Recovery is K-shaped not V-shaped

The Economic Survey 2021, predicted a ‘V’ shape recovery. The Survey projects the real economy to grow at 11 per cent in 2021-22. The estimates are close to the one given by IMF (11.5 per cent) in its global outlook report. If achieved, the real GDP will reach the pre-pandemic level of 2019-20.

Two more reports, RBI’s Financial Stability and NSO’s first advance estimates, hinted at V shape recovery. As per NSO, the real GDP contracted by 7.5 per cent in Q2 of 2020-21, compared to a whopping 23.9 per cent during Q1. The total GDP contraction for the first half of 2020-21 is estimated at 15.7 per cent.

It further predicted that the economy would recover in the second half of 2021. However, this recovery in the average GDP is upwardly biased and doesn’t capture the typical median income of households. It simply means that the income of richer households is several times greater than those of the poorest households. It also means that the rate of recovery is different for the richest and poorest households.

A closer look at the GDP numbers indicates a K shape recovery, recession followed by recovery, but at different rates and magnitudes. The richer households and businesses are witnessing their incomes and profits growing at a faster pace. Meanwhile, income and consumption are destroyed at the bottom. The differences are visible in employment and consumption statistics.

Deteriorating employment, discouraged workers

Interestingly, CMIE’s CPHS survey showed that employment fell by 20 per cent and 3.5 per cent in the June and September quarters respectively. The total aggregate employment was 406 million in the March quarter. This fell sharply to 320 million in the June quarter, recovered to 394 million in the September quarter and felt again to 393 million in November 2020 — 13 million short of what it was in March 2020.

A study conducted by researchers, at Azim Premji University, using CPHS survey finds that “while 80 per cent of pre-Covid workforce is back in employment, the structure of employment has changed dramatically”. For instance, younger and women workers have lost their jobs and still struggling to find employment. By August 2020, 60 per cent of women have lost their jobs (y-o-y basis).

A World Bank report, using CPHS data, highlighted that the recovery was uneven and changed the pattern of the employment by shifting (30 per cent) workforce into informal employment, particularly self-employment.

Economic distress has increased among workers in the labour force. This discouragement effect is captured by the labour force participation rate. The workers reporting to be unemployed, but are looking for work has declined to 27 million in November 2020 from 33 Million in November 2019. Similarly, the count of people who are willing to work, but, have stopped looking for work was 22 million in November 2020, almost twice the number recorded last year. Overall, the labour force participation has shrunk by 16 million in Nov 2020 (y-o-y basis).

This is in sharp contrast with the growth in the aggregate profits of the listed companies. Their cumulative net profits grew by 23 per cent in H1 2020-21, compared with an average growth of 12 per cent in the past 5 years. A similar shift away from wages and towards profits have been highlighted in Oxfam’s “Virus Inequality Report”. The report said “The wealth of India’s top 100 billionaires increased by ₹12 trillion. This is in stark contrast to the 13 million people who lost their jobs.

Consumption remains depressed

The last few decades have witnessed the share of employment, including self-employment, in sectors with low real wages, productivity and profits (construction, mining, micro and small enterprises, small retail and hotels) increasing. However, the share of employment in sectors with high productivity and profits (ITES, Financial, Education, Pharma) dwindled.

The implication, a dual economic structure, with high wages and profits for a few at the top and stagnant wages and profits for the majority at the bottom. Thus, the economic gains have mostly flowed through various channels to households in the top percentile of the income distribution. Households in the bottom were always vulnerable.

Unfortunately, the sector impacted by the pandemic are the ones with a large share in employment and hence income and job losses are hurting majority households. The resulting income losses have reduced household consumption which makes up almost two-thirds of India’s GDP.

For instance, as per NSOs advanced estimates, the private final consumption expenditure is projected to contract by 9.5 per cent for fiscal year 2020-21. In the current fiscal year, consumption is down by 10-12 per cent, compared to pre-Covid levels. At the disaggregated level, expenditure on essentials, including fruits, vegetables, dairy and non-essentials has dropped substantially.

The way forward

The fiscal stimulus provided by the government for revival has largely proven to be inadequate. It’s magnitude — ₹20 lakh crore and 10 per cent of GDP — was huge, but the breakdown of the spending is biased towards business and less supportive of households. The funds that can directly support the households comes to 0.8 per cent of the GDP.

Given the three wheels of the Indian economy — consumption, investments and exports — have come to a complete halt, the only way to support the economy is for the government to support effective demand. This is most essential for supporting consumption and investments and hence the economic activity. The government can restore effective demand by judiciously managing its Budget spending.

So far, the government has restrained from acting as the borrower of last resort and transferring the money to households, fearing a breach of fiscal deficit and increasing debt to GDP ratio. An expansionary fiscal policy is the need of the hour. if the government could increase its net borrowings and spend that money on Capex, meaningful infrastructure creation-rural roads, districts hospitals, farm gate infrastructure, urban job creation etc.

This would do the trick. These injections will be demand stimulating and would crowd in private investments. However, if the new spending is largely channelised towards the revenue side of the Budget i.e. revenue deficit, this would hamper growth and push the economy towards stagflation- high inflation and suboptimal growth.

The writer is an Economist with Swaniti Initiative, and has previously worked in Economic Advisory Council to Prime Minister, NITI Aayog, GOI, and Food and Agriculture Organisation of the United Nation. Views expressed are personal.

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