Double-engine growth hypothesis: evidence from India

Purpose The primary objective of this study is to examine the double-engine growth hypothesis – a claim in recent elections in India that having the same political party run both the central (federal) and state (provincial) governments is more conducive to economic growth than its alternative. Design/methodology/approach We test this hypothesis empirically for 19 major Indian states using both panel and time-series data from 1980 to 2017. For the panel analysis, we estimate a dynamic linear panel model. To overcome aggregation bias (if any), we also conduct a time-series analysis for each state. For the latter exercise, we employ the bounds-testing approach to cointegration and error-correction modeling (Pesaran et al., 2001) to estimate a reduced form, augmented model and investigate the underlying long-run and short-dynamics. Findings Based on the dynamic panel data analysis, we find no evidence supporting the double-engine growth hypothesis. Robustness checks with bootstrap-corrected fixed effects (LSDV) estimator for the dynamic panel data model and additional controls also lead to rejection of the political alignment – economic growth nexus in India. In the time-series analysis, the results vary from state to state. However, in an overwhelming majority of cases, there is no evidence that similar political alignment at the state and central levels translates into better economic outcomes (e.g. economic growth). Originality/value Our research brings a fresh perspective to the table. To the best of our knowledge, the role of political alignment between the federal and state governments on economic growth has not been thoroughly explored. We use a dynamic panel model as well as time series estimations to uncover whether the alignment of political interest and shared ideas fosters cooperative federalism, good governance and, hence, economic growth.