Growth Convergence Among Indian State

Several low-income Indian states are now growing faster than richer states, indicating early signs of economic convergence. This trend suggests a gradual catch-up driven by improved infrastructure, governance, and public investment.

Key Trends in India’s Subnational Growth Rebalancing

Growth Convergence: Laggard states like Bihar (9.2%) and Assam (12%) outpaced national real GDP growth (8.2%) in FY24, reversing the pre-pandemic FY13-FY19 divergence trend.
Growth Spread: High growth momentum moved beyond southern states, with Odisha at 11.2% and Assam at 12% nominal growth in FY25.
Payroll Transition: Formal employment expanded faster in low-income states. Uttar Pradesh accounted for more than 5% of net EPFO payroll additions in 2025.
Female Workforce: Catch-up states expanded the female labour force, with rural female LFPR in Bihar rising from 24.8% in FY23 to 33.5% in FY24.
Urban Expansion: Service-sector growth shifted to Tier-2 and Tier-3 cities, which accounted for 60% of new online shoppers in 2025.

Factors For Growth Convergence in India

Capex Support: Centre allocated a ₹1.5 trillion interest-free loan under Special Assistance to States for Capital Investment (SASCI), financing 20-25% of capital outlay in low-income states.
Fiscal Incentives: Higher tax devolution is linked with Ease of Doing Business reforms under the 15^th and forthcoming 16^thFinance Commissions.
Digital Leap: India Stack helped low-income states leapfrog development stages and cut fiscal leakages by 10–15%, freeing capital for infrastructure.
Energy Shift: Emerging states like Rajasthan and Odisha are attracting industrial investments through large-scale renewable energy capacity expansion.
Wage Advantage: Rising labour costs in southern and western states have pushed labour-intensive manufacturing toward Bihar and eastern Uttar Pradesh.

Key Challenges to Sustaining Growth Convergence

Revenue Pressure: Slower growth in the Centre’s divisible tax pool creates immediate revenue stress for developing states.
Spending Trade-off: Pre-election expansion of cash transfer schemes (E.g., Ladli Behna) raises revenue expenditure and risks cuts in capital expenditure.
Debt Burden: High Debt-to-GSDP ratios limit fiscal space for new projects due to elevated debt servicing costs. Bihar’s Debt-to-GSDP ratio remains near 39%, far above the recommended 20%.
Climate Risk: Extreme weather events in highly vulnerable catch-up states such as Bihar and Assam can erode nearly 2% of annual GDP.
Skill Mismatch: Limited mid-tech vocational skills keep emerging states confined to low-value “construction growth” instead of manufacturing.

Way Forward to Sustain Growth Convergence

Predictable Capex: Adopt a 3-5-year multi-year SASCI outlay instead of annual allocations to ensure financial certainty for large projects.
Labour Reforms: Implement the Industrial Relations Code in states and raise the layoff threshold beyond 300 workers to attract global manufacturers.
Municipal Finance: Empower Tier-2 cities in emerging states to raise funds through municipal bonds, reducing pressure on state budgets.
GVC Focus: Align state manufacturing strategies with specific Global Value Chains, such as mobile assembly in Uttar Pradesh or food processing in Bihar.
Regional Corridors: Develop inter-state economic corridors to pool logistics and power infrastructure to attract larger foreign direct investment than individual states.

Lagging Indian states are now catching up, driven by targeted policy support and infrastructure investment. As Amartya Sen noted, “development is a process of expanding real freedoms,” underscoring the need for skills, resilience, and robust institutions to sustain growth.

Reference: The Indian Express | PMFIAS: Uneven Industrial Distribution in India

PMF IAS Pathfinder for Mains – Question 480

Q. “Several low-income Indian states are now growing faster than richer states, indicating early signs of economic convergence.” Examine the drivers of this subnational growth convergence and the challenges in sustaining balanced long-term development across Indian states. (250 Words) (15 Marks)

Approach

Introduction: Write a brief introduction about the economic convergence of Indian States.
Body: Write the drivers of subnational growth convergence and challenges in sustaining balanced long-term development across Indian states and the way forward.
Conclusion: Emphasis on subnational economic convergence for sustainable & regional growth in India.