Vishleshan for Regulatory Exams (16 July 2025): India’s Rural Recovery & Inequality

To get ready for the UPSC, RBI, SEBI, or NABARD exam, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we discuss India’s rural recovery and inequality. These issues are highly relevant for competitive exams and offer valuable insights into India’s evolving economic scenario. Keep reading to stay ahead with a clear understanding of these current updates.

Also, know why RBI Grade B Phase 1 Exam: The Silent Eliminator of 99% Aspirants & What is the Finance and Management Syllabus for RBI Grade B Exam?

India’s Rural Recovery: Still An Uncooked Food

Context: Several data points make a case for optimism but there are also signs of the revival losing strength. Investors would still need to watch the rural sector for a few months before they can get a clear picture of its performance.

Link to the Article: Mint

India’s rural economy, a crucial component of its overall economic health, showed a strong recovery in the latter half of 2024-25, reaching a four-year high growth. This resurgence was initially fueled by an early and abundant monsoon and a significant pick-up in agricultural real wages. However, despite these positive indicators, a closer examination of various macroeconomic data points suggests a potential fading of this rural recovery, raising cautions for market participants and policymakers alike regarding its sustained strength in 2025-26.

Overview of India’s Rural Economy:

India’s rural economy is a vast and complex ecosystem that plays a foundational role in the country’s economic and social fabric.

• Share in Total GDP: Historically, the agriculture and allied sectors (predominantly rural) contribute around 15-20% to India’s Gross Domestic Product (GDP). The rural non-farm sector also contributes significantly. Together, these two sectors make the rural India’s contribution to the GDP 21-25%.
• Share in the Workforce: The rural sector is the largest employer in India, engaging a significant majority of the country’s workforce, especially in agriculture. It accounts for over 50-60% of India’s total workforce.
• Share in Total Export: The rural economy, particularly through agricultural and agro-processed products, contributes 12-15% to India’s total exports. Including the non-farm sector, rural India’s contribution reaches approximately 20%.
• Rural Consumption vs. Urban Consumption: The article notes that an “improving rural sector offset a weakening urban sector” in the latter half of 2024-25. This indicates that rural consumption growth outpaced urban consumption during that period. As per NABARD’s Rural Economic Conditions and Sentiments Survey (July 2025), consumption-led growth buoyancy in the rural economy seems to have continued, with 76.6% of the surveyed households reporting an increase in consumption during the last year.
• Tools to Assess Rural Consumption in India:
  • National Sample Survey (NSS) – Household Consumption Expenditure Surveys (CES): These quinquennial (now more frequent) surveys provide detailed data on household consumption patterns in both rural and urban areas.
  • Sales of FMCG (Fast-Moving Consumer Goods): Companies closely track rural sales of FMCG products as a proxy for rural consumption trends.
  • Two-wheeler sales: Often considered a key indicator of rural prosperity and consumer sentiment.
  • Fertilizer Sales/Availability: An indicator of agricultural activity and farmer’s purchasing power for inputs. The article notes its contraction as a sign of fading rural strength.
  • NREGA Work Demanded: Demand for work under the National Rural Employment Guarantee Act (NREGA) is often used as an indicator of financial stress or lack of alternative employment opportunities in rural areas.
• Rural Inflation vs. Urban Inflation as on June 2025: The rural headline inflation is 1.72% in June, 2025 while the same was 2.59% in May, 2025. While in urban India, the headline inflation declined from 3.12% in May, 2025 to 2.56% in June, 2025.

Analysis of the Article: Decoding the Health of India’s Rural Economy

The article presents a nuanced view of India’s rural economy, highlighting recent gains but also flagging several indicators that suggest a potential slowdown in the recovery.

