Why location matters in determining living standards

An economic migrant can (on an average) expect to be better off in the lower classes of urban India than in the middle-class of rural India. Given that rural India offers much lower living standards on an average, a migrant may not mind moving down to a relatively lower social position upon migrating to urban area due to the absolute gains emanating from such movement, observes the International Monetary Fund (IMF) working paper titled ‘Inequality and locational determinants of the distribution of living standards in India’.

Using 2011-12 consumption micro-data, researchers Sriram Balasubramanian, Rishabh Kumar and Prakash Loungani found that that nearly one-third of the variation in living standards in India can be explained by location alone. Consumption levels and locational inequality are positively related. In effect, from an individual’s perspective, living standards are higher in richer, but more unequal, locations in India. The central factor behind these findings is the large difference in average consumption levels between rural and urban India and continued divergence in per-capita income between rich and poor States.

Key finding

Using nationally representative survey data on consumption (a proxy for living standards), the main finding of the research is that almost a third of the variation in living standards can be accounted for by location. Richer States are associated with higher consumption levels and an individual can increase his/her living standards in the more unequal subregion. It means that consumption is positively related to the degree of locational inequality.

“While this last result is especially pronounced for the upper classes, it is statistically significant for every decile of the consumption distribution. One potential explanation may be the concentration of economic growth in the urban sphere which simultaneously produces higher inequality,” researchers added in the paper.

“Our results show that the growing rural-urban gap and divergence in growth across States exacerbate the otherwise slow rise of consumption inequality in India. These gaps have created significant location premiums which explain between 25 per cent and 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,” researches claim.

The research outcome explains the large flow of inter-State migration. According to the 2017 Economic Survey of India, and the 2011 census, 9 million migrate annually in India and 139 million out of a 1.3 billion strong population are migrants. The researchers have not included socio-economic factors like caste, gender or religion that may be specific to each individual.

Income level in Bihar

To elucidate, Bihar, mostly rural, has 10 per cent of SGDP per capita compared to Delhi. Assume one-to-one proportionality between consumption and income. Then, if an individual placed at an income level of one-tenth of the mean income in Bihar is shifted to Delhi, but has to accept 1/20th of the mean income level there, this individual still sees a five-fold increase in actual income. The downgrade in relative class position is accompanied by an upgrade in absolute gains.

In 2011-12, the average income in the poorest State in India (Bihar) was around 13 per cent of the corresponding figure for the national capital (New Delhi), measured using per capita State Gross Domestic Product (SGDP). Partly this is due to a wider dispersion of consumption – urban regions account for the bulk of India’s rich while rural India remains relatively more equal, albeit at lower consumption levels.

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