The Hidden Divide: Unpacking the Consumption Inequality Gap
- Hindu College Gazette Web Team
- Jul 18
- 6 min read
We often discuss Inequality through the lenses of income and wealth, yet an equally important but less discussed dimension is ignored: Consumption Inequality. This concept shows disparities in how different social and economic groups spend on various goods and services. Income inequality reflects earnings; consumption inequality, on the other hand, reveals how these earnings translate into lived experiences and what people can afford, buy, and access. This aspect is very crucial for understanding the wider socio-economic division in rapidly developing countries like India.
Consumption inequality underscores the difference in spending capacities across the economic groups, exposing the true magnitude of socio-economic imbalances. It reflects how vital and discretionary spending varies between wealthy and low-income households. Affluent groups spend on luxurious goods, quality education, and private healthcare facilities, while lower-income groups struggle to even meet daily basic needs. According to a report by the World Inequality Lab’s 2023 report, the top 10% of Indians earn over 57% of the country’s national income, while the bottom 50% earn only 13%. This uneven income distribution, as a matter of course, translates into consumption inequality, widening the gap between the economic tiers.
According to the Capability Approach proposed by Amartya Sen, inequality is not only about the difference in expenditure, but it also represents the different rights and opportunities. What people accomplish with their costs is more important than their consumption volume. The Law of Engel is the best example of how it takes place: the higher the income, the smaller the proportion spent on the necessities. India 1 has a surplus for luxuries, whereas India 3 still pays the majority of it for food and basic needs.
The India 1, India 2, and India 3 Framework
A useful framework to understand these divisions is the segmentation of the population into "India 1," "India 2," and "India 3."
India 1: This 10% of the population, which is equal to 140 million people, has a per capita income of $15,000. They have globalised consumption and account for two-thirds of India’s discretionary spending. Their teeming ranks of consumers are fuelling the Indian startup ecosystem and kindling demand in premium categories: think luxury housing and premium travel.
India 2: Representing about 30-40% of the population (Closer to 300 million people), the aspirant class has a per capita income of ~$3,000. Though they eat more than they ought to, they can’t afford to eat as much as they would like. Digital payment systems such as UPI may have opened up small-ticket transactions for this constituency, but they stand financially exposed.
India: 3: 50% (~1 billion) with a per capita income of $1,000. Only food and public health care are essential enough to be purchased. For the most part, they're not monetizable at all for the majority of consumer internet startups and are left out in the cold when it comes to things that come with growth.
Indian consumer stack by share of household discretionary spend
Why the Gap Persists and Widens
Despite several technological advancements and rapid economic growth in the past decade, a big part of our country, India 2 and India 3, continues to fall behind. Various structural and systemic factors play a part in contributing to this continuing divide:
Uneven Income Growth: India 1 has enjoyed and continues to enjoy the benefits from globalisation, digital economies, and financial markets, and many in India 2 and India 3 have seen their wages stagnate, especially those in informal sectors. The hypothesis of Permanent Income by Friedman explains the reason for which India 2 and 3 have low consumption. That is, they face economic and social vulnerabilities that make uncertain their future income and savings, and, therefore, they are not willing to spend what they possess.
Access to Essential Services: India 1 enjoys premium services such as private education and healthcare, as well as quick commerce daily, meanwhile India 2 and India 3 rely on underfunded public services, which are often not up to the mark and sometimes entirely out of reach. For many families, basic healthcare facilities remain a luxury rather than a right.
The Digital Divide: In a world where digital space has taken over, wealthy economic groups leverage advanced digital infrastructure. But millions of rural and low-income groups face difficulties and barriers to accessing digital services, further deepening inequalities in education and financial inclusion.
High Costs of Living: Rising costs of food, healthcare, and education affect the vulnerable India 2 and 3 the hardest. Inflation takes away their purchasing power, becoming a barrier to their aspirations for upward mobility.
Why Tech-Driven Solutions Fall Short
While digital platforms and financial technologies do have the potential to democratise access, in reality, their benefits still stay within India. The rapid rise of quick commerce, which caters to the upper class, is an example of this disparity, which is built on cheap labour and densely packed neighbourhoods. India's rider cost-to-gross-order value is far lower than we see in China or the West, making these services profitable yet leaving lower-income groups largely excluded from their benefits.
For the aspirational India 2, the shift towards tech-driven solutions has been anything but straightforward, mainly due to patchy digital literacy and shaky infrastructure. Fintech and digital payment systems have no doubt expanded financial access, but for many households , easy access to small loans has also led to rising debt levels. Instead of fueling sustainable growth, it has, sometimes, added to their financial vulnerability.
The Broader Economic Implications
The effects of consumption inequality stretch beyond individual hardships; they ripple across the entire macroeconomy:
Shrinking Household Savings: Over the last two decades, India's household financial savings dropped from 10.1% of GDP in FY00 to 5% in FY23. Much of this dip is largely due to rising personal debt. At the same time, Small-ticket personal loans have exploded, growing nearly sixfold over the past seven years. Rising debt might help families get by today, but it eats away at future consumption and leaves the economy more vulnerable.
A narrow Consumption Base: With most spending power concentrated in India 1, domestic demand remains uneven. Luxury markets continue to thrive, but India 2 and 3 struggle to raise their spending, limiting broader economic participation and weakening the foundations for long-term, sustainable growth.
An Uneven Tax Burden: As of FY23, just 2% of Indians were paying income tax, a number expected to fall even more due to new tax exemptions. This growing imbalance puts pressure on a small slice of the population, tightening the government's budget and making it harder to fund public services.
The Role of Land, Labour, and Capital
One big obstacle to narrowing consumption inequality lies in structural barriers to industrial and manufacturing growth. Historically, countries which transitioned from developing to developed economies relied on strong manufacturing sectors, which India skipped. However, in the case of India, industrial land remains prohibitively expensive, and labour, though it is cheap, is largely unskilled. Moreover, lending rates fall between 12% to 15%, compared to 4% in China, making capital beyond the reach of small and medium enterprises (SMEs). Without any notable improvements in these areas, India 3 cannot make headway into India 2, and India 2 remains confined below the lower bounds of India 1, where per capita incomes start at around $8,000.
The Future of the Consumption Divide
Apart from getting wider, India 1 is getting deeper. An inclination, such as the rising share of premium housing and luxury consumption, underscores this shift. The experience economy, shaped by the urban elite, reflects a bitter reality where wealthy conditions the market. However, the structural barriers restraining India 2 and India 3 are long-term risks to social harmony and economic viability. It's why tackling these inequalities must be based on evidence and why it requires a whole series of policies covering education, access to finance, reducing industrial land costs, and fostering skill development.
The 'consumption inequality' gap in India is not just an economic statistic, it is an indication of societal disequilibrium. While India 1 keeps growing wealthier and more influential, India 2 and 3 remain at the edge of economic well-being. For India to achieve long-term multi-decade, shared growth, policymakers, corporates and civil society need to work together hand in hand to break down systemic barriers and provide greater avenues for advancement. Only when the consumption divide truly comes to an end, the country be able to build a more inclusive future. It is only with such collective effort that the country can bridge the gap in consumption and create a more inclusive future.
By Pakhee Dubey
Pakhee Dubey is a first-year Economics Honours student at Daulat Ram College. She is keen on economics, public policy, and global trends. She enjoys analysing complex ideas and sparking conversations about the forces shaping modern society.
References
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