Inter‐State Variations in Economic Growth: How Much Governance Matters?

Abstract

AbstractDespite somewhat similar central allocation of funds, States in India have been achieving varying growth rates of Per Capita State Domestic Product (PC SDP). To analyze the extent to which this variation is on account of variation in governance levels, the paper constructs the Composite Quality of Governance Indices using six governance dimensions: namely, Administrative Effectiveness, Transparency Awareness and Control of Corruption, Fiscal Efficacy, Law and Order Situation, E‐Readiness Level, and Social Justice Index. Thereafter, panel regressions have been carried out to examine the extent to which governance matters in explaining inter‐State growth variation. In addition to the main explanatory variable, control variables such as Per Capita Public Expenditure (PCpe), Per Capita Consumer Expenditure, and State and time dummies have been included. Drawing upon data from 14 non‐special category Indian States over the period 2003–7, econometric results confirm that the quality of governance matters. Its coefficient is estimated to have a significant favorable impact on not just the level and growth of PC SDP. Further, output elasticity of governance has been estimated to be higher than that of public spending (PCpe). An important policy implication is that the States of India, while seeking additional funds from the Center, must also focus on improving governance to make more effective use of these funds.