Income convergence of Indian states in the post-reform period: evidence from panel stationarity tests with smooth structural breaks

Abstract

This paper investigates income convergence of Indian states in the post-reform period when markets played a greater role in resource allocation. We analyze stochastic convergence of relative per capita incomes of 19 states for the period 1994–2018 by employing a recently developed panel data approach controlling for structural breaks as smooth shifts. Smooth shifts are modelled using a more flexible Fourier approach that does not require identifying the number, date, and form of breaks. The empirical results, contrary to recent empirical findings, do not support evidence in favour of convergence in per capita income among Indian states. Poor infrastructure, lack of adequate financial development, and weak governance structure coupled with low total factor productivity growth seem to be responsible for the divergence of income. The findings suggest that development intervention in the post-reform period has neither been of the required order nor in the desired direction to help the lagging states to catch up with the leading ones.

Keywords:

• Income convergence
• India
• structural shifts
• panel data

JEL CODES:

• O40
• C12

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 An absolute majority by a single party in the Lower House of the Indian Parliament which is the principal Legislative Body was observed after a gap of almost 25 years.

2 India accounts for 17% of the global population.

3 The back series of output data for the new state was made available by the Directorate of Statistics of the respective states.

4 The null hypothesis of stationarity would be more natural than the null of unit root for many macroeconomic series (Carrion-I-Silvestre, Del Barrio-Castro, and Lopez-Bazo 2005) and useful to confirm results from the tests with the null hypothesis of unit root (Hadri 2000; Becker, Enders, and Lee 2006).

5 See Table 1 of Nazlioglu and Karul (2017) for the mean and the variance of $Z\left(k\right)$ test.

6 The under-development index was based on ten sub-components viz, (i) monthly per capita consumption expenditure, (ii) education, (iii) health, (iv) household amenities, (v) poverty rate, (vi) female literacy, (vii) percent of SC-ST population, (viii) urbanization rate, (viii) financial inclusion, and (x) connectivity. The three way classification was meant for allocating additional funds from the central government to the states.

7 The Inclusix was launched in 2013. The Inclusix, is a composite index based on the achievement of three service providers (banks, insurers, and microfinance institutions) across four dimensions viz, branch penetration, deposit penetration, credit penetration, and insurance penetration. The index ranges from 0 to 100. The classification of states in level of financial inclusion is based on the CRISIL (2018) Inclusix score. A score of >65, >50.1 and <65, >35 and <50, and <35 is used to define ‘high’, ‘above average’, ‘below average’ and ‘low’ levels of financial inclusion, respectively.

8 Mundle, Chowdhury, and Sikdar (2016) have ranked 19 Indian states for 2001 and 2011 by considering diverse factors such as economic and social infrastructure, fiscal performance, Justice, Law and Order and Quality of Legislature. Except Jammu and Kashmir, our study and Mundle, Chowdhury, and Sikdar (2016) cover the same states.

Additional information

Notes on contributors

Biswa Swarup Misra

Biswa Swarup Misra is currently working as a Professor of Economics at the Xavier Institute of Management, XIM University, Bhubaneswar, India. He has also served as the Dean of XIMB during 2013- 2016. Prior to joining Academics, he was an economist at the Reserve Bank of India. He also had intermittent stints as the Chief Economist of Bank of India and Bank of Baroda, on sabbatical from XIM. He has publications in Journals such as Comparative Economic Studies, Review of Urban and Regional Development Studies, Journal of International Development, Journal of Quantitative Economics, India Growth and Development Review, Indian Economic Journal, RBI's Occasional Papers on issues related to development, banking, credit cooperatives, infrastructure. Apart from Journal publications, he has three research monographs on different development themes published by Palgrave Macmillan, UK and Routledge, UK.

Muhsin Kar

Muhsin Kar has PhD in economics and is Professor at the Department of Economics at the Faculty of Economic and Administrative Sciences, Ankara Yildirim Beyazit University/Ankara, Turkey. His research areas are international finance and trade, and economic development.

Saban Nazlioglu

Saban Nazlioglu has PhD in economics and is Professor at the Department of International Trade and Finance at the Faculty of Economic and Administrative Sciences, Pamukkale University/Denizli, Turkey. His research areas are applied econometrics (in particular panel data), international trade, and commodity prices.

Cagin Karul

Cagin Karul is Research Assistant at Department of Econometrics at the Faculty of Economic and Administrative Sciences, Pamukkale University/Denizli, Turkey. His research area includes econometric methods, particularly testing panel unit root and cointegration.