Economic Growth and the Income-Consumption Disconnect: Evidence from Indian States

There is a fairly vast literature, which attempts to explain cross-regional (between countries or between states within countries) differences in per capita income growth. But poverty rates have a more direct relationship with household per capita consumption growth, which has generally not gone hand-in-hand with per capita income growth. Based on data from Indian states, we find that conditional on several parameters of interest; poorer states grew faster across sectors – on average – than richer states, but only when output is measured in terms of consumption. This ‘income-consumption disconnect' in the context of economic convergence may be indicative of migrant remittances from rich to poor states, welfare programs, or divergence in components of output other than consumption. Further, unlike the case of income, there is a robust negative relationship between consumption growth and the share of registered manufacturing in total output, perhaps indicative of the jobless growth that has characterized India's registered manufacturing sector. While the income-consumption disconnect is largely absent for all other variables, the share of agriculture in total output, the male-female literacy gap, population growth, road infrastructure, development expenditure and rainfall appear to have a robust association (albeit weak in some cases) with both consumption and income growth.