Discuss the modern theory of regional d sparity.
Ans. The convergence theorem (Barro, 1991) postulates that when the growth rate of an economy accelerates, initially some regions with better resources would grow faster than others. But after sometime, when the law of diminishing marginal returns set in, first growth rates would converge, due to differential marginal productivity of capital (higher in poorer regions and lower in richer regions), and this in turn would bridge the gaps in the levels of income across regions. The empirical evidence on this is however, very controversial. It has also been observed that when an economy is liberated, especially, after controls on investment are lifted, then regions with better infrastructure would attract more investment, especially foreign capital, through market mechanism, and this in turn would lead to regional inequity, at least in the early-phase of reforms. The regional disparity in China after economic reform is a classic example of this. In India, the growth rate of gross domestic product (GDP) accelerated since the 198os. During the 198os, the GDP growth rate accelerated from 3.6 to 5.6 percent, and after economic reforms in the 1990s; it has further accelerated to 6.0 per cent and thereafter to 7-8 per cent. The structural changes in the Indian economy, such as deregulation of investment-both domestic and foreign-and liberalisation of trade, exchange rate, interest rate, capital flows and prices during the post-reforms period led to a lot of changes which was reflected in regional inequality being aggravated.
Although, there is very little information on investment at the regional level, the available indicators suggest that more and more investments are now taking place in richer states. The RBI data on capital flows show that four/five developed states have cornered the major chunk of foreign direct investment in India. The poorer states with inadequate infrastructure are not able to attract foreign investment.
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