["Economics &Politics, EarlyView. ", "\nABSTRACT\nThis paper examines the role of political alignment in affecting regional growth and interstate inequality in India, the world's largest multiparty democratic country with three layers of fiscal federalism system. Using a state‐level data set during the 1991–2022 period, we find that political alignment overall has a positive effect on states' growth. It also affects income inequality across states: a broader measure of political alignment (when both the Union and state are governed by the same party or its allies) has no impact on interstate income inequality. Whereas the narrow definition (when the heads of both the Union and state governments belong to the same political party, not just allies) demonstrates a divergence effect. The effects of political alignment on growth and interstate inequality weaken as institutional capability improves. The growth and inequality effects of political alignment vary considerably during different periods. During the period when an alliance was mandatory to form the government (1991–2013), politically aligned states experienced higher growth and generated a divergence effect. During the period of a single‐party stable government (2014–2022), political alignment tended to have a negative growth effect and reduced interstate income inequality. The overall divergence effect is attributed to the faster growth of politically aligned states with higher income levels in the below‐median income group.\n"]