Lower-income Indian states are beginning to show early signs of economic “growth convergence” in the aftermath of the pandemic, driven by a rise in public capital expenditure that is enabling some lagging regions to grow faster than wealthier states, according to a new report by HSBC Global Investment Research released on Wednesday.
The report identifies Assam, Uttar Pradesh, Rajasthan and Bihar as standout performers, citing higher public capital spending and stronger growth momentum in these states. Analysts noted that rising state-level capital expenditure, supported by increased resource transfers from the Centre after the pandemic, has played a key role in narrowing inter-state growth disparities.
HSBC explained that states with lower per capita income can experience sustained catch-up growth if fiscal and policy conditions are supportive. This phenomenon, referred to in economic terms as “growth convergence,” can act as a driver of stronger overall national growth over the medium term. The report observed that emerging states tend to raise capital expenditure once fiscal revenues stabilise, enabling investments in infrastructure and development projects.
The analysis also highlighted the Centre’s expanded fiscal transfers to states following the pandemic, which contributed to improved spending capacity at the state level. However, it cautioned that slower growth in central tax revenues could dampen the pace of automatic transfers going forward. At the same time, several states heading into elections have announced new cash transfer schemes. While these initiatives are not yet crowding out capital expenditure, HSBC flagged them as a key area to monitor.
To sustain the momentum, the report suggested that the Centre consider expanding its capital expenditure loan programmes for states. Recommendations included increasing the size of such programmes, broadening their scope, improving flexibility, and enhancing predictability over multiple years. Greater clarity on funding availability could allow states to undertake larger infrastructure projects that require multi-year financial commitments.
The report further noted that states themselves could support growth by pursuing deregulation initiatives and operationalising labour law reforms. Such steps, combined with higher capital spending, could reinforce the convergence trend observed in recent data.
Separately, Morgan Stanley earlier this month assessed that India’s macroeconomic indicators remain stable, giving policymakers sufficient space to support growth through both monetary and fiscal measures. With rural and urban consumption expected to expand, GDP growth is projected at 6.5 per cent in the 2027–28 financial year.
Taken together, the findings suggest that targeted public investment and supportive fiscal policies are beginning to yield results across lower-income states, potentially marking a shift toward more balanced economic growth across regions.
