The Effects of Alternative Income Distribution on Resource Allocation in India

Abstract

<p>In the thesis, we examine the effects of alternative income redistribution schemes on the optimal pattern of allocation of resources. We also identify the sectors in the economy which are under strain when these redistribution schemes are implemented and the years in which the strains are felt most. We find that the redistribution of income between the lower and middle income groups in the rural sector leads to the maximum value of the objective function, which is a discounted sum of gross outputs. Alternatively, the redistribution of income between the upper and middle income groups in the urban sector consistently leads to low values of the objective function.</p> <p>We also conduct tests to determine how sensitive these results are to changes in the values of the parameters assumed. The results regarding the relative desirabilities of various redistribution schemes are found to be rather insensitive to changes in the values of the social discount rate and the savings rate. A higher availability of foreign aid increases the desirability of urban redistribution schemes. Modest requirements of post-terminal growth lead to infeasibilities for most redistribution schemes, as well as the reference solution, which assumes the status quo distribution of income. The only feasible redistribution schemes are those which redistribute incomes between the upper and middle classes, and the middle and lower classes in the rural sector. This leads us to recommend rural redistribution as not only a desirable policy, but as a necessary prerequisite to obtaining modest growth rates in the post-plan period.</p>