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Economic Growth and Income Inequality in India

Keith Gehring, Graduate School of International Studies 2201 S Gaylord Street, University of Denver, Denver, CO 80208.

Kishore G. Kulkarni, Ph.D., Professor of Economics, Campus Box 77, P. O. Box 173362, Metropolitan State College of Denver, Denver, CO 80217-3362. And Editor, Indian Journal of Economics and Business (visit: www.ijeb.com)

First draft of this paper was completed in June 2006. Comments on this paper should be sent to the second author. Each author would like to blame the other for remaining errors.

ECONOMIC GROWTH AND INCOME INEQUALITY IN INDIA

Abstract:
The Indian economy continues to grow as a global economic powerhouse. India’s development is particularly impressive given the considerable obstacles in fostering economic growth. These obstacles are truly epic with widespread poverty, limited natural resources, and one of the largest populations. While this growth is impressive, India continues to have hundreds of millions in abject poverty and much of the economic prosperity has been fairly localized to specific regions and sectors. The booming software and technology sector receives daily world attention, however those languishing in poverty remain largely ignored. Thus, it is important to understand whether the nascent economic prosperity has also caused an increase in income inequality. Economic theories vary on both the causes and implications of income equality, however empirical evidence indicates that India has been able to maintain low income inequality during periods of significant economic growth. It is important to not, that India’s economic miracle is a recent phenomenon and that future prospects are far from certain. How well the Indian people and government will be able to channel current growth into long-term prosperity remains to be seen.

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Economic Growth and Income Inequality in India
Introduction: India has made significant economic progress over the last ten years and is rapidly emerging as a major economic force. Overall economic growth has continued at an impressive rate while specific sectors, most notably software and related services, are recording exponential rates of growth. This growth is all the more impressive, even if the significant obstacles inherent in the Indian economy remain to be overcome. These obstacles include: a high rate of poverty (primarily in absolute but also in relative terms); the lack of significant natural resources, administrative hassles, low rate of educational progress, income inequality and a very large population of 1.2 billion people, second only to China. However, it is suspected that because of the specific localization of the nascent economic growth, the benefits have been realized by a relative minority, while hundreds of millions continue to live in abject poverty. This could result in significant increases in income equality; a situation that may have significant repercussions. Economists and social scientists have dedicated significant effort to the study of income equality. The topic has waxed and waned in importance over the years, with many academics and policy experts choosing to focus more on absolute poverty than overall income distribution. However, income equality is important because of the implications for social and political development. It is widely understood that income equality can provide stability for a nation, which can only help in fostering long-term economic growth. More directly, income equality enables many more individuals to participate more fully in the economy. This is due to income equality providing

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opportunities for employment, product consumption, access to borrowing, and the ability to invest and save. Therefore, it is necessary to understand the income distribution effects in India, with a primary emphasis on the last fifteen years when India began significant market reforms. India has had a relatively short history as an...
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