ARDL Approach to Drivers of Inclusive Growth In India

Abstract

The call for inclusive growth has been unanimously declared by policymakers across the world. With India’s rapid economic growth rate, Indian policymakers also set its economy on the track of inclusive growth while formulating the 11th Five Year Plan. Despite, India’s fast-growing and vibrant economy, it fails poorly in Human Development Index ranked 131 in 2016. An unfortunate aspect of the current phase of high growth of the Indian economy has been its ‘non-inclusive’ nature. The distribution of income has been highly iniquitous. The richest 1% in India cornered 73% of the wealth generated in 2017, presenting a worrying picture of rising income inequality. In this regard, the study attempts to identify the determinants of inclusive growth in India by using annual data from 1981 to 2015. The study employs the autoregressive distributed lag (ARDL) model and the error correction method (ECM) to investigate the long-run and short-run relationship between inclusive growth and its determinants. The bounds test findings confirm the cointegrating relationship among variables. The ARDL estimates suggest that growth in initial income, government expenditure, human development, investment and financial development fosters inclusive growth; while inflation and population growth dampens it. The results also imply that increasing trade openness and foreign direct investment would not be beneficial for India in terms of growth inclusiveness. Based on these findings, the study recommends that the Government of India should take appropriate steps to increase per capita income and social spending with particular attention to macroeconomic stability while they work at improving the quality of population in order to achieve sustainable and robust inclusive growth. JEL Codes: Q4, F1, H7, D31, O43