Decentralization and Its Impact on Growth in India

Fernanda Andrade de Xavier, Aparna P. Lolayekar and Pranab Mukhopadhyay

Journal of South Asian Development, 2021, vol. 16, issue 1, 130-151

Abstract: We study the effect of revenue decentralization (RD) and expenditure decentralization (ED) on sub-national growth in India from 1981–1982 to 2015–2016 for 14 large (non-special-category) states. Our study provides evidence that both RD and ED play a defining role in India’s sub-national growth in this three-and-a-half-decade period. We use a panel data model with fixed effects (FE) and Driscoll and Kraay standard errors that control for heteroscedasticity, autocorrelation and cross-sectional dependence. To test for causality between growth and decentralization, we use the Granger non-causality test. The regression analysis is supplemented with the distribution dynamics approach. We find that: (a) While decentralization Granger-caused economic growth, the reverse causality effect of growth on decentralization was not significant; (b) Economic growth increased significantly after liberalization; (c) Decentralization, capital expenditure and social expenditure had significant positive impacts on economic growth; and (d) States that had high levels of decentralization also had high levels of per capita income, while states that had low decentralization also exhibited low per capita income.

Keywords: Decentralization in India; economic growth; sub-national government; distribution dynamics; Granger Causality (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:sae:soudev:v:16:y:2021:i:1:p:130-151

DOI: 10.1177/09731741211013210

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