An autonomous research institute under the Ministry of Finance


Federalism, Fiscal Asymmetries and Economic Convergence: Evidence from Indian States

Publication date

May, 2018


NIPFP Working Paper No. 232


Lekha Chakraborty and Pinaki Chakraborty


This paper tests economic convergence across States in India by incorporating federal fiscal asymmetries and differentials in gross fixed capital formation at the state level. Using dynamic panel models, it is observed that there is no unconditional convergence of economic growth. Controlling for state-wise asymmetries in fiscal policy variables, financial parameters, capital formation and human development outcomes using Arenallo and Bond (1991) panel data methodology, no strong evidence for conditional convergence is observed. It is observed from the GMM estimations that public capital spending has positive and significant relationship with economic growth. It is also observed that the quality of human capital formation is a pre-requisite for economic growth, both for club and (aggregate) conditional convergence. 
Key words: economic convergence, asymmetric federalism, dynamic panel estimation, GMM, fiscal policy
JEL Classification codes: C33, E62, H77, R11, R58
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