The Nature of Economic Disparities That are Widening Inequality Across India

Understanding how these trends interact is essential to addressing India's economic challenges.

Policymakers need to focus on promoting balanced economic growth across regions by investing in infrastructure, education, and job creation, particularly in rural areas and low-spending states.

(Photo: The Quint)

Recent household consumption data shows significant disparities in the pattern of disposable income spending across India amidst rising inflation, especially in the food consumption basket (driven by higher food inflation).

These disparities exist not only between states but also across urban and rural areas, that spatially disaggregate growing inequality in India. Understanding how these trends interact is essential to addressing the country’s economic challenges.

Economic Inequality Across States

States like Kerala and Andhra Pradesh lead with higher average disposable incomes, while states such as Bihar, Assam, and Chhattisgarh lag behind significantly.

Chandigarh, as a Union Territory, exhibits the highest average disposable spending of Rs 41,917, while Bihar, on the other hand, showcases an alarming negative disposable income of minus Rs 4,298.

Urban-Rural Divide

Across India, urban households spend significantly more than rural ones, reflecting the higher wages, better job opportunities, and diverse economic activities available in cities. Urban residents in prosperous states like Chandigarh and Delhi spend nearly twice as much as their rural counterparts.

The urban population tends to benefit from higher-paying jobs in sectors like information technology, pharmaceuticals, real estate, and manufacturing, which boosts their disposable income and overall spending capacity.

Comparison of rural and urban expenditure across India.

(Author's calculations)

In rural areas, where agriculture remains the primary source of income, households tend to spend a significant proportion of their limited income on necessities such as food, leaving little room for discretionary spending on education, healthcare, or housing.

In states like Bihar and Assam, the low wages and dependence on subsistence farming make rural populations particularly vulnerable to economic shocks like food inflation. In Bihar, the monthly expenditure of rural households proportionate to total expenditure is significantly higher than that of urban households, reflecting the region's high cost of living and limited access to markets.

Rising Food Inflation

Inflation in essential food items—such as grains, vegetables, and oils—has been driven by a combination of erratic weather patterns, disruptions in the global supply chain, and urbanisation, all of which have placed significant financial pressure on households.

Food inflation disproportionately impacts poorer states and rural areas, where a large percentage of household budgets are allocated toward food.

In states like Bihar, Odisha, and Chhattisgarh, more than 50 percent of household budgets are directed toward food expenditures. This is in stark contrast to wealthier union territories and states like Chandigarh and Tamil Nadu, where food accounts for only around 30 percent of household spending.

The high expenditure on food in poorer regions leaves households with little disposable income to invest in other critical areas such as education and healthcare, deepening the cycle of poverty.

How Inflation Shapes Migration and Urbanisation

As more people migrate to cities, the demand for processed and premium food items has surged. Urban households tend to spend more on fruits, vegetables, dairy products, and imported goods, creating imbalances between supply and demand and pushing up prices.

Additionally, the conversion of agricultural land for urban development has reduced food production near cities, further exacerbating inflationary pressures​.

While rising disposable incomes in urban areas have contributed to the increased demand for food services and dining out, supply chain inefficiencies—such as inadequate cold storage and transportation issues—have further strained the food supply, driving up costs.

Urban areas are also more vulnerable to global price fluctuations and currency swings, which impact the cost of imported food items​.

Household Spending Trends

In wealthier states like Chandigarh, Delhi, and Tamil Nadu, monthly household expenditures are significantly higher, driven by spending on housing, healthcare, and education.

Chandigarh, for instance, has the highest average monthly expenditure among all states, followed closely by Delhi.

Percentage of food expenditure out of total expenditure in states.

(Authors’ Calculations from HCE Data.)

These regions benefit from a predominantly urban population with access to modern infrastructure, high-paying jobs, and a high cost of living.

On the other hand, states like Bihar, Assam, and Chhattisgarh exhibit much lower average monthly expenditures, with the bulk of household budgets directed toward subsistence spending.

Disposable Income Disparities

Relatively more prosperous regions such as Kerala have significantly higher disposable income levels, reflecting their more developed urban economies and diverse job markets.

Kerala, with an average disposable income of Rs 25,937, benefits from a strong service-based economy, high literacy rates, and remittances from its large diaspora working abroad.

State-wise average disposable spending.

(Authors’ Calculations from HCE Data.)

In contrast, states like Bihar, Assam, and Chhattisgarh struggle with low disposable incomes, leaving residents vulnerable to debt and financial distress.

In Bihar, where the average disposable income is negative, households are forced to borrow or cut back on essential expenditures, contributing to a cycle of economic stagnation.

Impact of Disposable Income on Food Inflation

As households in states like Bihar and Chhattisgarh spend a large proportion of their income on food, any rise in food prices has an outsized impact on their financial well-being.

In wealthier states, however, households can better absorb price increases, as they have more disposable income available for discretionary spending.

In states with low disposable incomes, rising food prices increase the likelihood of food insecurity, as households are forced to allocate even more of their limited resources to necessities.

Conversely, wealthier states are better equipped to manage the effects of inflation, allowing households to maintain a higher standard of living despite rising costs.

Key Drivers of Economic Disparity

Several key factors contribute to the economic disparities between states:

Urbanisation: Urban centres provide better job opportunities, higher wages, and access to diverse industries such as IT, real estate, and services.

Economic Structure: States with diversified economies—such as Andhra Pradesh, Kerala, and Tamil Nadu—benefit from a mix of industries, including manufacturing, services, and agriculture. This diversity creates more employment opportunities and higher wages.

Infrastructure: States with well-developed transportation, healthcare, and education infrastructure tend to have higher economic productivity and higher household spending. The gap between urban and rural areas in infrastructure is a key driver of the urban-rural divide​.

Education and Employment Opportunities: High literacy rates and access to education are directly correlated with higher disposable incomes. States like Kerala, with its strong emphasis on education, benefit from a more educated workforce that can access higher-paying jobs in industries like technology and services.

Policymakers need to focus on promoting balanced economic growth across regions by investing in infrastructure, education, and job creation, particularly in rural areas and low-spending states. Strengthening food security programs and stabilising food prices is also essential to protecting vulnerable populations from the adverse effects of inflation.

(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. Aryan Gopalakrishnan is a Research Analyst with CNES and graduated from Jindal School of Government and Public Policy. This is an opinion article and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)