The social cost of rising rural-urban inequality as a result of implementing an open economic policy within a developing country is a widely accepted fact. In context to India, pages have been filled over trying to assess the implications of the neoliberal economic reform programme over the 1990s.This paper highlights the idea of divergence within India due to poor implementation of Washington Consensus type policies in 1990s leading to higher rural-urban inequality. While the pro-market reforms of 1990s were not specifically directed at employment, ‘the stated expectation’ of policy makers over this period was that liberalizing markets, easing the conditions for entry and operation of foreign investors and encouraging exports especially in agriculture, would all contribute to generating more employment. The paper contradicts this stated expectation of neo liberal advocates and focuses on identifying the link between public expenditure, wage inequality and growth of employment opportunities across sectors within rural-urban areas during the 1990s. Indicators like employment elasticity and state per capita output in the paper provide a forward looking approach needed by policymakers and the state in addressing the rise of rural-urban inequality.