Abstract Despite three decades of sustained economic growth, income inequality across Indian states has widened, with persistent rural-urban disparities. This paper argues that inequality is fundamentally a legal and institutional problem, not merely an economic one. Using a multi-metric empirical framework — integrating the Gini coefficient, percentile ratios, Generalized Entropy (GE) indices, and the Atkinson index — we analyse income inequality across High, Moderate, and Low Net State Domestic Product (NSDP) state groups, identified through Z-score standardisation, supplemented by OLS regression and Theil index decomposition. Moderate NSDP rural areas record the highest inequality (Gini = 0.4849; p90/p10 = 15.656; A(1) = 0.394), while High NSDP urban areas exhibit rising top-end wealth concentration (GE(1) = 0.1969). Financial inclusion emerges as the strongest predictor of reduced inequality (β = −0.31, p < 0.01). Theil decomposition reveals that 58% of total inequality is intra-state, rendering inter-state fiscal transfers insufficient as a standalone remedy. The paper recommends targeted reforms to the Direct Benefit Transfer framework, labour law, agricultural market regulation, and progressive taxation to address India's structural inequality.
