ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Will GST Exacerbate Regional Divergence?

This article analyses the extent of regional disparities in income per capita in India, considering both disparities amongst and within major states. For within-state inequality, this article is the first to use a “nightlights” luminosity data set as a proxy for gross domestic product per capita, whereas the choice of a crisper data set, comprising the 12 largest states, yields sharper results than in previous literature. It concludes with a cautionary note on the goods and services tax, which, contrary to the optimists, is likely to further exacerbate, rather than ameliorate, regional income disparities, marking the need for a turn to “place-based” economic policies.

The authors would like to thank Rithika Kumar, Ishita Trivedi, and Chandrani Sarma for their able research assistance. Versions of this research have appeared as IDFC Institute Briefi ng Papers and in newspaper columns in the Hindu and Mint, as noted in the references.

The advent of the goods and services tax (GST) has been heralded by its proponents as a game-changing economic reform which will help stitch the nation into a genuine single market and provide a boost to gross domestic product (GDP) and possibly its growth rate. Yet, we caution that India has adopted GST in a context of large and widening regional economic disparities, both across, and within, major states. While optimists believe that the GST may narrow those gaps, there are reasons for concern that these gaps may actually be widened further. It is entirely plausible that with reduced policy levers (in terms of tax policy) at the level of the states, together with the existence of agglomeration economies and network effects, could actually exacerbate regional inequality.

It is in this context that this article revisits the research on regional income convergence and divergence, deploying a novel methodology and new data. Our main findings, that disparity in income per person both across and within major states, is skyrocketing, gives us reason to be cautious in asserting that the GST will ameliorate, rather than exacerbate, these trends of dangerous divergence.

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Updated On : 11th Jul, 2017
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