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The effect of inequality on growth: Theory and evidence from the Indian states

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Author Info
Sugata Ghosh (Cardiff Business School)
Sarmistha Pal (Cardiff Business School)

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Abstract

This paper examines the effect of inequality on growth among the sub- national states in India. Theoretically, growth of the regional economy is driven by productive public investment in the provision of health and education services financed by a linear output tax, and the optimum tax rate is determined by the median voter. Unlike the existing results, we obtain an ambiguous relationship between initial inequality and subsequent economic growth. Analysis of the Indian state-level data suggests that rural inequality influences growth of total output more than urban inequality, and does so, negatively. The indicator of intersectoral inequality is more important in explaining sectoral output growth.

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Paper provided by EconWPA in its series Development and Comp Systems with number 0309006.

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Length: 20 pages
Date of creation: 09 Sep 2003
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Handle: RePEc:wpa:wuwpdc:0309006

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Related research
Keywords: Endogenous growth; inequality; public investment; optimum tax rate; panel data analysis; Indian states.;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May. [Downloadable!] (restricted)
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  3. Paul Cashin & Ratna Sahay, 1995. "Internal Migration, Center-State Grants and Economic Growth in the States of India," IMF Working Papers 95/66, International Monetary Fund.
  4. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 35-52, January. [Downloadable!] (restricted)
  5. Ravallion, Martin, 1995. "Growth and poverty: Evidence for developing countries in the 1980s," Economics Letters, Elsevier, vol. 48(3-4), pages 411-417, June. [Downloadable!] (restricted)
  6. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, vol. 61(1), pages 73-77, October. [Downloadable!] (restricted)
  7. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May. [Downloadable!] (restricted)
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  8. Ravallion, Martin & Datt, Gaurav, 1996. "How Important to India's Poor Is the Sectoral Composition of Economic Growth?," World Bank Economic Review, Oxford University Press, vol. 10(1), pages 1-25, January.
  9. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June. [Downloadable!] (restricted)
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  10. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November. [Downloadable!] (restricted)
  12. Partridge, Mark D, 1997. "Is Inequality Harmful for Growth? Comment," American Economic Review, American Economic Association, vol. 87(5), pages 1019-32, December. [Downloadable!] (restricted)
  13. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sarmistha Pal & Sugata Ghosh, 2008. "The Elite and the Marginalised: an Analysis of Public Spending on Mass Education in the Indian States," CEDI Discussion Paper Series 08-15, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
    Other versions:
  2. Sarmistha Pal & Robert Palacios, 2006. "Old Age Poverty In The Indian States: What Do The Household Data Tell Us?," CEDI Discussion Paper Series 06-08, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
    Other versions:
  3. Andrew McKay & Sarmistha Pal, 2003. "Relationships between consumption and inequality in the Indian states," Development and Comp Systems 0309005, EconWPA. [Downloadable!]
  4. Sarmistha Pal & Sugata Ghosh, 2006. "Elite Dominance and Under-investment in Mass Education: Disparity in the Social Development of the Indian States, 1960-92," CEDI Discussion Paper Series 06-05, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
    Other versions:
  5. Pal, Sarmistha & Palacios, Robert, 2008. "Understanding Poverty among the Elderly in India: Implications for Social Pension Policy," IZA Discussion Papers 3431, Institute for the Study of Labor (IZA). [Downloadable!]
  6. Sarmistha Pal & Robert Palacios, 2005. "Old Age Poverty In The Indian States: What The Household Data Can Say?," Labor and Demography 0505015, EconWPA. [Downloadable!]
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This page was last updated on 2009-12-9.

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