Growth, Inequality and Structural Adjustment: An Empirical Interpretation of the S-Curve for the Indian Economy

Most developing countries have witnessed a higher rate of growth in the modern industrial sector than for GDP. This highlights the fact that effect of growth in one sector is crucial to growth in another. The, sectoral composition of economic growth changes with time and thus influences economic inequality. A change in overall level of economic development, according to the Kuznets’ Hypothesis of Economic Growth (KHEG), results in changes in inequality. During various stages of development a structural shift of agriculture to manufacture (ATM) or manufacturing to service (MTS) is responsible for the turning points in the Kuznets’-U-process. Theories of growth and distributional change have emphasized the role played by economic shifts from the traditional rural sector to the modern urban sector. A sectoral interdependence of economic activities may thus enhance or retard its direct effect on inequality, for overall inequality is a population weighted average of sectoral inequalities. It will be of interest to look at the relationship between economic development measured in terms of per capita income and economic inequality, because of its wide-ranging implications for poverty reduction and through it for the economic reforms initiated vigorously in most of the developing economies and particularly in India in 1991. It is argued that when the share of secondary sector increases during the second stage, inequality declines due to shifts of ATM thus, an inverted U-curve occurs. Another turning point occurs during the third stage of development, which corresponds to MTS, and thus it becomes an augmented inverted U-curve.