Revisiting the Finance-Inequality Nexus: New Insights from South Asian Economies

Abstract

The present study examines the impact of financial development on income inequality in South Asian countries using panel data for the period 2003 to 2025. The study uses Panel Quantile Regression (PQR) technique as a primary estimation strategy and for robustness purpose the Instrumental Variable Two-Stage Least Squares (IV–2SLS) econometric technique has been used. This study investigates whether the impact of Financial Development (FD) on income inequality is heterogeneous across the income distribution. The empirical results revealed that FD exerts positive and statistically significant effect on income inequality, highlighting that profound and more inclusive financial system are associated with the increase in income dispersion. This result remains robust across all quantiles of the income inequality distribution. Furthermore, it appears consistent through IV-2SLS estimation addressing potential endogeneity concerns. Beyond FD, this analysis identifies that globalization is also significant determinant of income inequality which help in reducing income inequality. The consumer price index varies across the estimation. While infrastructure development increase income inequality. The results of the study carry important policy implications, underscoring the critical role of financial sector development as a tool for promoting equitable and inclusive economic growth. The study recommends that the policymakers of South Asia should prioritize financial deepening, broaden access to financial services, and strengthen political frameworks for mitigating income disparities and foster sustainable socioeconomic development.