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Growth, Development Spending, and Inequality in Indian States
The relationship of economic growth from 1988 to 2012 in Indian states with poverty and inequality is analysed. The results suggest that in faster-growing states, poverty levels have declined, but poverty intensity has not changed and the highest increase is in inequality. An examination of the performance of development spending (which should mostly benefit the poor) incurred by the states indicates that though faster-growing states showed high spending on the development sector, development spending benefited the rich more effectively than the poor—contrary to the intent behind it—thereby raising inequality in the state.
The authors would like to thank the anonymous referee for valuable comments. They also thank Ashwini Deshpande and Shubhashis Gangopadhyay, and the participants for useful discussions at two workshops—the United Nations University World Institute for Development Economics Research workshop on between-group inequalities held in June 2016 at Helsinki, and the Duke–Shiv Nadar University conference held in April 2016 at Delhi. A part of this research work was done at Shiv Nadar University where Bharti Nandwani was a doctoral candidate.
The past quarter of a century has seen the Indian economy grow at impressive rates, especially since the economic liberalisation reforms of 1991. However, critics of the Indian growth story argue that this growth has been skewed across sectors. The agricultural sector, which continues to employ a large number of people, grew at a very sluggish pace. The most spectacular growth has been in the high-skilled services sector, whereas the manufacturing sector, typically the one that generates more employment, has not seen similarly impressive growth rates. One of the outcomes of this unequal growth across sectors has been that while the income of a few has grown, the majority have not benefited much, raising income inequality (Banerjee and Piketty 2005). Additionally, it is argued that the pattern of growth deepened caste-based inequality in India, as people belonging to high castes reaped the maximum benefits of the new opportunities (Shah et al 2017). It is important to better understand the source of this rise in inequality at a disaggregate level.
Since many growth-enhancing and redistributive policies are taken up at the state level, this paper does so by looking at the growth and inequality experience of Indian states from 1988 to 2012. In particular, this paper looks at the impact of economic growth on poverty and inequality1 using the fixed effects estimation technique. It uses consumption expenditure data from various rounds of the National Sample Survey (NSS) to construct inequality measures for Indian states from 1988 to 2012. Summary statistics indicate that most of the states have become unequal over time, consistent with the national trend. In addition, all states except one (Tamil Nadu) have experienced an increase in between-group caste inequality.
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