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

Lekha cHAKRABORTY () and Pinaki Chakraborty

Working Papers from National Institute of Public Finance and Policy

Abstract: 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.

Keywords: economic convergence; asymmetric federalism; dynamic panel estimation; GMM; fiscal policy (search for similar items in EconPapers)
JEL-codes: C33 E62 H77 R11 R58 (search for similar items in EconPapers)
Pages: 35
Date: 2018-05
New Economics Papers: this item is included in nep-mac
Note: Working Paper 232, 2018
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