Finance and inequality: a study of Indian states

Although a large literature exists on finance and economic growth, few studies have empirically examined the relationship between finance and inequality. Using grouped national household sample survey data on monthly household consumption expenditure at the sub-national level for the years 1999–2000 to 2006–2007, we examine the relationship between Financial Development (FD) and rural and urban inequality in India. The results indicate that FD is associated with a reduction in inequality, but only in the urban areas. Further, inequality is found to be higher in the richer states compared to less developed and low income states, and as state income increases, inequality also increases both in the rural and urban areas. Finally, our results show that increase in population per bank branch leads to higher inequality in urban areas but decline in rural areas.