Let’s start with a small thought experiment that Chip Heath and Karla Starr write about in Making Numbers Count – The Art and Science of Communicating Numbers. There is a lottery with several large prizes on offer, but with a simple condition, whatever amount you win, you need to spend $50,000 per day until you run out of the prize money you have won.
Let’s say you win a million dollars. At the rate of $50,000 per day, you will spend a million dollars in 20 days. Now let’s say your friend wins $1 billion. How long will a billion dollars last at the rate of $50,000 a day? Any guesses? A billion is a thousand times a million. Hence, if a million lasts for 20 days, a billion should last 20,000 days, which is around 55 years.
While we all know that a billion is many times a million, this example explains the difference in human terms and tells us how big it really is. There is something else that the example tells us. Once you are rich and have sufficient money and assets, you are likely to continue being rich and even become richer unless you have absolutely no control over your spending (as the example shows).
This happens for the simple reason that the assets you have accumulated are likely to keep growing. Or, as the poet and lyricist Gulzar wrote in the title song of Gol Maal, paisa kamane ke liye bhi paisa chahiye (to earn money, you need money).
The dynamic at work is very simple. The well-to-do own a bulk of the assets, everything from stocks to mutual funds to gold to real estate to art and so on. When any asset class gives good returns, the well-to-do insiders who already own the assets tend to do well.
Take the case of what has happened worldwide since the covid pandemic began. The rich have become richer as stocks and real estate (not in India) have rallied. A 27 December news report in the Business Standard pointed out that the number of Indian billionaires grew to 126 at the end of 2021 from 85 at the end of 2020. And it’s not just the billionaires who have done well. So have the millionaires and the lakhpatis who had enough money to invest in stocks.
And this is not just limited to India. As the Oxfam report titled Inequality Kills, published on 17 January, points out in a global context: “A new billionaire has been created every 26 hours since the pandemic began… while over 160 million people [including many Indians] are projected to have been pushed into poverty.”
But let’s concentrate on the Indian bit here, starting with gold. From April to December 2021, the first nine months of the current financial year, gold worth $40.1 billion has been imported. This is more than in any of the full financial years from 2013-14 to 2020-21. This tells us that rich are doing well and buying gold.
On the flip side, take a look at loans against gold jewellery given by banks. As of November 2021, they had gone up by 42% to Rs 65,630 crore. This means people are borrowing money against gold jewellery big time, which is the last thing an Indian family resorts to in a financial emergency. Also, the business newspapers are full of notices on defaults of loans taken against gold jewellery, meaning, many aren’t able to repay gold loans after taking them on.
As the latest Knight and Frank report for July to December 2021 points out: “The residential market turned a corner in 2021 with sales momentum consistently improving over the year.”
The trouble is that home loan data from banks doesn’t show the same kind of optimism, at least not for everyone. In December 2019, the total home loans given by banks stood at around Rs 12.8 trillion. By November 2021, this had jumped to Rs 14.9 trillion. Banks give out nearly two-thirds of the overall home loans. The housing finance companies give out the remaining.
Take a look at the following chart. It plots the priority sector home loans outstanding and the non-priority home loans outstanding over the last two years.
According to the Reserve Bank of India (RBI), a priority sector home loan is defined as: “Loans to individuals up to Rs 35 lakh in metropolitan centres (with a population of 1 million and above) and up to Rs 25 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed Rs 45 lakh and Rs 30 lakh respectively.”
Hence, in cities with a population of 1 million or more, home loans of up to Rs 35 lakh, for homes priced up to Rs 45 lakh, get categorized as a priority sector home loan. In other centres, home loans of up to Rs 25 lakh, for homes worth up to Rs 30 lakh, get categorized as a priority sector home loan.
Now take a look at the above chart. It can be seen that the outstanding priority sector home loans have been largely flat over the last two years, whereas the non-priority home loans have grown from Rs 8.33 trillion to Rs 10.45 trillion. The jump in overall home loans outstanding is primarily because of non-priority sector home loans.
