The Dynamics of Finance-Growth-Inequality Nexus: Theory and Evidence for India

27 Pages Posted: 21 Feb 2019

See all articles by Pranab Kumar Das

Pranab Kumar Das

Centre for Studies in Social Sciences, Calcutta

Bhaswati Ganguli

University of Calcutta

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta; City University of Hong Kong (CityUHK) - Department of Economics & Finance

Sugata Sen Roy

University of Calcutta

Date Written: 2018

Abstract

The purpose of this research study has been to expand our understanding of the finance-growth ‘nexus’ to finance-growth-inequality ‘nexus’ in the presence of both the formal and the informal sources of borrowing. Using empirical evidence of IHDS Survey data for two rounds the study attempts to assess the co-evolution of finance-growth-inequality in an intertemporal framework. The most important finding of the paper pertains to the econometric result that the household asset grows at the same rate independent of the source of loans - banks or moneylenders though the level effect (intercept) is higher if the loan is obtained from banks or lower if the household lives below poverty line. The same also holds for the rate of growth of per capita income. There is virtually no significant difference for the households living below poverty line (BPL) on the rate of growth of capital asset or income whether source of borrowing is bank or money lender. This is then formalized in a theoretical model of intertemporal choice of entrepreneur-investor to show that if there are both formal and informal sources of borrowing with a constraint on the formal sector borrowing and no constraint on the latter, then growth rates of asset and income are determined by the informal sector interest rate. The result can be generalised for any number of sources of borrowing. This questions the conventional wisdom regarding the policy aimed at financial inclusion. Inequality of income increases independent of the source of borrowing, though the BPL households are worse off in general.

Keywords: financial development, financial inclusion growth, inequality, bank, India, IHDS, logit model

JEL Classification: C350, E500, G210, O110

Suggested Citation

Das, Pranab Kumar and Ganguli, Bhaswati and Marjit, Sugata and Roy, Sugata Sen, The Dynamics of Finance-Growth-Inequality Nexus: Theory and Evidence for India (2018). CESifo Working Paper No. 7429. Available at SSRN: https://ssrn.com/abstract=3338783

Pranab Kumar Das (Contact Author)

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India
913324627252 (Phone)
913324626183 (Fax)

HOME PAGE: http://http//www.cssscal.org/

Bhaswati Ganguli

University of Calcutta ( email )

Senate House, 87/1 College Street
Bagnan
Kolkata, West Bengal 700073
India

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Sugata Sen Roy

University of Calcutta ( email )

Senate House, 87/1 College Street
Bagnan
Kolkata, West Bengal 700073
India

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