Rising Income Inequality in India: A Race to the Top — With Many Left Behind

Abstract

Income inequality in India has risen substantially since the economic liberalisation of 1991, manifesting across states, between rural and urban sectors, and within both sectors. This paper argues that the dynamics of divergence have taken the form of a "race to the top" — every segment of the population, including the rural poor in lagging states, has registered gains in average consumption expenditure, but the gains have been dramatically larger for the educated, skilled, and urban. Using National Sample Survey (NSS/HCES) data from 1993-94 to 2023-24 and Periodic Labour Force Survey (PLFS) data, we document the evolution of inequality across multiple dimensions. The Gini coefficient of income, estimated using income tax tabulations and World Inequality Database series, rose from approximately 0.45 in 1990 to above 0.51 by 2013 and further, with the top 1 per cent now commanding 22.6 per cent of national income — higher than the United States, Brazil, and China. A Bourguignon-style poverty-growth-inequality decomposition demonstrates that while growth has been the dominant force reducing poverty headcount ratios, worsening distributional effects have partially offset growth gains, especially in urban areas. A wage equation decomposition shows that rising returns to tertiary education account for roughly 55-65 per cent of urban income growth and nearly 20 per cent of rural income growth between 1993-94 and 2022-23. Regional divergence between richer southern and western states and lagging northern and eastern states has intensified, with the richest state (Goa/Sikkim) boasting per capita income more than six times that of the poorest (Bihar). The paper concludes that while inequality of outcome may be an inevitable transitional phase, persistent inequality of opportunity — differential access to quality education, healthcare, and productive employment — threatens both social cohesion and sustainable growth. Broad-based investment in human capital and inclusive structural transformation remain the most effective long-run policy levers.