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The dynamics of finance-growth-inequality nexus: Theory and Evidence for India

Pranab Das (), Bhaswati Ganguli, Sugata Marjit and Sugata Sen Roy
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Bhaswati Ganguli: Department of Statistics, University of Calcutta
Sugata Marjit: Centre for Studies in Social Sciences, Calcutta(CSSSC).
Sugata Sen Roy: Department of Statistics, University of Calcutta

No 593, Discussion Papers Series from University of Queensland, School of Economics

Abstract: The paper critically inquires the ‘finance-growth-inequality’ nexus based on an econometric analysis of the IHDS Survey data for two rounds – 2005-06 and 2011-12. The study attempts to assess the co-evolution of finance-growth-inequality in an intertemporal framework. At the household level asset is still the most important determinant of bank loans inspite of several policy measures aimed at financial inclusion. However, the probability of receiving a bank loan increases if any member of the household is active participant of the local level government or caste association. 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 informal 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 observation is also confirmed for per capita income of the households. The phenomenon is explained 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. This 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 households living below poverty line are worse off in general. If the major source of borrowing is bank for the business and industry then inequality increases more for the above poverty line households than if the major source is moneylenders or the households belong to the below poverty line category. Moneylenders as the source of borrowing is not as regressive as is believed. So the whole issue of financial inclusion needs a review in the light of the findings of the paper.

Keywords: Financial development; Financial Inclusion Growth; Inequality; Bank; India; IHDS; Logit Model (search for similar items in EconPapers)
JEL-codes: C35 E5 G21 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-fle, nep-iue and nep-mac
Date: 2018-05-22
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