Growth, inequality and innovation: A CGE analysis of India

This paper probes into the growth and distributional consequences of four basic policy options emanating from the three sources of economic growth, namely, physical capital, human capital and technological progress, with the help of a computable general equilibrium model of India. The simulation results show that, the efficacy of physical capital accumulation in augmenting growth and abating income inequality is greater than that of human capital accumulation. In the long term, however, the latter overtakes the former in promoting growth, but inequality worsens. When the two policies are commingled, growth improves but it continues to be inequality‐augmenting. Finally, with concomitant Hicks‐neutral technological progress, not only is growth enhanced further, but it turns out to be significantly inequality‐mitigating. The emerging policy lesson is that any integrated policy of boosting investments in physical as well as human capital must be closely bound up with technological progress for growth to be inclusive.