Lower-Income States Lead Growth On Higher Capex

India’s lower-income states are beginning to show signs of “growth convergence” in the post-pandemic period, supported by a rise in public capital expenditure that has enabled several lagging regions to expand faster than wealthier states, according to a new research report.

Assam, Uttar Pradesh, Rajasthan and Bihar have emerged as notable performers with increased public capex and strong economic momentum, the report by HSBC Global Investment Research indicated.

“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.

The analysis noted that states with stable fiscal revenue positions tend to raise capital expenditure, particularly emerging states.

It also highlighted that central transfers to states have increased since the pandemic, aiding this growth trend.

However, the report cautioned that slowing tax revenue growth at the central level could impact automatic resource transfers.

It observed that several states, especially those headed for elections, have announced new cash transfer schemes.

While these are not yet affecting capex, they remain an important factor to monitor.

The research suggested that the Centre could expand its capex-linked loan programme to states.

“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 report also noted that states could support growth by advancing deregulation efforts and implementing eased labour laws.

Citing recent assessments, it added that macroeconomic indicators remain stable, giving policymakers room to maintain both monetary and fiscal support.

With rural and urban consumption expected to strengthen, India’s GDP is projected to grow at 6.5% in FY 2027–28, the report said.

—IANS