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

Abstract

We examine the relationship between financial development and income inequality in India over the period 1952-2011 using the cointegration techniques of VARX and ARDL. In addressing India’s “finance-inequality” nexus, we are concerned with finance’s size and efficiency and their linear- and nonlinear effects on income distribution respectively. To consider the influence of India’s exposure to globalization, financial crisis, trade and financial openness are taken into estimation. Our findings are: (i) both financial size and efficiency increase inequality; (ii) economic growth increases, whereas other variables increase inequality; and (iii) the nonlinear effect of financial development is not found.