Theory and Empirics of Economic Inequality Influencing Economic Growth: A Study of Major Indian States

Debnarayan Sarker, Debraj Das

Abstract


Unlike the conventional approach, this paper theoretically shows that when median voter’s income is much below the mean level, higher inequality of income increases redistribution in favor of median voter, and thereby influencing higher economic growth provided that major share of tax-financed capital is allocated in public education which benefits all. In the empirical findings this study suggests that despite continuous increase in consumption inequality in major Indian states, redistribution in real social expenditure by Centre and States continues to increase in real per capita terms including median voter during post-reform period. Although inequality of consumption expenditure induces an increase in economic growth for about 50 per cent of major Indian states and the regression coefficients are almost insignificant, such tax-financed public education might act as externality to everybody if major tax financed resources are allocated on education. This might lead to a positive and significant impact into the growth process provided that the large proportion of working population of major Indian states get employment in the service sector. However the empirics of Indian states during the current years also show that service sector of Indian economy, which depends completely on stepping up of educational level to the working population, acts as the major contributor to growth.

Full Text: PDF DOI: 10.5539/ibr.v5n8p132

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International Business Research  ISSN 1913-9004 (Print), ISSN 1913-9012 (Online)

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