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The relationship between income inequality and GDP growth is matter of big concern especially in those countries in which income inequality has been increasing continuously. The Kuznets inverted U-curve hypothesis regarding this relationship states that income disparity increases initially as income increases, reaches at the peak and thereafter, it decreases steadily. This pattern of relationship between income inequality and GDP growth forms Kuznets inverted U- shaped curve. The validity of this hypothesis is further examined by various economists and revealed contradictory conclusions. An effort is made to re-examine the Kuznets hypothesis in context of Indian economy as Indian economy has emerged as fastest growing economy among the developing economies. The data of Gini index and GDP per capita at constant price are taken from World Bank for the selected years during the period from1977 to 2019. The result of this study revealed that a positive and significant relationship exists between income inequality and GDP per capita but the analysis does not support strongly to the Kuznets inverted U-curve hypothesis regarding relationship between income inequality and GDP growth.

To examine the relationship between income inequality and GDP growth.

Kuznets (1955) tested  the relationship between income inequality and economic growth and revealed a positive relationship at early stage of economic development but it become negative during advanced stages of economic development and concluded that inverted U shaped curve relationship  exist between income inequality and economic growth at different level of economic development of economies. 

Perotti R. (1993) examined the effect of income inequality on economic growth on the basis of both the time series and cross sectional data by assuming that investment in human capital is a source of economic growth and result shows inverted-U shaped relationship between levels of inequality and income levels in cross-sections data but not necessarily in time series data.

Alesina and Rodrik (1994) examined the relationship between income inequality and economic growth by undertaking data of 46 nations during the period from 1960 to 1985 and found negative relationship between income inequality and economic growth. Persson and Tabellini (1994) also examined the relationship by undertaking data of 56 nations for the same time period and found similar conclusions.

Falkinger J and J. Zweimüller (1997) examined the effect of income disparity on per-capita growth and revealed that the relationship may be positive or negative depending on whether productivity growth is positively or negatively related to product variety. The study further revealed that a significant negative relationship exist between income inequality and economic growth.

Deininger and Squire (1998) used new cross-country data on income and asset (land) distribution in order to examine the relationship between economic growth and inequality and to show its effect on poverty during the process of economic development. The results of the study revealed significant relationship between initial asset inequality and long-term growth and it is also found that inequality tends to reduce the growth of poor but not of the rich people. Further, the results slightly supported the Kuznets hypothesis.

Barro (2000) examined the relationship between income inequality and economic growth and found that income inequality has different effects on economic growth at different level of economy’s economic development. The study revealed that higher income inequality impedes economic growth in backward nations, while encourages economic growth in advanced countries.

Kristin J. Forbes (2000) examined the effect of income inequality on economic growth and revealed a significant positive relationship between income inequality and economic growth during short and medium term.  

Panizza (2002) examined the association between inequality and economic growth by using a cross-state panel data for the United States during the period from 1940 to 80 and result of the paper revealed only negative association between inequality and growth but the relationship did not found robust.

Rangel L.A. et al. (2002) examined the effect of income inequality on economic growth by using Akaike information criterion and undertaking data for the period from 1991 to 2000 of Brazil. The result of the study confirmed an inverted-U shaped relationship exists between income inequality and economic growth in Brazil.

Knowles (2005) examined the relationship between income inequality and economic growth by undertaking data of 40 nations for the period from 1960 to1990. The result of the study revealed significant negative tradeoff between Income inequality and economic growth in low-income economies, however, this relationship was found insignificant in high and middle income economies.

S. Voitchovsky (2005) investigated the relationship between income distribution and economic growth and revealed that inequality at the top end of the distribution is positively related to the economic growth and inequality at lower down the distribution is negatively related to growth.

Wan et al. (2006), measured the impact of inequality on investment, education, and in turn eventually on economic growth in the post reform era of China for the period 1987-2001 by undertaking polynomial inverse lag framework and the results of the study  revealed nonlinear and is negative  relationship between income inequality and economic growth.

Gunther Rehme (2007) examined the relationship between education, economic growth and income inequality and it was found in the study that higher education leads to increase in both economic growth and income inequality first and then leads to decrease in both economic growth and income inequality, however, a significant relationship does not  exists between income inequality and economic growth.

Bhorat and Vander Westhuizen (2009) investigated the relationship between economic growth, poverty and inequality during the period from 1995 to 2005 in South Africa and revealed a positive relationship between income inequality and economic growth.

Castello-Climent (2010) examined the effect of income inequality and human capital inequality on economic growth in different regions across the world and the results of the study revealed that income and human capital inequality affects economic growth negatively in low and middle income economies and positively in the higher-income countries.

