Authors: Gargi Chander
Abstract: This paper examines the relationship between consumer price inflation (CPI) and per capita net state domestic product (PCNSDP) across Indian states using a balanced panel dataset spanning 2014-15 to 2024-25. The study draws on official data from the RBI’s Handbook of Statistics. After constructing a balanced panel of 24 states and Union Territories over 11 years (264 observations), applying a suite of panel econometric estimators: pooled OLS, one-way fixed effects (entity), two-way fixed effects, random effects GLS, between estimator, and first-differences. Model selection follows the Hausman specification test. Unit-root diagnostics using augmented Dickey–Fuller tests indicate that both series carry non-stationary behaviour in levels, motivating the first-differences specification. The two-way fixed effects model—which accounts for both time-invariant state heterogeneity and common macroeconomic shocks—yields a statistically significant positive coefficient on CPI inflation (β = 0.0049, p = 0.046), while the first-difference estimator produces a significant negative coefficient (β = −0.0084, p < 0.001). The Hausman test (p = 0.91) favours random effects over one-way fixed effects. Taken together, these results suggest that the inflation–income relationship in India is nuanced: short-run income growth is dampened by inflationary shocks, but within-period cross-sectional variation, once purged of state and year effects, shows a mild positive co-movement consistent with demand-pull dynamics. The paper contributes a rigorous methodological treatment of India's state-level inflation–income nexus and discusses policy implications for monetary and fiscal coordination.
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