Abstract. This paper tries to track the degree of causation between economic outcomes and political polarization and finds the roadmap of the role of state’s decision-making process under the process of fiscal federalism considering select major states in India. Several composite indices like ‘fractionalization index’ and ‘polarization index’ consisting interrelated parameters have been constructed to verify the impact of religious diversity, government coalition, political concentration on the state’s budgetary process and thus in state’ economic development. A dynamic panel-data framework has been conducted to understand the causality between political concentration and economic outcomes. It has been established significant inverse relationship between social and political polarization and economic outcomes. Women representation makes the governance efficient and thus increases the democratic decentralization in the process.

Keywords: fractionalization, social diversity, political federalism, economic development, panel data analysis.