Why has Apple chosen to locate its new manufacturing unit in India, in wealthy and expensive Karnataka rather than (say) poor and cheaper Bihar, and why, by extension, has it chosen to locate in wealthy and expensive Bengaluru rather than (say) poor and cheaper Shimoga?
If low labour costs and a putatively higher return to capital are drivers to attract investment, as theory suggests, we ought to have seen Apple locate in Bihar rather than Karnataka or at least within Shimoga rather than Bengaluru. However, agglomeration economies and network externalities have offset this. In simpler terms, capital also benefits from being close to other capital, markets, and transportation and communication networks. The conventional channel for economic convergence between poor and rich regions is diminishing returns to capital– if they don't kick in, how else can poorer states narrow the gap with richer states?
Redistribution of income is a crucial feature of all federal economies and a moral obligation of representative democracies. It is the very reason why taxation systems, and other mechanisms for redistribution, like public provisioning, exist; they enable poorer states to catch up with richer states. This catch-up is what economists call ‘convergence’. Economic theory suggests that we should observe convergence in income per capita among countries or within regions in a large federal country. So has decades of redistribution, from rich to poor states of India, helped achieve such convergence? At present, the life experiences of the average Tamilian and the average Bihari are such to suggest they live in two different countries. Our findings support this; there is considerable evidence of convergence among advanced economies, and of convergence within subnational regions of major economies such as the US and China. India is one major economy that bucks the trend.
Was India always diverging? Are districts within states diverging as well? If that is the case, is it the quality of governance or the model of development that is to blame for this divergence? Should divergence within major states be a justification to impose more centralised policies? Is it possible that heterogeneity in the capacity of state governments to make sound policies have triggered diverging incomes? Considering social indicators move in-line with per capita income, are human development outcomes diverging too? What will be the implications of this divergence on our public policy choices? Are policies like GST likely to have an effect on this existing pattern?
Publications related to this project aim to answer these questions by testing hypotheses using new, novel datasets and applying the seminal work of Barro and Sala-i-Martin to test for sigma and beta convergence.