Manufacturing Activity and Inequality in India

We examine the relationship between manufacturing activity and inequality in India at the district level. Our inequality measures are defined on both consumption expenditure and earnings. The measures of manufacturing activity are based on district-level manufacturing activities. Controlling for district-level fixed effects, we show that there exists a U-shaped association between manufacturing activity and inequality, implying that inequality first decreases and then increases following the growth of manufacturing activity. In the attribution exercise, we observe that this relationship between manufacturing activity and inequality operates through the employment channel. Our results are robust to the alternative measures of manufacturing activity and inequality and to alternative estimation where we control for the spatial correlation across the districts.