The Growth Volatility Relationship: A Spatial Panel Analysis of the States of India

Abstract

The impressive growth rate of the Indian economy and the subsequent signs of slowdown in the last few years have warranted the need to revisit the issue of determinants of growth. While most of the studies on economic growth in India focus on the demand and supply factors, which determine the growth rate, volatility as a major determinant of long-run growth (Kydland & Prescott, 1982, Econometrica: Journal of the Econometric Society, 1345–1370) has been ignored by most researchers. The present study attempts to fill the gap using data from 17 major states of India in a spatial panel data framework for the period 1995–2015. The results of empirical analysis clearly reveal that a significant and inverse relationship exists between volatility and growth in India. Also, the significant spatial effects in the growth regressions, highlight the importance of the role played by spillovers from adjoining areas, in the growth process. The results clearly highlight the important role that countercyclical policies can play in improving the growth rate of India.