The Empirical Economics Letters, 14(9): (September 2015) ISSN 1681 8997

Inter-state Disparity of Net State Domestic Product (NSDP)

in India: A Sectoral Decomposition Analysis
Mohammad Kashif Khan*
School of Economics, University of Hyderabad
Hyderabad, Telangana, India
Abstract: The objective of the paper is to examine the decomposition of sectoral
contribution in overall inequality. This study employs decomposition analysis for the
per capita NSDP during 1993-94 to 2012-13. This study found that the contribution of
the service sector in overall inequality has increased during the study period per capita
NSDP. The contribution of the industry sector has also increased. This study further,
reveals that the share of the agriculture decline in inter-state disparity. Its share was
negative in per capita NSDP. Finally, we can conclude that regional inequality of per
capita NSDP has increased over the period. This inter-state disparity was the due the
higher share of the service sector than due to industry sector and agriculture sector.
Keywords: per capita NSDP, Inter-state, Disparity, Decomposition, Sectoral
Contribution

JEL Classification Number: D3 and I3

1. Introduction
The term Inequality has long been the subject of academic interest since the work of
Kuznets. The inverted-U curve hypothesis, which has brought about political and
academic discourse on the nature of inequality at cross country-level, did not touch upon
the sub-national level however. The (income) inequality or disparity amongst states or
sub-national level has remained a prime cause of concern for a federal political nation like
India. And this was thus understood and given utmost attention in various Five-year plans
(from second to tenth five-year plan). Notwithstanding the above priority, the regional
disparity has been found to be widening till now and, in particular, it had widened during
the period from 1991 to 2004 (Khomiakova, 2008). In addition, the Indian economy has
been passing thorough a structural change, particularly, since the economic reforms. There
has been a structural transformation from agriculture to the service sector in the economy.
In the 1970s, the economy was agro-based which transformed into a service-based during
the 1990s (Sakia, 2011). The growth pattern has not been same in all the sub-sector of
service sector some segments, say software and telecommunications. These two sector
are found to be growing very fast, while some others (say health and education) do not
seem to be growing and some, say legal services, have meagre shares in the growth of the

*
PhD Scholar. Email: kashifiips@gmail.com
The Empirical Economics Letters, 14(9): (September 2015) 944

service sector in India (Banga 2005). This structural transformation and unbalance growth
of the some sector in the economy necessarily has an impact on the inequality and its
source. In the light of the above discussion, this paper tries to understand the role of the
different sectors in the inter-state inequality (disparity) in India. This study is first to use
the Gini Coefficient to know the sectoral contribution to overall inequality during the
1993-94 to 2012-13 in 31 states of India.
This paper is organized into five sections including the introduction. Section 2 discusses
the available literature on the inter-state disparity in India and various sources to the inter-
state inequality are also discussed in this section. The framework of the study that is,
decomposition of Gini Coefficient in section 3. Essential data set for the study is described
in section 4. Section 5 presents the result of the decomposition analysis. The last section
concludes the paper.

2. Inter-state Disparity in India

The inter-state disparity has been a heavily focus point among the academia and scholars.
It is research through the lenses of the convergence and divergence hypothesis. There is no
dearth of study which has applied regression approach to study convergence or divergence
in India at aggregate level in the economy (further study see Kalra and Thakur, 2015;
Stewart and Moslares, 2014).

This convergence or divergence literature has missed the role of the sector in the inter-
state disparity. So that to know the contribution of the each sector into the overall
inequality so that it required to decompose the trend of the inequality (Kar&Sakthivel,
2006). To the best of our knowledge, there is few study who have analyzed the role sector
in regional inequality in India. They are following, Das and Barua (1996) and Dasguptaet.
al. (2000) are among the few studies who have studied the sectoral role in inter-state
disparity by using regression approach. Rao et al. (1999), Kar and Saktiwal (2006) which
has employed the measure of the inequality to examine the source of regional inequality in
India.

Rao et al. (1999) use the and for convergence or divergence in the par capita SDP
during 1965-94. They found that the first major source of dispersion in per capita SDP was
the primary sector. The second, major source of dispersion in per-capita SDP is the
secondary sector that was stable during 1990 after that drastic increase. Per capita SDP for
the service sector did not have any definite pattern. Dasguptaet. al. (2000) uses the
regression approach to studying the sectoral role in inter-state disparity during 1970-71 to
1995-96. They reveal that Indian states diverged in terms of per capita real SDP over the
25- year period. CVs for per capita SDP originating in both agriculture and manufacture
The Empirical Economics Letters, 14(9): (September 2015) 945

share the positive trend with total per capita SDP, tertiary sector shows a negative trend.
They further noted that CV has increased in transport, storage and communication and
electricity, gas and water whereas CV of banking and insurance, and forestry and logging,
fishing. Mining and quarrying, construction, trade, hotels and restaurants, real estate
ownership and public administration and other services has fallen.

