - in determining the geographical spread of investment and incomes. It finds that divergence in income levels has been mainly cau sed by the allocation of private investments which in turn, has been influe nced by the inequitable spread of infrastructure. The inequitable nature of public expenditure spread across states is attributed to the inability of the intergovernmental transfer mechanism to adequately offset the fiscal di sabilities of the poorer states as well as regressive nature of the invisib le interstate transfers.