Inflation convergence across Indian states

NO : WP-2024-014

AUTHOR : Yadavindu Ajit and Taniya Ghosh

TITLE : Inflation convergence across Indian states


This study examines the convergence of inflation and the formation of inflation clubs across Indian states from 2012 to 2023. The empirical findings indicate a reduction in inflation dispersion among Indian states. The convergence test using panel unit root analysis and the club convergence test suggest that inflation will eventually reach a steady state. We observe this convergence, particularly during the inflation targeting period, implying that the inflation targeting regime plays an important role in achieving inflation convergence across Indian states. This also suggests increased economic integration, improved policy effectiveness, and enhanced market efficiency in India. Additionally, our club convergence test revealed the possibility of ’conditional’ convergence. Further analysis using System-GMM reached the same conclusion. Our findings highlight concerns regarding the significance of wages, as they substantially increase inflation disparity. Consequently, we recommend that policymakers take steps to eliminate wage inequality between states in India. This can be achieved by increasing investment in underdeveloped states, reducing disparities in minimum wages, and ensuring compliance with minimum wage regulations.

Keywords: Club convergence; Inflation convergence; Inflation Targeting; Regional analysis; Sigma convergence
JEL Code : E31, E50, E52, R12