Internal Migration, Center-State Grants, and Economic Growth in the States of India: A Reply to Rao and Sen

Abstract

IN THEIR COMMENTS on our recent paper (Cashin and Sahay, 1996), Rao and Sen have concerns about several issues: our test of convergence; the sample of states included in our analysis; our measure of state disposable income; and our measure of center-state equalization payments. We respond below to each of these issues in turn. First, Rao and Sen are incorrect in asserting that the neoclassical growth model predicts absolute convergence as it, in fact, predicts conditional convergence. What drives the speed of convergence is the level of initial income for each economy relative to its own steady state level of income and steady state income growth rate. Absolute and conditional convergence are likely to be similar for regions of a given country (such as the states of India) that are reasonably homogeneous with respect to their steady state income levels and growth rates (that is, for regions that share similar preferences and technology). As to our examination of cross-state convergence, Rao and Sen seem to be unaware that the use of multiple sectoral variables to control for differential sectoral shocks (which may temporarily affect the growth performance of a state in a manner that is correlated with initial income) is common in the empirical growth literature (Barro and Sala-i-Martin, 1991, 1992, and 1995; and Sala-i-Martin, 1996a and 1996b). Notwithstanding this, Rao and Sen's comment that the share of manufacturing output may be regarded in the Indian context as a policy variable is an interesting one. If true, they are correct in asserting that this "may indicate conditional con-