Shahbaz M. (2010) analyzed the effect of income inequality on economic growth by undertaking annual time series data of Pakistan for the period from 1971 to 2005 using ARDL cointegration approach and the results revealed Kuznets inverted‐U shaped and inverted S‐shaped curve relationship between income inequality and economic growth.

Shin I (2012), examined the relationship between income inequality and economic growth with the help with a stochastic optimal growth model and concluded that a negative relationship exist between income inequality and economic growth in the early stage of economic development and a positive relationship exist between income inequality and economic growth in a near steady state of economic development.

Fawad Fazi et al. (2014) assessed the effect of income inequality on economic growth by undertaking international data for the period 1960- 2010 through using dynamic panel technique and revealed that a significant negative relationship exist between income inequality and economic growth in low income developing nations and a significant positive relationship exist between income inequality and economic exist in high-income developing nations.

Petersen Thie and Ulrich Schoof (2015) examined the relationship between income inequality and economic growth and found that rising income inequality generates both growth-promoting and growth-dampening effects and it was also found that in highly developed nations like Germany, Japan and the Unites States, increasing income inequality hinders economic growth.

Galina Kolev and Judith Niehues (2016) examined the tradeoff between income inequality and economic growth by using GMM dynamic panel estimator system and found a non-linear relationship between income inequality and growth for both developed and developing economies. Further, a negative relationship between income inequality and economic growth was found only for less-developed countries and countries with high income inequality.

Majeed M.T. (2016) examined the effect of income inequality on economic growth in Pakistan using ARDL approach to cointegration by undertaking annual time series data for the period from 1975 to 2013 and revealed that inequality has positive effect on annual economic growth in Pakistan. The result also shows that poverty has negative effect on growth.

Castells-Quintana D. and V. Royuela (2017) examined the relationship between income inequality and economic growth and revealed that both negative and positive relationship between income inequality and long-run economic growth.

Kandek Barbara and Veronika Kajling (2017) examined the relationship between regional inequality and local economic growth in 357 metropolitan cities in USA during the period from 2010 to 2015. The result shows that a positive and significant relationship exists between inequality and GDP Per Capita Growth rates but a negative and insignificant relationship exists between inequality and GDP Per capita levels.

Niyimbanira F. (2017) examined the relationship between economic growth and income inequality and poverty by undertaking secondary data of 18 local municipalities of Mpumalanga province in South Africa for the period from 1996 to 2004. By using fixed effect and pool regression models, revealed that that high economic growth leads to decline in poverty but rise in income inequality.

Benos Nikos and Stelios Karagiannis (2018) explored the relationship between economic growth and income inequality by undertaking human and physical capital accumulation using U.S. state-level data for the period from 1929 to 2013. The result shows that no relationship exists between income inequality and economic growth in both short and long run in the United States. The results of this study corroborates the unified theory of inequality and growth in which the relationship between economic growth and inequality becomes insignificant in the latest stages of economic development that the United States experienced during the period of study.

Bruckner Markus and Daniel Lederman (2018) examined the relationship between inequality and gross domestic product per capita growth in the context of countries’ initial incomes by using a panel model. The result of the model shows that higher income inequality positively affects the transitional growth in low-income countries and negatively affects the transitional growth in high-income countries.

Braun M. et al. (2019), examined the relationship between inequality and growth given financial development levels of the economy by using panel dataset of large number of nations. The result shows that negative relationship exists between income inequality and economic growth rate in those nations in which level of financial development is low and a positive relationship exists in those nations in which level of financial development is high. Thus, author suggested that effect of high-income inequality on economic growth can be controlled by improving financial markets.

Buyume Ekonomik et al. (2019), studied the relationship between income disparity and economic growth by using secondary data and literature and revealed that rising income inequality is the problem of all the nations across the world and it cannot be reduced only by economic growth rather all nations should review their economic policies and should adopt such economic policies which provide equal opportunities to all member of society.

Royuela V. et al. (2019) examined the effect of income inequality on economic growth in OECD regions for the period from 2003 to 13. A negative relationship was found between inequalities and economic growth during the starting phase of economic crisis in the region.

Shen Chengfang and X Zhao (2022) analyzed the relationship between income inequality and economic growth. The result shows that economic growth is being hampered by higher income inequality at low-income levels rather than at high-income levels, but, the relationship become insignificant if the fertility rate or country differences are controlled.

S.G Topuz (2022) examined the relationship between income inequality and economic growth for the periods between 1980 and 2017 in 143 nations. The nations are categorized into two groups based on income levels by using panel data techniques. The result shows that a negative relationship exists between income inequality and economic growth in developing countries as high income inequality adversely affect human capital investments in these nations but on the other hand, the relationship becomes positive in developed nations as high income inequality encourages savings in these nations.

