BackThe pandemic will leave India with worse inequality
A failure to protect incomes could widen the gap between have-nots and haves and thus hurt growth
PremiumWhen the facts change, I change my mind," John Maynard Keynes is believed to have said almost a century ago. Responding to the economic after-shocks of the covid pandemic, governments and central banks have been living by this maxim. In the UK and US, supposedly fiscally conservative governments have spent with abandon to prop up the incomes of the poorer sections of society. In the US, a pay cheque protection programme and expanded unemployment insurance gave the poorest 10th percentile of households an increase in income of 165% in April and 14% in May, compared with February 2020 levels. More than 80% of workers in the retail, restaurant and hotel sectors in the US were eligible to receive more benefits from unemployment insurance than from working.
Developed-world governments have been seeking to protect what a recent paper by Martin Sandbu for the International Monetary Fund calls the “precariat" of service workers: “Those with insecure employment and income …(the) shockingly many people in the world’s richest countries with thin financial buffers." The plight of these workers, many in the gig economy, is not dissimilar to informal workers in developing countries such as India. Sandbu proposes more unconventional policies, even as countries such as the US have seen interest rates drop to near-zero, compared to 3% at the outset of the global financial crisis. “High demand pressure is necessary to benefit those on the margins of the labour market—the young, ill-educated, and minorities—who tend to be fired first in a recession and hired last in an upturn," he writes. “Concretely, this means running macroeconomic policy ‘hot,’ calibrating monetary and fiscal policies to keep demand always slightly ahead of the economy’s capacity."
The University of Chicago, long a bastion of free-market economics, has just published a book that turns its back on Milton Friedman’s famous credo that the primary social responsibility of the corporation is to make profits. In one of the essays, the Financial Times’ chief economics commentator, Martin Wolf, denounces companies that lobby to keep money offshore in tax havens, a financial sector that argues for “inadequate capitalisation that causes huge crises" and those firms that seek to “neuter effective competition policy".
India is a striking exception to this rebooted economic thinking as the world confronts economic inequalities made worse by the pandemic. Government consumption in the quarter ended 30 September fell by 22%. For the first half of the financial year, it was down a more muted 4%, but that it was declining when it should have been boosting demand is alarmingly contrarian. Finance minister Nirmala Sitharaman’s comment to Bloomberg on Tuesday that she will not “allow the fiscal deficit to worry" her perhaps suggests a change of heart, but the proof will be in higher spending.
There is also little evidence that the Narendra Modi government is beefing up competition policy to counter worries that Reliance Industries and the Adani Group may be carving up large tracts of India’s consumer and infrastructure sectors, respectively, between them.
What this adds up to is that India, one of the world’s most grotesquely unequal countries, is becoming more unequal. Profits of listed non-financial firms jumped 35% in the quarter ended 30 September. But, as JP Morgan’s Sajjid Chinoy points out, given that gross domestic product (GDP) declined, this underlines that “unlisted firms, small and medium enterprises, wages and employment contracted very sharply". He cites a sample of 4,000 firms that showed pressures on real wages and salaries starting from December 2018. When I asked him why, Chinoy pointed to the marked deceleration in GDP growth over the past couple of years—from 7% to about 3% in the quarter ended 31 March 2020.
The Indian economy was already suffering before covid struck, hurting lower-income workers, but since then it has been a bloodbath. This is apparent in Mint’s Long Story on 9 December, which showed that two in five of all equated monthly instalments via auto-debit transactions failed in October because of inadequate funds. Walking around my neighbourhood in Bengaluru this week, there was evidence aplenty that businesses catering to people with lower incomes are struggling. Gone is the tiny north Karnataka eatery that through some wizardry dished out two portions of delicious vegetables and jowar rotis for ₹30 a plate to students and construction workers alike. In a metaphor for India’s growing inequalities, it has been replaced with an (empty) shop selling expensive protein powder for gym junkies. The flower booth is gone. The witty pharmacist next door reported business is down 30%.
When I asked a gym manager at a five-star hotel how he was faring, he reported that his human resources manager called him in, back in May, to brief him of his career options: Sign either a leave-without-pay agreement or a resignation letter.
Millions of such stories of people trying to clamber up the middle-class ladder now being kicked off means that next year is unlikely to provide the V-shaped recovery India’s stock market seems to be projecting. As former chief statistician Pronab Sen recently said to The Wire, next year could see investment drop in response to squeezed consumption. If and when the government changes its mind and offers a sizeable fiscal stimulus, it will probably be too late.
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