Spatial Durbin Model of Regional Incomes in India: The Role of Public, Private and Human Capital Policy Implications for the Regional Development and Fund Allocation

In the Indian context, the central and state finance commissions allocate resources to the less developed states and to the sectors that would need higher public investments when private investment is inadequate or nearly absent. The few regional income studies in India examine only the convergence of per capita incomes and ignore the role of public investments in basic infrastructure and basic household amenities on per worker regional incomes beyond the level of states in India. Spatial Durbin model based on the augmented Mankiw-Romer-Weil (MRW) is estimated using the 2015 Indicus data on per worker incomes for 103 regions (clusters of districts) of India. The results of the spatial model support the spill-over effect of public, human and private capital from neighbouring regions on per worker Gross Regional Domestic Product (GRDP) as found in several studies for European regions. We additionally find that public capital, which is not accounted for separately in the developed country regional models, is a relatively more important determinant of a developing country like India’s regional than private capital or human capital measured as the share of tertiary education. As far as growth of per worker GRDP is concerned, none of the capitals have significant impact on the regional growth rate. The regions having state capital do witness the higher growth rate compared to other regions. The level effect of capitals on regional income does underline the importance of public intervention in regional context.