This paper examines the club-convergence and conditional convergence of economic growth of the major 15 states in India over the periods from 1993–1994 to 2004–2005 by using dynamic fixed effect growth models. The result finds that there is club-convergence within the middle income states. There is also evidence of the convergence of per capita income among Indian states by conditioning private investment and public investment along with other factors of economic growth. This paper is innovative in separating the significance of private investment from the public investment in the long-run dynamics of income in Indian states. This paper suggests that regional disparity in income can be reduced by equitable allocation of private investment and equitable distribution of public investment.

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The Fiscal Responsibility and Budget Management (FRBM) Act 2003 was introduced in India in order to reduce revenue deficit by curtailing revenue expenditure. This paper examines the impact of public expenditure by type and nature on the income by constructing new data on combined capital expenditure and combined revenue expenditure of Centre and State governments of 15 major States during the period 1993-94 to 2004-05. This paper finds that, though public expenditure crowds-out private investment, public expenditure of all types and nature positively contributes to state income due to the inclusion of some productive expenditure in the revenue account. All revenue expenditures are not growth retarding, and specifically, infrastructure investment may be used as an instrument by the Central and State governments directly for equitable allocation of private investment to achieve balanced income across states and higher economic growth as a whole.JEL-Code: H72, E22, C23, R11

Comparisons of pre and postreform economic growth in India are widely researched in the literature. This paper adds to this literature, but with a sectoral growth accounting perspective. We compare the proximate sources of economic growth in India during the 1950–1980 periods, the so‐called Nehruvian socialist regime, with that of the post‐1980 period, which includes the pro‐business reforms in the 1980s and more aggressive pro‐market reforms in the 1990s. We document two important features of India's growth dynamics. First, the overriding importance of the services sector in India's growth is not new, but it has always been the case in independent India. However, there has been a major shift in the composition of service sector growth. While the socialist regime fostered more nonmarket services, including the government sector, the market services sector flourished in the market regime, in terms of labour productivity, TFP and economic growth. Second, the economic growth in the socialist period was substantially driven by capital accumulation, except in the nonmarket services, whereas the market regime sees a combination of both productivity and capital accumulation.

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