1. Recent Recovery and Optimism:

• Strong Growth in H2 FY25: India’s rural sector posted a “solid recovery” in the last two quarters of 2024-25, achieving “a four-year high growth”. This was a “huge relief” as it “offset a weakening urban sector”.
• Monsoon Boost: The “early onset of the southwest monsoon in India and a 9% surplus in June rainfall” have strengthened optimism. Live storage in 161 reservoirs was 36.4% of total capacity by end-June (compared to 20.3% a year earlier and 50% higher than long-term average), marking the “highest at the end of June for any year in the 21st century”.
• Rising Agricultural Wages: Agricultural real wages grew at a “six-year high of 3.4%” in Q4 2024-25, following a 0.3% average decline in the previous three years. This pick-up continued in April with a “seven-and-a-half-year-high real growth of 4.8%”. Non-agricultural rural wages also increased, though less strongly.

2. Signs of Fading Rural Strength (Five Indicators): Despite the positive momentum, the article identifies “at least five other indicators that suggest fading rural strength”.

1. Farming’s Terms-of-Trade Decline: This measures profit margins for agricultural producers (output price inflation vs. input inflation, excluding labour). It declined for the second consecutive month in May, after 22 consecutive months of improvement. This decline is due to rising agricultural input inflation (from February) and declining output inflation (from April).
2. Contracted Fertilizer Sales: The sale or availability of fertilizer (production plus imports) contracted for the second consecutive month in May, marking the “worst contraction of 14.3% year-on-year in 15 months“. This is a concern as it indicates reduced agricultural activity.
3. Declined Central Government Rural Spending: Rural spending by the central government (excluding fertilizer subsidy) fell 13.9% year-on-year in real terms during April-May, following contractions in the previous two years (2023-24 and 2024-25).
4. Declining Two-Wheeler Sales: Two-wheeler sales, a key indicator of rural demand, declined 7.6% year-on-year in April-May, marking the fourth decline in seven months after 30 consecutive months of growth. Sales remained weak in June.
5. Rising NREGA Work Demand: Work demanded under NREGA, an “indicator of financial stress in rural India,” fell in April but grew by 1.1% year-on-year in May 2025 and 3.7% in June. This rise occurred “notwithstanding excess rainfall and an early onset of this year’s monsoon,” suggesting underlying stress. The central government has already released ₹37,500 crore (44% of annual target) for NREGA spending in Q1 2025-26.

3. Outlook and Caution for Investors:

• The argument’s purpose is to “caution investors on the rural sector’s strength”.
• While “better wage growth and a plentiful monsoon are definitely positive for the sector,” there are “several other pieces of economic data pointing to a fading of the recovery in India’s rural economy”.
• It is “still early days,” and a “firm conclusion on the health of India’s rural sector can be drawn only after a few months”.

In conclusion, while agricultural real wages and a strong monsoon have provided a welcome impetus to India’s rural economy, a deeper dive into indicators like terms-of-trade, fertilizer sales, government spending, and two-wheeler sales suggests a potential loss of recovery momentum. This mixed signals environment warrants a cautious approach, as the true health of the rural sector will only become clear over the next few months.

Has Indian Inequality Declined?

Context: Many who are accustomed to media reports claiming high inequality in the country have responded to the World Bank’s claims with scepticism or outright dismissal. From a macroeconomic point of view, the major determinants of income inequality are the rate of return on capital vis-à-vis the GDP growth rate.

Link to the Article: Business Standard

A recent World Bank (WB) report (Poverty and Equity Brief 2025) on India’s consumption inequality has sparked debate, claiming a significant reduction in consumption inequality between 2011-12 and 2022-23, placing India’s Gini coefficient as the fourth-lowest globally. This optimistic assessment, based on official Household Consumption Expenditure Survey (HCES) 2022-23 data, contrasts sharply with popular narratives and reports by organizations like the World Inequality Lab (WIL) that often highlight high income inequality in India. The article aims to decode this apparent contradiction by scrutinizing the methodologies and data limitations of various estimates.

Summary of the World Bank’s Report: Poverty and Equity Brief 2025

The World Bank report being referred to makes the following key claims regarding India:

• Between 2011-12 and 2022-23, India significantly reduced consumption inequality.
• India’s Gini coefficient (a measure of inequality) is ranked as the fourth-lowest in the world.
• The WB’s estimates are based on the official Household Consumption Expenditure Survey (HCES) 2022-23 data.
• The estimates account for some but not all government-provided free goods and exclude consumer durables.
• The decrease in India’s consumption inequality (Gini) from 28.8 in 2011-12 to 25.5 in 2022-23 is “substantial and indisputable”. Similarly, a “significant improvement in India’s international ranking is factual”.

