(wl 5396)-Relationship between Growth and Inequality in India and Tax Policy Implications

This paper examines the relationship between economic growth and income inequality for India. Empirical findings seriously challenge some popular prevailing notions that higher inequality has been an unintended outcome of higher growth in the post reform period, and that lower inequality can support higher growth. Based on such notions, tax policy changes have been advocated, to make the income tax structure more progressive, besides exploring imposition of a super tax on the net wealth of the wealthiest. Results of different household surveys, on the contrary, find that inequality may have actually declined in the recent years in India. Importantly, the paper finds no statistically significant evidence of either economic growth causing inequality or higher inequality dampening growth. It highlights, therefore, that any suggestion to revamp the tax regime to lower inequality in India must be backed by robust empirical support.