Economic Growth and Regional Disparity in India: The Kuznets Hypothesis Revisited

The paper analyses the link between economic growth and regional disparity in India for the period 1970–2010 with special reference to the service sector. From a slow-growing nation in the 1950s until 1980s, India moved to a high growth path in terms of real Gross Domestic Product following the initiation of the economic reforms in 1991 and has become the second fastest growing nation in the world. A striking feature of India's accelerated growth performance over the past decades has been the strength of the service sector. However, it has also been observed that regional disparity in India has been steadily increasing over time. Keeping the negative influences of regional disparity in mind, it becomes necessary to analyse whether service sector growth has actually accentuated regional disparities in India or not, especially after India's policy of economic liberalisation, which is presumed to have aggravated regional inequalities in India. The paper constructs indices of regional disparity through a Theil entropy measure and performs a trend analysis using data for India's 16 major states. First, it is found that regional disparity in India has been increasing in all components of income except for the manufacturing sector and community social and personal services where a persistent decline in regional disparity in India is observed. Second, regressing income inequality on the inequalities in various components of income, it is found that all sector namely agricultural, manufacturing and services inequalities significantly and positively affect income inequality. Again, all the sub-sectors of services inequalities positively affect income inequality, with transport, storage and communication exhibiting maximum regional disparity. Finally, the Kuznets hypothesis relating to regional disparity and economic growth is tested. The results indicate India is in the rising part of the Kuznets curve, where increase in the growth of output increases regional disparity. Income inequality among the states has been rising and this growing divide between the richer states and the poorer states deserves immediate attention of policymakers and economists.