India`s lower-income states grow faster than richer states due to higher capex
India's lower-income states are showing early signs of "growth convergence" after the pandemic, indicated by a rise in state public capital expenditure that has helped some lagging regions grow faster than richer states, a report said on Wednesday.
Assam, Uttar Pradesh, Rajasthan, and Bihar are standout states with higher public capex and strong growth, the report from HSBC Global Investment Research said.
"Those states that have lower GDP per capita can display strong catch-up growth for several years if the conditions are right. This is what we call 'growth convergence' in economics and can be a driver of strong national growth," the report said.
HSBC’s analysts found that when states are comfortable on the fiscal revenue front, they tend to raise capex, especially in the case of emerging states, adding that the centre's transfer of resources to states increased after the pandemic.
The report also flagged that slowing tax revenue growth at the centre could slow automatic transfers to states. Several states, especially those going into elections, are announcing new cash transfer programmes, which are not a concern so far in terms of crowding out capex, but remain a key watch point.
The research firm suggested that the centre could raise the scope of its capex loans to state programmes.
"Centre can increase the size, broaden the use, make it more flexible, and increase its predictability. It may help to get clarity for the next few years, so that states can invest in some bigger capex projects that need multi-year funding," it said.
The states could do their part in a deregulation drive and operationalise the easing of labour laws. Morgan Stanley earlier this month said that macro indicators remain stable, giving policymakers ample room to support growth through both monetary and fiscal measures.
With both rural and urban consumption expected to expand, GDP is projected to grow at 6.5 per cent in FY 2027–28, it said.
