1 Economic Growth and Convergence in India

In the recent years there has been considerable emphasis on understanding regional dimensions of economic growth in India within the convergence implications of neoclassical growth paradigm. The most important issue emerges from this literature is that how to control for differences in the steady state. This paper attempts to re-examine the issue of convergence and economic growth by focusing on the differences in the steady state of 14 major states of India from 1976-77 to 2000-01 by employing dynamic fixed effects panel growth regression. Once per capita investment, population growth rate and human capital along with state-specific effects are controlled for, then there has been evidence of conditional convergence at the rate around 12 % per five-year span. These variables alone could explain around 93 per cent variation in the growth rate of per capita real income across 14 major states from 1976-2000. This highlights the importance of policy activism to achieve balanced growth and regional convergence. 1