Determinants of Economic Growth Across States in India

Economic performance has been widely different across states in India. This paper attempts to examine some possible determinants of gross state domestic product (GSDP) growth across 17 major states in India during 2004–05 to 2016–17. A major handicap in this endeavour has been non-availability of private investment data at the state level to examine its influence on state economic growth. Nevertheless, the growth literature over the years has focused on several other variables such as infrastructure, social sector expenditure, urbanization, financial inclusion and state fiscal discipline for which state level data are available. We examine these possible determinants in this paper using a fixed effect panel regression model. In this context, a well-recognized point is that some of these variables such as social sector expenditure have a bidirectional relationship with economic growth in the sense that they influence growth as well as they are influenced by growth. A two stage least square approach using instrument variables has been used to treat the endogeneity problem. Second, an infrastructure index has been constructed at the state level using principal component analysis to combine several infrastructure related variables like power availability, gross irrigated area, telecom connection, road density and rail density. The results indicate that infrastructure development, social sector expenditure, urbanization and financial inclusion have positive and significant effects while state fiscal deficit has detrimental effect on GSDP and per capita GSDP across states.