Given this, only those who can afford homes and home loans over a certain price and a certain amount are actually taking fresh home loans to buy homes. This is because they have the confidence in their economic future to repay the EMI. The rest lack the confidence needed.
Passenger vehicles sales
A similar trend can be seen in domestic passenger vehicles sales during this year. Passenger vehicles comprise cars, vans and multi-utility vehicles (MUVs). Data from the Society of Indian Automobile Manufacturers (SIAM) tells us that a total of 2.15 million units were sold domestically (excluding BMW, Mercedes and Volvo) in the nine months to December. During the same period in 2020, total sales were at 1.78 million units. It was at 2.12 million units in 2019. Clearly, the passenger vehicles sales are back at the level before the pandemic.
Passenger vehicles in India are typically bought by the well-to-do. Nonetheless, the growth has been driven by MUVs. Sales have jumped from 6.77 lakh units from April to December 2020 to 1.04 million units during the same period in 2021. This tells us that even when it comes to passenger vehicles, the more rich are doing better than, the less rich. Also, there is a long waiting period for some of these expensive vehicles.
In fact, if we consider only non-MUV sales, they were flat from April to December 2021. (The reason I am sticking to data for only the last few years is that the reporting format of this data has changed).
What about domestic two-wheeler sales?
Take a look at the following chart which plots the domestic two-wheeler sales from April to December over the years. Two-wheelers include motorcycles, scooters and mopeds.
Last week I wrote a piece for Livemint.com, in which, looking at the above chart, I concluded that domestic two-wheeler sales from April to December 2021 had been the lowest in a decade. They were lower than the sales from April to December 2020, even though there were zero two-wheeler sales in April 2020. (These sales include some electric vehicles and don’t include others, given that every electric two-wheeler manufacturer is not a part of SIAM, the industry body which shares this data. But the sales of electric vehicles are minuscule, and they don’t make any difference to the overall point being made).
The two-wheeler sales are at a decadal low despite very low interest rates. What this tells us is that people who possibly want to buy two-wheelers aren’t confident enough about their economic future and their ability to pay EMIs. The interesting bit is that this is not just the negative economic impact of the pandemic. Two-wheeler sales peaked in 2018-19. They have been falling since.
A possible explanation for this lies in the fact that the economy was already suffering from the negative impact of demonetization and the botched up introduction of the goods and services tax before three covid waves struck, destroying a significant portion of the informal sector.
Hence, the impact of India’s post and pre-covid slowdowns has been different on different segments. Passenger vehicles sales haven’t been impacted as two-wheeler sales have been. The demand for expensive real estate has picked up post covid. Credit card spending remains strong.
When I made the point regarding two-wheelers last week, many explanations were offered on social media. They concluded that the fall in sales had got nothing to do with different sections of the population being impacted differently.
Let me try and summarize those explanations and why they don’t make sense.
1) The number one explanation offered was that people are waiting to buy electric two-wheelers. Two-wheeler sales have been falling for three years now. Does it mean people have been waiting for three years to buy an electric two-wheeler? Somehow I am unable to digest that.
2) Another explanation offered was that people are buying electric two-wheelers. They are. But the total amount is way too low. As a report in the Mint pointed out, data from the Society of Manufacturers of Electric Vehicles (SMEV) shows the total electric two-wheeler sales in 2021 had stood at 233,971 units against 100,736 units sold in 2020. Clearly, sales have more than doubled, but they are minuscule in the overall scheme of things.
3) Rajiv Bajaj has explained the slowdown in two-wheeler sales by linking it to a 30% increase in prices in a quick time. Electric two-wheelers tend to be more expensive than normal ones. So, if many people are not buying normal two-wheelers, they can’t possibly be waiting to buy electric ones.
4) Another explanation offered was that while people may not be buying new two-wheelers, the second-hand market is hot. I spoke to a couple of experts who know the second-hand market well, and they did say that the market is pretty hot right now.
