New Delhi: India’s lower-income states are beginning to narrow the growth gap with wealthier regions, aided by stronger public capital expenditure and improved fiscal support, according to HSBC Global Investment Research.
The report said Assam, Uttar Pradesh, Rajasthan, and Bihar have emerged as key examples of states where higher state-funded capex is contributing to faster economic expansion.
States with lower per capita GDP have the potential to register higher “catch-up” growth when conditions align, the report noted. “This is what we refer to as ‘growth convergence’ in economics, and it can significantly boost overall national growth,” it added.
HSBC’s analysts observed that states tend to increase capital expenditure when their revenue position is stable. This trend has been particularly visible among emerging states, supported by a rise in central resource transfers following the pandemic.
However, the report cautioned that slower growth in central tax revenues may affect these transfers going forward. It also pointed out that several states heading into elections are launching new cash transfer schemes. While these programmes have not yet restricted capital spending, they remain an important risk to monitor.
To sustain momentum, the research suggested expanding the central government’s capex loan programme to states. “The Centre can increase the size, broaden the use, make it more flexible, and increase its predictability. Clarity over multiple years would help states undertake larger projects that require long-term funding,” it said.
On the policy front, the report indicated that states should prioritise deregulation efforts and implement eased labour laws to strengthen growth conditions.
Citing Morgan Stanley’s recent assessment, HSBC added that macroeconomic indicators remain stable, providing policymakers room to support the economy through fiscal and monetary measures. With both rural and urban demand seen rising, India’s GDP is projected to grow at 6.5 per cent in FY 2027–28, the report said.
