Does economic growth and financial development lessen or widen income disparities? An econometric evidence from India

The principal aim of the present study is to comprehensively investigate the effects of economic growth and financial development on income inequality in India. This study uses the autoregressive distributed lag (ARDL) model to examine the variables’ long and shortrun relationships. This study also employs principal component analysis (PCA) to construct a comprehensive financial development index. In addition, this study utilised the unit root test developed by Ng-Perron to analyse the order of integration of variables used. The study finds a long-run relationship between economic growth, financial development, and income inequality in India for the period under consideration. The results suggest that per capita growth and government expenditure for most of the estimated models (both short and longrun) are inequality-narrowing factors in India, while inflation worsens the income distribution. The study confirms an inverted U-shaped relationship between financial sector development and income inequality, thus validating the Greenwood-Jovanovic hypothesis for the Indian economy. The findings of this study can aid concerned quarters and policymakers in framing appropriate policies for economic growth and financial sector development to improve the income inequalities in India.