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On Regional Inequality and Growth in India: Theory and Evidence

  • Sugata Ghosh

    (Cardiff University)

  • Sarmistha Pal

    (Cardiff University)

This paper examines, both theoretically and empirically, how initial inequality affects economic growth with particular reference to the subnational states in India, for which no such evidence exists. The theoretical model is characterized by endogenous growth within an OLG set-up, where growth of the subnational economy is driven by productive public investment financed by a linear output tax, and the optimum tax is determined by the median voter rule. State-level data for the period 1960-94 from sixteen major subnational states in India are used to investigate the nature of the 'reverse causation'. Both single cross-section and pooled regression estimates suggest a negative relationship between initial inequality and growth: more initially unequal states need to have more redistributive measures as dictated by the majority voters which in turn creates distortionary effects and lower growth. However rural inequality seems to matter more than urban inequality.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1391.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1391
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  1. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
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  8. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
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  10. Ravallion, Martin & Datt, Gaurav, 1996. "How Important to India's Poor Is the Sectoral Composition of Economic Growth?," World Bank Economic Review, World Bank Group, vol. 10(1), pages 1-25, January.
  11. Paul Cashin & Ratna Sahay, 1996. "Internal Migration, Center-State Grants, and Economic Growth in the States of India," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 123-171, March.
  12. Banerjee, Abhijit & Newman, Andrew F, 1998. "Information, the Dual Economy, and Development," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 631-53, October.
  13. Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 755-76, October.
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