Gini Coefficient:

The Gini coefficient (or Gini index) is a widely used statistical measure of income or wealth inequality within a nation or any other group. It is represented as a number between 0 and 1 (or 0% and 100%).

How it Works:

• A Gini coefficient of 0 (or 0%) represents perfect equality, meaning everyone has the same income or wealth.
• A Gini coefficient of 1 (or 100%) represents perfect inequality, meaning one person has all the income or wealth, and everyone else has none.
• In practice, real-world Gini coefficients fall between these two extremes. A lower Gini coefficient indicates lower inequality, while a higher Gini coefficient indicates higher inequality.

Example:

• If a country has a Gini coefficient of 0.25 (or 25%), it suggests a relatively low level of inequality in the distribution being measured (e.g., consumption).
• If another country has a Gini coefficient of 0.50, it indicates a significantly higher level of inequality.
• The article states India’s Gini coefficient is 25.5% (implying a score of 0.255) for consumption inequality in 2022-23, which is positioned as the fourth-lowest in the world.

Why Inequality is Bad for a Country?

High levels of inequality can be detrimental to a country’s overall well-being and long-term development across various parameters:

Economic Parameters:

• Slower Growth: High inequality can reduce aggregate demand (as the poor have less purchasing power) and discourage investment in human capital, ultimately leading to slower and less sustainable economic growth.
• Reduced Innovation: If opportunities are concentrated among a few, it stifles innovation and entrepreneurship from a broader talent pool.
• Financial Instability: Extreme inequality can lead to financial instability by encouraging excessive risk-taking by the wealthy and increasing the debt burden of the poor.
• Misallocation of Resources: Resources may be allocated based on the preferences of the rich rather than the overall societal good.

Social Parameters:

• Social Unrest: High inequality can fuel social discontent, resentment, and political instability, potentially leading to protests and unrest.
• Reduced Social Mobility: It can create a “poverty trap,” where individuals from disadvantaged backgrounds find it difficult to improve their socio-economic status, perpetuating inequality across generations.
• Erosion of Trust: Widespread inequality can erode trust in institutions, government, and the economic system.
• Health and Education Disparities: Inequality often translates to disparities in access to quality healthcare, education, and other essential services, reinforcing cycles of disadvantage.

Democratic and Governance Parameters:

• Political Capture: Concentrated wealth can lead to political influence, where the rich can disproportionately influence policies in their favour, undermining democratic processes.
• Weakened Governance: Inequality can weaken governance by fostering corruption and reducing accountability.

Analysis of the Article: Decoding the Inequality Debate in India

The article addresses the scepticism surrounding the World Bank’s claims of reduced inequality in India, particularly by dissecting the methodological differences between consumption-based and income-based inequality estimates.

1. Scepticism towards WB’s Claims:

• Many media reports and commentators, accustomed to claims of high inequality in India, have responded to the WB’s claims of reduced consumption inequality with “scepticism or outright dismissal”.
• Critic’s Argument: Critics argue that the HCES data underestimates consumption inequality because it “does not capture consumption by the elite”. They also cite World Inequality Lab (WIL) studies to argue that India has a “very high level of income inequality”.

2. Methodological Debate: Consumption vs. Income Inequality:

• Universal Problem of Elite Capture: The article concedes that “All survey data across countries fail to capture the elite consumption and income. The problem is universal. India is not an exception”.
• HCES and International Best Practices: The HCES 2022-23 uses the “Modified Mixed Recall Period (MMRP) method in line with international best practices,” making its data suitable for international comparisons.
• “Substantial and Indisputable” Decline in Consumption Inequality: The article asserts that the decrease in India’s consumption inequality from Gini 28.8 in 2011-12 to 25.5 in 2022-23 is “substantial and indisputable”.

