Balanced development

Spatial inequality must be addressed

One of the prevalent views among economists and economy watchers, particularly after the pandemic, has been that inequality in India has increased over the years. Several studies and reports in recent years have emphasised this view. However, details for the Household Consumption Expenditure Survey (HCES) 2022-23 — released last week — show inequality, as measured by the Gini coefficient, has, in fact, declined. At the all-India level, the Gini coefficient of consumption expenditure in rural areas declined from 0.283 in 2011-12 to 0.266 in 2022-23. For the urban areas, it declined from 0.363 to 0.314 during the same period. The Gini coefficient measures inequality on a scale of 0 to 1, with a higher value indicating higher inequality. In some states, it has gone up.

Although the headline number suggests that inequality has come down in the stated period, the numbers must be read cautiously. As argued by Pronab Sen, chairperson of the Standing Committee on Statistics, the affluent class doesn’t report their spending well. The data is sensitive to certain income quartiles and doesn’t capture the changes in the affluent quartiles very well. Therefore, the conclusion that inequality has gone down may not be correct. Besides, the real problem of inequality in India is spatial. In some states, there is a significant gap in the level of consumption between rural and urban areas. The difference in average monthly per capita consumption expenditure (MPCE) between rural and urban areas is stark in some states. In Chhattisgarh, for instance, the difference is 82 per cent. At the all-India level, the difference is nearly 71 per cent.

Further, the level of consumption is markedly different between states. For instance, MPCE in rural Tamil Nadu is nearly double that in Jharkhand. MPCE in urban Telangana is over 70 per cent higher than that in Bihar. There is no surprise that MPCE is higher in states that have moved ahead on the development path. Thus, the real policy challenge is to reduce spatial inequality and ensure growth and development are not skewed. Since the better-off states are in a superior position to attract investment and have more resources, the divergence will only increase over time, which itself may hurt India’s overall growth prospects.

To address these issues, it will be important for the Centre to provide sustained policy and fiscal support to lagging states. Some of the poorer states do not have enough revenue to improve developmental outcomes. These states need to be provided more resources through the Finance Commission or directly by the Union government. To be fair, this will not be easy politically because better-off states, mostly in the southern part of the country, have already started complaining that their tax resources are being spent in poorer states, mostly in North India. But there is hardly another way to pull along these states. On their part, laggard states need to make the right policy interventions and invest in the right areas to attract investment. At a broader level, one of the reasons for the development difference is that India has not been able to build a large enough base for low-skill manufacturing. There would have been incentives for firms in a large manufacturing sector to relocate to areas with cheap labour, potentially uplifting poorer regions.