Gini coefficient as a measure of income inequality and growth rate of GDP per capita as a measure of economic growth are undertaken for analysis. The data are taken from World Bank at constant prices. Correlation and simple linear regression model is used to examine the relationship between income inequality and economic growth and effect of income inequality on GDP per capita growth rate.

India’s GDP per capita at Constant prices for selected years, the average growth rate of GDP per capita for selected years compared to previous years and  value of Gini coefficient  for selected years are shown in table 1

Table 1: GDP Per Capita and Gini Coefficient

Year	GDP Per Capita (Constant Prices)	GDP Per Capita (Average Growth Rate)	Gini Coefficient	Gini Coefficient (in %)
1977	20993	4.83	0.333	33.30
1983	22996	4.83	0.321	32.10
1987	25027	1.72	0.326	32.60
1993	30276	2.71	0.317	31.70
2004	48515	6.19	0.344	34.40
2009	62831	6.19	0.354	35.40
2015	86780	6.80	0.347	34.70
2019	106234	2.69	0.357	35.70

Source: World Bank

The gross domestic product (GDP) at constant prices is estimated to be at Rs. 20993 in the year 1977 thereafter increased continuously and estimated to be at Rs. 106234  in the year 12019 as shown in  the following chart -1.

During the period from 1977 to 2019, the GDP per capita average growth of Indian economy is showing fluctuating trends around so called ‘Hindu Growth Rate’, however, overall average growth rate accelerated excluding some years as shown in the following chart -2.

The major focus of policy makers was remained to accelerate the growth of Indian Economy but simultaneously income inequality was also become a major problem. For example, the  value of Gini coefficient was accounted 33.30 percent in 1977 and it fell down to 31.70 percent in 1993 thereafter increased to 35.70 percent in 2019, thus, it was fluctuated slightly but overall showing increasing  trend as shown in the following chart-3

In order to examine the relationship between GDP per capita and income inequality, first of all correlation between GDP per capita and Gini Coefficient is measured. Secondly, to investigate the effect of income inequality on GDP per capita, following two models are estimated:

OLS Model 1: GDPpc = ɑ + ßGini Coefficient + μ                              -----(1)

OLS Model 2: GDPpc growth = δ + λ Gini Coefficient (%) + μ         ------(2)

Table 2:  Correlation between GDPpc and Gini Coefficient

corr(GDP per capita, Gini Coefficient) = 0.85

t(6) = 3.91148

p-value 0.0079 < 0.01

Significance:  Significant

Source: Authors Calculation

As shown in table 2, there is perfect positive correlation between GDP per capita and Gini Coefficient implying that income inequality and GDP per capita are positively related to each other. The association between GDP per capita and income inequality is also shown by the trend line shown in chart 4.

Table 3:  Effect of Income Inequality

	OLS Model 1	OLS Model 2
Dependent Variable	GDP per capita	GDP per capita growth rate
Variable Coefficients	1.79E+06	0.536087
t-ratio	3.911	1.164
p-value	0.0079	0.2888
R Squared	0.718306	0.184118
Sample size
Significance	Significant	Insignificant

Source: Authors Calculation

Following char -4 showing graphical relationship between GDP per capita and Gini Coefficient which is not one of the perfect positive and it has varied during selected time period.

However, the empirical result shown in table 3 shows that relationship between GDP per capita and income inequality is positive and significant implying that as  Income Inequality increases, the GDP Per Capita also increases. This follows that the major concern for policy makers was to accelerate economic growth without addressing the problem of inequality, therefore this inequitable economic growth further leads to widen the gap between rich and poor.

Further, the effect of Gini Coefficient on GDP per capita growth rate is also analyzed. The empirical results shown in table 3 revealed a positive relationship but it found insignificant.

As shown graphically in the following chart 5, the relationship is seems strange but its approximation leads the shape of inverted U curve, which shows initially as Gini Coefficient increases, the GDP per capita growth rate increases then reaches at maximum and thereafter starts to decline. This means a certain level of inequality is necessary to accelerate the growth but after achieving certain level of GDP growth, efforts should also made to control inequality along with high growth of GDP.

The empirical results show that both the income inequality and GDP per capita are increasing simultaneously and a positive and significant relationship exists between income inequality and GDP per capita implying that GDP per capita has increased during the period under analysis but simultaneously the gap between rich and poors also increased during the same period. Further the effect of income inequality on GDP per capita growth rate found positive and insignificant and does not leads to normal shape of inverted U shape curve, however, its approximation seems shape like the inverted U shaped curve. Therefore analysis does not support strongly the Kuznets inverted U shaped relationship between income inequality and GDP per capita growth rate.

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