3. Critiquing World Inequality Lab (WIL) Income Estimates:

• No Official Income Data in India: Unlike consumption, “there is no official data yet on income distribution in India”.
• WIL’s Methodology and “Implausible Assumption”: WIL derives income distributions using tax data for top income groups and old consumption data combined with “its estimates of the income-consumption relationship for low- and middle-income households”.
  • The key flawed assumption is that “for 70-80 per cent of households, the consumption expenditure exceeds their income“. The article calls this “implausible”.
  • Underestimation of Bottom Income, Overestimation of Top Income: As an implication of this assumption, “the income of the bottom 80 per cent is underestimated,” pulling down their national income shares, while “the shares of top income groups are overestimated”.

4. Is Income Inequality Increasing? The Author’s Perspective:

• WIL Data Re-interpretation: Even accepting WIL estimates, the article argues that between 2017 and 2022, “the income shares of the bottom 50 per cent increased from 13.9 per cent to 15 per cent, while those of the top 10 per cent decreased from 58.8 per cent to 57.7 per cent”. This suggests a decrease in income inequality by these metrics.
• Better Tax Enforcement vs. Increased Inequality: The author contends that the “high share of the top 1 per cent is a concern,” but the increase since 2016-17 is only 0.3 percentage points. This increase is “attributable to better tax enforcement,” meaning “Improved compliance should not be mistaken for increased inequality”.
• Post-Tax, Post-Subsidy Income: To be meaningful, income inequality should be assessed based on post-tax, rather than pre-tax, incomes.
  • The top 1% of individual taxpayers paid 42% of the total tax in assessment year 2023-24. Considering all taxpayers, the top 1% paid 72.77% of the total tax. This means their post-tax income is only 65-75% of their pre-tax incomes (as taken by WIL).
  • For low-income groups, WIL estimates often “do not account for the all-time high welfare transfers, which amount to approximately 8% of Gross Domestic Product (GDP)“.
  • On a “post-tax, post-subsidy income basis,” a decline in income inequality over the last decade is likely.

5. Determinants of Income Inequality and Inclusive Growth:

• Rate of Return on Capital vs. GDP Growth: From a macroeconomic view, major determinants of income inequality are the “rate of return on capital vis-à-vis the GDP growth rate”. When the growth rate is higher than the post-tax returns on capital, an “increasing share of national income goes to labour,” which “reduces inequality”.
• Inclusive Growth: Data suggests that the “rate of return is smaller than the growth rate.” This, along with “the Centre’s fiscal support, has made growth inclusive”.

6. Evidence of Poverty Reduction and Improved Well-being:

• Poverty Reduction: Between 2012 and 2025, India has pulled around 320 million out of extreme poverty, based on the International Poverty Line of $3 (at 2021 purchasing power parity).
• Improved Consumption Patterns: Per capita consumption of fruit, vegetables, milk, eggs, and other protein-rich products is at an “all-time high”. The two most recent HCES rounds show a decrease in the share of cereals in total calorie intake, with an increase in healthier products, “most striking for the bottom 20 per cent”.
• Welfare Transfers: Factoring in policies like Ayushman Bharat (health insurance) would make aggregate welfare levels look even better than WB numbers suggest.

7. Conclusion and Future Imperatives:

• While “much more” needs to be done, such as “plugging the loopholes in tax laws” to reduce inequality further, the article calls to “celebrate India’s successes too”.

In conclusion, the article argues that the World Bank’s finding of reduced consumption inequality in India is credible, challenging alternative income-based estimates due to methodological flaws, particularly their implausible assumptions about low-income households and failure to account for taxes and welfare transfers. It suggests that India’s growth has been inclusive, driven by factors like better tax enforcement and a higher GDP growth rate relative to returns on capital, leading to substantial poverty reduction and improved consumption patterns across all strata. While acknowledging that more needs to be done, it advocates for recognizing these successes.

• Sign Up on Practicemock for Updated Current Affairs, Topic Tests and Mini Mocks
• Sign Up Here to Download Free Study Material