Inequality, to an extent, depends on where you live. That's because, one-third of the variation in living standards in India is due to location, according to an IMF study. It found that consumption levels and locational inequality are positively related and living standards are higher in richer, but more unequal locations.
The working paper authored by Sriram Balasubramaniam, Rishabh Kumar and Praksah Loungani outlines two trends. The first is the well-documented decline in rural poverty in India since the 1980s - the lowest rural deciles on average saw some of the highest growth rates. Secondly, the middle class at the aggregate level appears relatively flat, with the top decile capturing the highest growth.
"The basic takeaway is that an economic migrant can, on average, expect to be better off in the lower classes of urban Indian than in the middle class of rural India. Given that rural India offers much lower living standards on average, a person may be indifferent to their relative class position and prefer the absolute gains emanating despite moving down in the class hierarchy," the authors note.
But, just how much of the variation in living standards can be explained solely based on location? The authors believe that while there’s substantial regional variation across states in industrialization and development, internal migration is not constrained by state boundaries.
In essence, if location turns out to be an important determinant of living standards, then domestic migration can act as a low-cost option to move up the opportunity ladder.
According to estimates, about nine million migrate every year. It means, about 139 million of the 1.3 billion Indians are migrants. This paradox of absolute versus relative gains underpins the challenge of
inclusive growth in a developing economy.
Growth and poverty reduction move hand-in-hand, with the former eventually overriding initial inequalities, but the study shows that the growing rural-urban gap and divergence in growth across states exacerbates the otherwise slow rise of consumption inequality in India. These gaps have created significant location premiums, which explain between 25-31 per cent of the variation in living standards.
While class is an important determinant of consumption, the rural vs urban location also plays a significant role. This is one potential explanation of the persistence of migration from rural to urban India despite the latter contributing to growing inequality.