Financial development and income inequality in India: an application of ARDL approach

Purpose - The purpose of this paper is to examine the relationship between financial development and income inequality in India using annual data from 1982-2012. Design/methodology/approach - Stationarity properties of the series are checked by using ADF, DF-GLS, KPSS and Ng-Perron unit root tests. The paper applied the auto regressive distributed lag (ARDL) bound testing approach to co-integration to examine the existence of long run relationship; and error correction mechanism for the short run dynamics. Findings - The co-integration test confirms a long run relationship between financial development and income inequality for India. The ARDL test results suggest that financial development, economic growth, inflation aggravates the income inequality in both long run and short run. However, trade openness reduces the gap between rich and poor in India. Research limitations/implications - The present recommend for appropriate economic and financial reforms focussing on financial inclusion to reduce income inequality in India. Originality/value - Till date, there is hardly any study that makes a clear comparison between market-based indicator and bank based indicator of financial development in India and those examining the relationship between finance and income inequality nexus. Further there is hardly any study to include gini coefficient as a proxy for inequality for India and apply ARDL techniques of co-integration, using the basic principles of GJ hypothesis and provide short run and long run dynamics for India. So the contribution of the paper is to fill these research gaps.