Does financial development increase rural‐urban income inequality? Cointegration analysis in the case of Indian economy

Abstract

Purpose

The purpose of this paper is to investigate the impact of financial development on the rural‐urban income inequality in India using annual data from 1965 to 2008.

Design/methodology/approach

The Ng‐Perron unit root test is utilised to check for the order of integration of the variables. The long run relation is examined by implementing the ARDL bounds testing approach to cointegration.

Findings

The results confirm a relation among the variables. Evidence suggest that financial development, economic growth and consumer prices aggravate rural‐urban income inequality in the long run.

Research limitations/implications

The present study offers fresh insights to policy makers on crafting appropriate policies that reduce rural‐urban income inequality in India.

Originality/value

The contribution of this paper is lies in extending the literature in the context of India towards an extensively researched area of rural‐urban divide but in time series framework and utilization of a better approach of time series approach, i.e. ARDL. Specifically, to the best of the authors' knowledge, this is the first empirical study to test poverty‐finance nexus using the basic principles of the GJ hypothesis and provide evidence of short‐ and long‐run dynamics on the postulated relation for India.

Citation

Tiwari, A.K., Shahbaz, M. and Islam, F. (2013), "Does financial development increase rural‐urban income inequality? Cointegration analysis in the case of Indian economy", International Journal of Social Economics, Vol. 40 No. 2, pp. 151-168. https://doi.org/10.1108/03068291311283616