Spatial Dynamics of Regional Inequality and Fiscal Policy in India: 1991–2023

Abstract In this study, we use trends in GDP gaps per capita or relative GDP per capita indicator as an aggregate alternative measure to show regional per capita income inequality between the states of India. The measure captures spatial divergence in income levels by comparing each state's GSDP per capita to the national average. Utilizing spatial econometric models to identify local and global effects of fiscal and political determinants on income inequality. The results consistently indicate that increased social sector expenditure, rather than mitigating inequality, is positively and significantly associated with higher relative inequality. The results indicates regressive public service delivery, elite capture, and spatial fiscal emulation among neighbouring states. Regarding fiscal deficits exhibit robust inequality-enhancing effects. Higher deficits are associated with reduced redistributive capacity and increased debt servicing, disproportionately benefiting capital-owning groups. These effects also spillover to adjacent states, consistent with theories of fiscal competition and inter-jurisdictional policy mimicry. Political economy variables also display spatially mediated influences. Single-party governments and non-centrist ideological regimes are associated with greater inequality, whereas regional parties are linked to more equitable outcomes. Significantly, the magnitude and significance of spatial effects vary with the choice of spatial weight matrix. Queen contiguity and KNN5 matrices yield consistent results, whereas distance-based matrices attenuate direct effects while amplifying spillovers—mainly for political variables—highlighting the sensitivity of spatial inference to network structure. These findings emphasise the imperative of spatially sensitive and politically cognizant fiscal frameworks to address India's persistent and geographically entrenched inequality.