'Hard to avoid income inequality...': Economist Neelkanth Mishra on why it is rising in India

As India becomes the world's fourth-largest economy with a projected GDP of $4.19 trillion in FY26, Neelkanth Mishra, Chief Economist at Axis Bank, said rising inequality is a structural challenge that is difficult to avoid at this stage of development. In an exclusive interview with India Today, Mishra explained that during this phase — where labour shifts from agriculture to industry or services — capital gains greater pricing power than labour, leading to a natural rise in income inequality.

"At this stage of growth, there is no economy in the world which has not seen an increase in inequality. Because at this stage of growth where a very large percentage of people are available in the labor force that are shifting from agriculture to manufacturing or services, there is a surplus of labor and there is a shortage of capital. So what tends to happen is labor then loses pricing power because there are too many workers and too little capital. So capital has more pricing power and therefore income starts to shift towards capital and that drives an increase in inequality."

Mishra cited standard economic theory to explain the trend but said India has been able to temper its effects in recent years. “Between 2012 and 2023 we actually saw consumption inequality in India fall," he said, attributing this to access to essential infrastructure like roads, electricity, phones, and cooking gas.

"After some time - it's called the Lewis Turning Point - when the labor supply stops growing, inequality starts to come down or is expected to come down. But that's some distance away. In the interim we have to be very careful about the the rising inequality," the economist added. 

He warned that if inequality continues unchecked, it could erode political consensus on critical economic reforms. "It's extremely important that we manage to drive growth in a path which does not increase inequality to the extent it can,” he said, suggesting solutions like broader access to credit, equity capital, and entrepreneurship support across Indian cities.

On India's rapid growth, Mishra said sustaining a 6–7% real GDP growth rate is an achievement, given global economic turbulence and domestic political churn. He added that while India has climbed in absolute GDP rankings, its per capita income still places it outside the top 100 globally, with significant distance to cover in terms of quality of life.

He acknowledged that India has made major progress in financial inclusion and basic infrastructure but stressed that moving from $3,000 to $10,000 per capita income will involve tougher challenges, such as managing urbanisation and fostering domestic innovation.

Responding to concerns about the middle-income trap, Mishra said India is not yet close to it, but preparations must begin now. "The middle-income trap hits you around $10,000 per capita. That's where just copying what the rest of the world has done and moving forward is not enough," he said, adding that India has a long way to go to get caught there.

"We have at least 15 years before we start worrying about the middle-income trap. But we need to start working towards preventing getting caught in that trap because after you get there you can't think about getting out of it."

He also highlighted geopolitical factors that may arise as India grows, referring to a possible "resisted rise." "Imagine if we were a $15 or $20 trillion economy. We will start becoming a threat to many other large economies. So this is the concept of the resisted rise. We will start to see other countries starting to put impediments on our path. So therefore preparing for what will hit us maybe 10-12-15 years later in the challenges that make countries get stuck in the middle-income trap we need to start working on them right now."