A tale of two Indias: are the best leaving behind the rest?

This thesis used the time-series framework developed by Carlino and Mills (1993) to examine the evolution of income disparities across India from 1960 until 2014. The methodology built on the two pillars of stochastic and beta convergence to determine if incomes have conditionally converged over time. A range of univariate unit root tests, including advanced third-generation tests developed to account for structural breaks in the data, were applied to two continuous relative income series of net and gross state domestic product per capita from 20 Indian states for the entire period under examination. Based on the results, there is evidence of stochastic income convergence in 19 states, but this was only matched by significant beta convergence of incomes in about a third of the sample, suggesting that only limited conditional convergence took place.

A number of statistically significant break dates were also identified, not all of which corresponded to the two significant changes in policy environments in the 1980s and 90s. The dispersion of the identified break dates suggests that many of these shocks were state-specific in nature.

The effects of the shocks after the identified breaks were also examined, and these were often found to be detrimental to income growth, a view supported by evidence of only limited beta convergence from a time-series point of view. These results question the effectiveness of government policy in reducing income inequality across India.

Second and third-generation panel unit root tests were used to examine convergence in India for the first time, which have expanded the scope of study and corroborated the earlier conclusions of stationarity across most states.

The findings of this thesis contrast with most applied studies, which have looked at conditional convergence and concluded in favour of it. The different point of view presented iv by the time-series approach points towards the ineffectiveness of governmental policy in achieving more equitable economic outcomes and promoting income convergence across the country. While per capita incomes have increased across the board and some states have managed meaningful catch-up, too many are still getting left behind with little evidence of them closing the gap.