India’s Growth Story Runs Through Its States: Why Convergence Has Re-emerged After the Pandemic

India’s macroeconomic trajectory is inseparable from the performance of its states. National GDP is, in effect, the aggregate of state gross domestic products (GSDPs), which means that faster growth in poorer, lower-income states can significantly lift overall economic outcomes. After years in which richer states consistently outpaced poorer ones, new evidence suggests a quiet but important shift since the pandemic: India’s laggard states may finally be catching up.

Why state-level convergence matters for national growth

Economic theory suggests that poorer regions, with lower capital stock and income levels, should be able to grow faster than richer ones — a process known as “catch-up” or convergence. If several large, low-income states enter such a phase simultaneously, the impact on national growth can be substantial and sustained.

For India, this question is especially consequential. States like Uttar Pradesh, Bihar and Rajasthan together account for a large share of the population but have historically lagged in per capita income. Their growth performance can determine whether India’s expansion remains broad-based or increasingly uneven.

Before and after the pandemic: a reversal in trends

Looking at data over the last 12 years, split between the six years before the pandemic (FY13–FY19) and the six years after (FY19–FY25), reveals a striking contrast.

In the pre-pandemic period, there was no sign of convergence. Lower-income states, on average, grew more slowly than richer ones, implying divergence rather than catch-up. Economic leadership remained concentrated among already advanced states.

The post-pandemic period tells a different story. Lower-income states have, on average, grown faster than their richer counterparts. The shift is particularly visible in Uttar Pradesh, Rajasthan and Bihar, all of which show a clear improvement in relative growth performance. This turnaround is recent and still fragile, but the pivot is unmistakable.

Why poorer states outperformed expectations after Covid

What makes this trend puzzling is its timing. The pandemic and its aftermath might have been expected to hurt poorer states more severely, given weaker health systems, larger informal sectors and limited fiscal buffers. Yet many of these states improved their relative growth even during this period.

To understand why, researchers examined multiple factors — economic structure, human capital, infrastructure, logistics, technology adoption and different categories of government spending. One variable stands out as the most powerful explanatory factor: state-level public capital expenditure.

The central role of state capital expenditure

Several emerging states — including Assam, Uttar Pradesh, Rajasthan and Bihar — have sharply increased infrastructure spending in recent years. This has had a twofold effect.

First, higher public capex strengthens the physical backbone of the economy, improving roads, power supply, urban infrastructure and logistics. Second, it signals administrative capacity and reform intent, which helps crowd in private investment. Together, these channels generate faster and more durable growth.

Importantly, this capex-led push has coincided with a period in which lower-income states have been growing faster than richer ones, suggesting a strong link between infrastructure investment and convergence.

Fiscal risks to sustaining the capex momentum

The sustainability of this trend, however, is not guaranteed. Strong public capex depends on healthy state revenues, and the fiscal environment is becoming more challenging.

Two pressures stand out. First, the Centre’s tax revenues are weakening due to tax cuts and lower-than-expected nominal GDP growth. Since around 41% of the Centre’s divisible tax pool is shared with states, this directly affects state finances. Indeed, after several years of growth, state revenues declined in FY25.

Rather than cut capex, states responded by widening fiscal deficits. While this has preserved infrastructure spending so far, deficits are now elevated. Continued revenue stress could eventually force states to scale back capital expenditure.

Populist spending and the risk to long-term investment

Second, many states have expanded cash transfer schemes, often ahead of elections. Current expenditure has risen alongside deficits. States such as Chhattisgarh, Madhya Pradesh, Rajasthan, Odisha, Telangana and Andhra Pradesh have so far managed to protect capex despite these pressures, but prolonged expansion of revenue spending could crowd out investment over time.

The tension between short-term political spending and long-term growth-enhancing capex is emerging as a key policy challenge.

How the Centre can help keep convergence on track

One way to stabilise the capex cycle is for the Centre to expand support to states, particularly through the capex loans to states programme. This scheme is ring-fenced for capital expenditure and cannot be diverted to other uses, making it well suited to sustaining infrastructure investment.

Since its launch, the programme has grown from ₹120 billion in FY21 to ₹1.5 trillion in FY26. Expanding its size, broadening its scope and providing multi-year visibility could help states plan and execute large projects more effectively, while complementing the Centre’s own infrastructure push.

Reforms, manufacturing, and the next phase of growth

Capex alone will not be enough. States must also capitalise on ongoing deregulation. Recent labour law reforms, including the higher threshold for layoffs under the Industrial Relations Code, give states the option to position themselves as destinations for large, globally competitive firms.

As global supply chains are reconfigured, opportunities are emerging in labour-intensive, mid-technology manufacturing sectors such as textiles, footwear, furniture and toys. India’s emerging states enjoy a wage advantage. Combined with better infrastructure and regulatory reform, this could allow them to attract foreign direct investment and integrate into global manufacturing networks.

Why the current moment matters

India’s emerging states are showing early but meaningful signs of faster growth and catch-up. If they can sustain public capital expenditure, manage fiscal pressures and seize reform-driven opportunities, they could become a powerful engine of national growth.

The convergence now under way is not guaranteed. But if nurtured carefully, it could reshape India’s economic geography — and anchor the country’s long-term rise on a broader, more inclusive foundation.