Das and Barua (1996) has used Theil index of inequality of NSDP during 1970-71 to
1992-93. They have shown that regional inequality in India has increased during this study
period. The contribution of the agriculture and services sectors contribution to overall
inequality in Indian states is positive and significant, Forestry and logging, fishing and
Quarrying is insignificant. Infrastructure (Construction, Electricity, Gas & Water Supply
and Transport, Storage & Communication) inequality has significantly increased. The role
of manufacturing is insignificant during 1970-92 but positive. Additionally, they noted
that unregistered manufacturing sector role is vital in total inequality whereas the role of
registered manufacturing sector is insignificant. These studies described above have
studied sectoral inequality as independently from SDP. They have not studied share of
each sector to the overall disparity in India. Kar and Shaktivel (2006) studied the sectoral
role in regional divergence during the reform and post-liberalization 1990-91 to 1999-00
whereas Khomiakova (2008) has studies the post-liberalization period 1993-94 to 2004-05
of GSDP. These two studies have used similar method i.e. CV. They found that the
regional divergence is largely responsible for the service and industry and agriculture are
offsetting the aggregate divergence. But these two study have different set of state and
study period, former 18 major and later 30 Indian States. These two studies have
decomposed sectoral contribution to overall inequality using CV method but missed the
temporal contribution of each sector to the overall inequality. This study tries to analyse
the temporal contribution of each share into the overall regional inequality in India by
using Gini Coefficient in India.

3. Framework to Decompose Inter-state Disparity in India

Most important and widely used method of the inequality measure is Gini coefficient
worldwide in the consumption/income distribution and also in other welfare proxies. The
decomposition exercise provides to understand the determinant of inter-state disparity.
This exercise generally used to decompose inequality either by the income source or by
the sub-group population (Lpez-Feldman 2006). If any measure of inequality is good if
and only if when inequality can be decomposed into the source of these inequalities. This
decomposability can be separated into a weighted sum of inequalities by various income
sources (in this particular paper, agriculture, industry and service sector) (Adams 2002).
The Empirical Economics Letters, 14(9): (September 2015) 946

Lpez-Feldman (2006) has extended the result of Shorrocks (1982), Lerman and Yitzhaki
(1985) and presented the Gini coefficient for total income inequality, G, can be written as:

= =1 (1)

where Sk represents the share of source k in total income, Gk is the source Gini
corresponding to the distribution of income from source k, and Rk is the Gini correlation of
income from source k with the distribution of total income (Rk= Cov{yk, F(y)}/ Cov{yk,
F(yk)}, where F(y) and F(yk) are the cumulative distributions of total income and of
income from source k). Inequality contribution from the kth source as a proportion to
overall regional inequality is:

=

(Singh et al., 2015) (2)

If an income source represents a large share of total income, it may potentially have a
large impact on inequality. However, if income is equally distributed (Gk= 0), it cannot
influence inequality, even if its magnitude is large. On the other hand, if this income
source is large and unequally distributed (Sk and Gk are large), it may either increase or
decrease inequality, depending on which households (state), at which points in the income
distribution, earn it. If the income source is unequally distributed and flows
disproportionately toward those at the top of the income distribution (Rk is positive and
large), its contribution to inequality will be positive. However, if it is unequally distributed
but targets poor households (state), the income source may have an equalizing effect on
the income distribution (Lpez-Feldman 2006).

4. Data and Results

4.1. Data Source
The data used for the present study are from the 5th Economic Census 2005for Net State
Domestic Product (NSDP) for the period of 1993-94 to 2004-05 and other series 2004-05
to 2012-13 from Reserve Bank of India (RBI) time series data. We have used splicing
method to change base year. These sectors are described as follows, Agriculture and allied
sector (henceforth agriculture), Industry and Service Sector. This paper is has used
splicing method to change base year. The states and Union Territory are following
Andaman and Nicobar Islands, Andhra Pradesh, Arunachal Pradesh, Assam, Bihar,
Chandigarh, Chhattisgarh, Delhi, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu and
Kashmir, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur,
Meghalaya, Nagaland, Orissa, Puducherry, Punjab, Rajasthan, Sikkim, Tamil Nadu,
Tripura, Uttar Pradesh, Uttarakhand and West Bengal. Because of the non availability of
the data for the other states, they have been excluded from the analysis .
The Empirical Economics Letters, 14(9): (September 2015) 947

4.2. Empirical Findings

4.2.1. Inter-state Disparity of Per capita NSDP, 1993-94 to 2012-13

Given the objective, this study presents results of the inter-state disparity trends in the post
economic reform India. The economic reform that led these policy changes into the state
led to market led growth in India (Singh, 2010). We can divide whole study period into
phase 1, 1993-94 to 2003-04 period and phase 2, 2004-05 to 2012-13. The value of Gini
coefficient has marginally declined during two end year of this period, but there is no clear
cut trend found this entire phase1. But main stories lies during the middle period, this first
four-year inter-state disparity increase, then after that three consecutive year decline in the
Gini coefficient value. Trend in Gini coefficient is given in Figure 2.

