Beta, sigma and club convergence: Indian experience from 1980 to 2015

Abstract

The debate over standard β, σ, and club convergence is empirically re-examined in India with respect to per capita net state domestic product (PCNSDP) across 22 states over time (viz. 1980–1981 to 2015–2016). We go beyond the σ convergence, and the distribution-sensitive inequality measure such as generalized entropy is used to exploring the pattern of distribution of PCNSDP among states over time. We find σ divergence, rising trend of inequality of PCNSDP with a higher sensitivity to the right tail of the distribution. The results show that there exists absolute β divergence but conditional β convergence; the conditioning variables which appear to be significant are per capita bank deposit (PCBD) and composite physical infrastructure index. The kernel density estimation and Markov’s transitional probability matrix (TPM) show that there exists club convergence among the states; we find higher stability, but lower mobility indices during different time intervals confirm the existence of club convergence in the short run; however, the long-run TPM gives the opposite results. The long-run TPM shows that very few states are stable to their respective clubs, but most of the states have been experiencing transitional movement from higher to lower income group over time; thus, our results do not support the earlier findings of ‘missing middle’.