State-Level Growth and India’s Macroeconomic Future: Signs of a Long-Awaited Convergence

Populist Spending versus Long-Term Investment

A second challenge arises from rising current expenditure. Many states have expanded cash transfer and welfare schemes, often linked to electoral cycles. Although several states have so far managed to shield capital expenditure, prolonged growth in revenue spending risks crowding out investment over time.

Balancing short-term political imperatives with long-term growth-enhancing investment is emerging as a central policy dilemma for state governments.

The Role of the Centre in Sustaining Convergence

The Centre can play a stabilising role by strengthening support mechanisms for state-level capex. The capex loans to states programme is particularly important, as it is ring-fenced for capital expenditure and cannot be diverted to revenue spending.

Since its inception, the scheme has expanded substantially. Further scaling, broader eligibility and multi-year certainty could help states plan large infrastructure projects more effectively and complement the Centre’s own investment push.

Beyond Capex: Reforms and Manufacturing Opportunities

Infrastructure alone will not sustain convergence. States must also leverage regulatory reforms, particularly in labour markets. Recent changes under the Industrial Relations Code give states flexibility to attract large-scale manufacturing.

As global supply chains diversify, labour-intensive and mid-technology sectors such as textiles, footwear, furniture and toys offer major opportunities. Emerging states possess a wage advantage which, combined with improved infrastructure and regulatory clarity, can help attract foreign investment and integrate them into global value chains.

Conclusion: A Critical Window for Inclusive Growth

India’s emerging states are showing early but meaningful signs of faster growth and convergence. If supported by sustained capital expenditure, prudent fiscal management and reform-driven industrialisation, they could become a powerful engine of national growth.

This moment is pivotal. The convergence underway is not guaranteed, but if nurtured carefully, it could reshape India’s economic geography and anchor long-term growth on a broader, more inclusive foundation.