Source: Authors own calculaltions using NSDP data from MOSPI and RBI.

The Gini value during 2000-01 to 2003-04 has been volatile or up and down, no clear
pattern found. First we are analysing the regional inequality trends in India. It has been
observe that slight increase in the inequality to 0.289 in 2012-13 from 0.263 in 2004-05
except few exceptional year i.e. 2007-08 and 2008-09. This might be due to the financial
crisis that resulted in the lowering economic growth during this period. This period 2004-
05-2012-12 marks an upward trend in Gini value in India. This means the gap in the per
capita NSDP has a lean increase during this 2004-05 to 2012-13.This is the period when
the country continuously grew at unprecedented higher GDP growth rate. As it is known
the service sector has experienced higher growth rate and it has larger share in GDP
growth, but it failed to accommodate much of the labour force as similar to its share and as
agriculture is still over-burdened with a larger share of labour force(Planning Commission,
2014). Banga (2005) has called the Indias growth story as a service-led growth story. In
The Empirical Economics Letters, 14(9): (September 2015) 948

the high growth story of India, the agriculture and the industry have smaller stakes
compared to the service sector. The important thing to note that absolute Gini value is
higher during 1993-94 to 2003-04 than 2004-05 to 2012-13. Second, later has no definite
trend whereas farmer has increasing trend. What led to increasing this inter-state disparity,
in other words, which sectors leads to grow this inter-state disparity. Now the question
arises: whether the elevated service growth has played a role in increasing or decreasing
overall inequality amongst states in India? And how the other two (agriculture and
industry) have contributed to the inequality process amongst India states?

4.2.2. Decomposition of Inter-state Disparity of Per capita NSDP by Source

Table 1 in the appendix exhibits results for the Gini coefficient decomposition or source of
the inter-state disparity of per capita NSDP. The result shows that while service NSDP has
the largest share in total per capita NSDP (Sk), its contribution to overall inequality in
percentage terms is also high, approximately similar its share. The similar trends also true
for other years and also other two sectors, but the service sector contribution over the
period increased. Chart 2 shows the very clear pattern that agriculture sectors share in
inter-state disparity has been continuously decline since 1993-94 to 2008-09 after that it
played a role of the counterbalance of the two sector industry and services sector. The
share of the services is continuously rising during the entire study period; same is true for
the industry sector. The significant role played the increasing the inter-state disparity is
service sector. The share of the service sector was approximately 60 percent in 1993-94
which reached roughly 81 percent in 2012-13, during this entire period almost 21
percentage point increase in the share of services sector in overall inter-state disparity. The
corresponding figure for the industry sector is 19.38 percent in 2012-13 from 13.5 percent
in 1993-94. But started decline since then, this might be due decrease industrial sector
growth rate in India. Agriculture sector share in inter-state disparity was 30.9 percent in
1993-94 which reached -0.63 percent in 2012-13. The highest fall has happened in this
sector. The declining share of agriculture resulted in an increase in the other two sectors
contribution in the overall inter-state disparity. The bigger gainer in the inter-state
disparity is service sector due to loss of the share of the agriculture sector. In the other
words, the loss in the proportion of the agriculture sector has higher transfer toward
service sector than the industry sector. This tipple case of the Indias growth story or
changing the economic structure i.e. agriculture led economy to the service led economy
(Chart1). Our finding is similar to the results of the Kar and Saktiwal (2006) and
Khomiakova (2008) that regional divergence is largely due to the service and industry and
agriculture are offsetting the divergence. As this paper discuss that the divergence might
be due the lag impact of the policy on the economy. But our finding suggest that, inter-
state disparity has increase over the period time. So that policy has negatively effect on the
regional inequality.
The Empirical Economics Letters, 14(9): (September 2015) 949

Source: Authors own calculaltions using NSDP data from MOSPI and RBI.

5. Conclusion
This study uses one of the widely used methods to decompose inter-state disparity in India
during last two decade. The study employs any decomposition method to know the exact
contribution of the sectors to the inter-state disparity of per capita NSDP. Firstly, the inter-
state disparity has increase over the entire study period in the per capita NSDP. Applying
the decomposition analysis to per capita NSDP, it finds a big role of the service sector in
widening inter-state disparity during the study period. The contribution of the industry to
overall inequality of the per capita NSDP has increase at lower than service sector. The
contribution of agriculture sector decline in over the study period. Hence, inter-state
disparity can be reduce by focussing on agriculture which have counter-balancing effect.
Further research can be done on the more disaggregate sub-sector contribution in the
overall inter-state disparity in India.

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