Examining the Nexus Between Diverse Forms of Capital and Labour Force Employment in Driving Economic Growth: Evidence from India

Abstract

This study employs the extended Solow growth model to comprehensively examine the nexus between diverse forms of capital and labour force employment in driving the economic growth of India. It includes a range of capital types, including physical, human and infrastructural, as well as labour force employment across 17 major Indian states. The empirical investigation adheres to a structured methodology using panel data: first, a degree of homogeneity test is conducted for each panel. Second, the cross-sectional dependence (CD) test is examined across panels. Third, second-order panel unit root tests applied to the variables exhibit non-stationarity at their levels, while they attain stationarity upon taking their first differences. The final Solow growth model, which embodies panel fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) models, is applied to examine the impact of various forms of capital and labour force employment on state-wise economic growth in India. Capital formation in the form of physical, human and infrastructural capital plays a crucial role in driving positive long-term economic growth across Indian states. Thus, revamping state-level fiscal coordination through efficient revenue mobilization and expenditure management is crucial for sustaining development. The study provides a nuanced understanding of the intricate dynamics influencing states’ economic growth in India, shedding light on the interconnected leading role played by capital formation and labour market dynamics in nurturing sustainable economic growth over the long run. It emphasizes the importance of infrastructure spending and investment in human and physical capital to achieve permanent and sustainable growth in India.