Financial development and income inequality in India: an application of ARDL approach

Abstract

Purpose – The purpose of this paper is to examine the relationship between financial development and income inequality in India using annual data from 1982-2012. Design/methodology/approach – Stationarity properties of the series are checked by using ADF, DF-GLS, KPSS and Ng- Perron unit root tests. The paper applied the auto regressive distributed lag (ARDL) bound testing approach to co-integration to examine the existence of long run relationship; and error correction mechanism for the short run dynamics. Findings – The co-integration test confirms a long run relationship between financial development and income inequality for India. The ARDL test results suggest that financial development, economic growth, inflation aggravates the income inequality in both long run and short run. However, trade openness reduces the gap between rich and poor in India. Research limitations/implications – The present recommend for appropriate economic and financial reforms focussing on financial inclusion to reduce income inequality in India. Originality/value – Till date, there is hardly any study that makes a clear comparison between market-based indicator and bank based indicator of financial development in India and those examining the relationship between finance and income inequality nexus. Further there is hardly any study to include gini coefficient as a proxy for inequality for India and apply ARDL techniques of co-integration, using the basic principles of GJ hypothesis and provide short run and long run dynamics for India. So the contribution of the paper is to fill these research gaps.

Linkage between Financial Development and Income Inequality in India

“…and other nancial services are enjoyed by the wealthy strata of the society. These results are consistent with the ndings of existing literature Jauch and Watzka (2016), Koh et al (2020), Sehrawat and Giri (2015) and Seven and Coskun (2016) but contradictory with the ndings of Kapingura (2017) and Omarand Inaba (2020) who report that access to nancial services and strong nancial inclusion alleviate income inequality signi cantly. To capture the nonlinearities, if any, and to explore thse presence of the GJ hypothesis (1990), the squared term of nancial development (FD 2 ) is used in the Eq.…”

“…Rubin and Segal (2015), Sehrawat and Giri (2015) and Shari (2000). and other nancial services are enjoyed by the wealthy strata of the society.…”

The Relationship Between Financial Development and Income Inequality in India: Evidence from VARX and ARDL Assessments

“…One important finding-from all models except Model H-is that while we take both financial size and efficiency separately into estimation, the two variables appear to increase the Gini coefficient, that is, the expiation and amelioration of the financial system are significant to exacerbate India"s income inequality. This result agrees with Bahmani-Oskooee and Zhang (2015) and Sehrawat and Giri (2015) but does not with Ang (2010) who confirmed the inequality-reducing effect of financial development. Furthermore, with no evidence of the nonlinear effect of financial depth on income distribution, we also discovered that India"s financial system is not releasing the distributional effect as Greenwood and Jovanovic (1990) expected.…”

Financial Instability and Inequality Dynamics in the WAEMU

“…The authors found that financial development increases income inequality after having controlled for fixed effects by country and possible endogeneity prob-lems. Likewise, Sehrawat and Giri (2015) studied the link between finance and inequality in India for the period 1982 to 2012, suggesting that financial development exacerbates income inequality both in the long and short term. In turn, Rajan (2010) -based on a model of Kumhof and Ranciere (2011) -found that individuals with incomes in lower deciles borrow to increase their consumption more than do those with stagnant incomes.…”