Recent household consumption data shows significant disparities in the pattern of disposable income spending across India, amidst the real impact of rising inflation, especially in the food consumption basket (driven by higher food inflation).
These disparities exist not only within and between states but also across urban and rural areas. This spatially disaggregates growing inequality in India. Understanding how these trends interact is essential to addressing the country’s economic challenges and the core hindrance in the government’s aspiration of making India, or Bharat, viksit – developed.
Economic Inequality Across States
India’s states demonstrate stark contrasts in household spending and disposable income. States like Kerala, and Andhra Pradesh lead with higher average disposable incomes, while states such as Bihar, Assam, and Chhattisgarh lag significantly behind.
Chandigarh, for example, 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 (negative) -Rs 4,298.
Urban-Rural Divide
One of the most significant drivers of economic disparity is the 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 boost disposable income and overall spending capacity.
Source: Authors’ Calculations from HCE Data
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, lower wages and dependence on subsistence farming make rural populations particularly vulnerable to economic shocks like food inflation. For example, in Bihar, the monthly expenditure of rural households is significantly higher than that of urban households, reflecting the region’s high cost of living and limited access to markets.
Rising food inflation slows macro-consumption demand
Rising food inflation has become a major concern in India, particularly for states with lower average incomes. 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% of household budgets are directed toward food expenditures. This is in stark contrast to wealthier states like Chandigarh and Tamil Nadu, where food accounts for only around 30% of household spending.
The high cost of 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
Urbanisation has played a significant role in driving food inflation. 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
Source: Authors’ Calculations from HCE Data
Household spending patterns across India reflect the broader economic divide between states and regions. 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. 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.
The lower expenditures in these regions highlight the economic challenges faced by households in less-developed parts of the country.
Disposable Income Disparities
Source: Authors’ Calculations from HCE Data
Disposable income spending patterns further underscore the disparities between states. 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.
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.
The impact of disposable income on food inflation
The relationship between disposable income and food inflation is particularly pronounced in poorer states. 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.
This disparity has significant implications for food security and economic inequality. 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: States with higher urbanisation rates, such as Kerala, in our data, tend to have higher disposable incomes and household expenditures. 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, contributing to higher disposable incomes and household spending.
- Infrastructure: Infrastructure development plays a crucial role in boosting disposable incomes. 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.
Policy implications
Addressing the economic disparities between states and the urban-rural divide requires targeted policy interventions. 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.
India’s economic landscape is marked by stark contrasts in disposable income, household spending, and the impact of rising food inflation. Another key area to assess growing inequality is in area of ‘access’ to basic social, economic goods and services (as analysed by our previous work on Access Inequality Index here). As urban areas continue to grow and wealthier states benefit from diverse economies, the gap between rich and poor states – and between urban and rural households – remains significant. Addressing these disparities through targeted policies is crucial to fostering inclusive and balanced economic growth across the country. By investing in human capital, public infrastructure for easier mobility, education, and targeted rural development, the Indian state can reduce the divide and create a more equitable (and just) economy for all its citizens.
Deepanshu Mohan is a professor of economics, Dean, IDEAS, and Director, CNES. He is a visiting professor at the London School of Economics and an academic visiting fellow to AMES, University of Oxford.
Aryan Govindakrishnan is a Research Intern with CNES.