Decentralization and Its Impact on Growth in India. (April 2021)

• Record Type: Journal Article
• Authors: de Xavier, Fernanda Andrade; Lolayekar, Aparna P.; Mukhopadhyay, Pranab
• Other Names: Sundar Aparna guest-editor.; Rajangam Krupa guest-editor.
• Is Part Of: Journal of South Asian development. Volume 16:Number 1(2021)
• Page Start: 130
• Page End: 151
• Publication Date: 2021-04
• Subjects: Decentralization in India -- economic growth -- sub-national government -- distribution dynamics -- Granger Causality; South Asia -- Economic conditions -- Periodicals; South Asia -- Economic policy -- Periodicals; 330.954
• DOI: 10.1177/09731741211013210
• Languages: English
• ISSNs: 0973-1741

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.