Now, what does that tell us? People buying second-hand vehicles does not expand the overall market or the economy in the same way as buying a new vehicle does. Further, people who are buying used vehicles are not financially in a position to buy a new one. For every buyer, there needs to be a seller. Hence, why are people selling their two-wheelers? Are they in a financial crunch?
Of course, it can be argued that people are selling their old-two wheelers to buy newer ones or possibly even buying a car. But that explanation also doesn’t work because sales of entry-level cars have largely been flattish. Also, given that two-wheeler sales have come down dramatically, people can’t be selling older two-wheelers to buy newer ones, at least not in the aggregate.
5) Oh, there was also the Uber-Ola argument. People are not buying two-wheelers because they are using Uber-Ola. Some lame arguments never die; they just find a new generation of believers. Uber-Ola was there even in 2018 when their services were perhaps much better than they are now, but that did not stop people from buying two-wheelers.
6) One sensible explanation offered was that people are working from home and hence, don’t need to buy a two-wheeler. This makes sense. Nonetheless, even those buying new passenger vehicles are working from home, but that hasn’t stopped them from buying.
7) Another sensible argument made was that the two-wheeler density in India is already quite high. The data bears this out. According to the Road Transportation Yearbook of 2018-19, as of 2018, India had 128 two-wheelers per 1,000 of population. This is one of the highest in the world, though not the highest, with Italy and Indonesia being higher at 161 and 403, respectively.
This leads to two more interesting points. First, while two-wheeler density may have peaked, people aren’t moving on to buying cars. When it comes to passenger cars, the penetration is at 23 per 1,000 people, when it’s at 116 in China and 56 in Indonesia. Clearly, people are not moving up the value chain.
Second, if two-wheeler density is already high, what does that tell us about the immediate future of electric two-wheelers? Of course, as the life of the two-wheelers people currently use gets over, they will have to buy newer ones. Nonetheless, for them to buy electric two-wheelers, many other things need to come into place.
The K-shaped economic recovery
What all this tells us is that a K-shaped recovery or a two-paced economic recovery is in place. While the well-to-do section of the economy is doing well, the not so well-to-do isn’t.
The section of the population which is lucky enough to be able to work from home has ended with forced savings, given that they don’t need to commute to offices. At the same time, savings have also gone up thanks to lower spending on everything from travel to eating out to shopping. Some of these savings have found their way into stocks and helped people upgrade to more expensive homes.
There are other data points that show a K-shaped recovery. As I have often pointed out, the labour participation rate has been falling over the years and has fallen faster since the pandemic started (though it has recovered a little in recent months). This means that people who can’t find jobs stop looking for one and simply drop out of the workforce. Many micro, small and medium enterprises are in trouble, though big business is thriving.
Also, as former RBI Governor Raghuram Rajan pointed out in an interview with The Economic Times, agricultural employment has increased from 26% of the labour force to 29%. “No growing country increases employment in agriculture,” he said. This basically means that people who have lost their jobs have fallen back on farming, increasing the labour force that depends on agriculture, as reflected in the fact that rural wages in November grew at a slower rate than the rural inflation.
It is also reflected in work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme. The work demanded under the scheme from April to December was around 4.9% lower than the work demanded during the same period in 2020. Nonetheless, it was around 45.3% more than the work requested during the same period in 2019. This tells us that the rural economy is still struggling primarily due to the destruction of the informal sector. This struggle is reflected in the slow two-wheeler sales and FMCG sales.
Further, as per the first advance estimate of the gross domestic product put out earlier this month, the total private consumption expenditure in 2021-22 is expected to be lower than that in 2019-20.
These are tough times for many. You, dear reader, may not be facing the same economic pain as others. But just because it’s sunny outside your window in the gated community you live in or the unicorn or IT company you work for, doesn’t mean that all is well.
The government can address this in the upcoming budget on 1 February. Of course, the first step in solving a problem is to recognize that it exists.
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Written by Vivek Kaul. Edited by Saikat Chatterjee. Produced by Nirmalya Dutta. Send in your feedback to firstname.lastname@example.org.