The duality in India’s economic recovery

India stands at a critical juncture of the Covid-19 pandemic. There is a belief that the pandemic-induced economic crisis may finally be over. The silver lining is that the majority of the eligible population is getting vaccinated against the Covid-19 infection. The higher rate of vaccination is enabling the Indian economy to regain its lost momentum.

However, there are still many variables that can derail the pace of economic recovery. For instance, the increasing disparity in vaccine coverage between low-income and high-income States poses an imminent danger to recovery. The higher income States, the powerhouse of economic activity, have vaccinated 45-50 per cent of its eligible population. Yet, the fully vaccinated population in poorer States remains under 30 per cent.

The initial push

According to government statistics, the economy is on the steady path to recovery from the shock of the second wave of the pandemic. The RBI projected real GDP growth of 9.5 per cent for the FY 2021-22. Similar projections have been made by the Finance Ministry and multilateral agencies like IMF and World Bank, projecting GDP growth rate in the range of 8.5-9.5 per cent, indicating a V-shape recovery.

From a negative growth rate (-7.4 per cent) in the FY’20-21, the GDP growth rate for the quarter ending June 2021 rebounded to 20 per cent and, for the quarter ending March 2021 to 1.6 per cent.

The optimism is the result of increased consumer confidence and vaccination coverage. Of the 940 million adults eligible for vaccination, 80 per cent or 752 million have received at least one dose. This along with natural immunity from past infection allowed the government to ease restrictions on mobility.

Google data indicates that the mobility trend across retail, transit, residential, and workplaces is back to its pre-pandemic level. Real-time Indicators, including, PMI, e-way bills, GST collection, electricity demand, etc. recovered to their pre-pandemic level. Industrial output recovered during the quarter ending September 2021 and recorded a growth of 8 per cent compared with the year ago.

The GST collections grew more than 25 per cent in July, August, September and, October and reached an all-time high of ₹1.3 lakh crore in October 2021. Exports and imports recovered to the pre-pandemic level. Exports grew 38 per cent in the quarter ending September 2021. The stock market is sizzling with a record number of IPOs debuting.

Uneven recovery

However, observers, would notice a duality: pandemic created a saving glut with the top income quintiles, who deferred consumption due to mobility restrictions and economic uncertainties.

The rest, in the bottom 50 per cent income quintile, suffered permanent loss of jobs and incomes. It is the former section of the population that is leading the present recovery. The present growth is a result of lower base effect and pent-up demand.

The pandemic has forced people in the top income quintile (100 million people with purchasing power equivalent to the bottom 50 per cent) to save more and defer consumption. However, with the threat of second-wave receding, along with higher vaccination coverage, these people have regained confidence and resumed spending — a release of pent-up demand.

Two economic phenomena substantiate these claims; as the rich get richer in terms of wealth and consumption, it creates a saving glut. The glut forces the interest rate to fall; people search for alternative asset classes for a higher return. In India, these excess savings are getting channelised into the stock markets and real estate, fuelling asset prices. Asset price bubbles make the rich feel even wealthier, exacerbating inequality.

This phenomenon explains the recent surges in stock markets and real estate, despite frail macro fundamentals. Asset price bubbles also exacerbate the economic duality. A proportion of the population recover faster and start to spend money on goods and services at an increasing pace. This is reflected in most high-frequency economic indicators.

On the other hand, a larger proportion of the population is yet to recover fully from job and income losses. For instance, per CMIE’s consumer pyramid survey, the labour force participation rate has declined from 43 per cent to 39 per cent between March 2020 to September 2021.

In absolute terms, 1.4 million people have been forced out of the labour force. The unemployment rate (age 15 years and above) for the quarter ending September 2021 was 7.3 per cent, roughly the same (7.5 per cent) recorded a year ago. In addition, 2.6 million people have lost their jobs since the start of the pandemic.

Another whopping 3.5 million people are unemployed and have stopped looking for jobs. i.e. discouraged workforce. In total, 60 million people are yet to get their jobs back. A higher proportion of workers who earlier identified them as casual/regular labour, now identify themselves as self-employed. As per recent estimates (calculated from PLFS), the absolute number of poor in the country has increased by 76 million between 2011 and 2020.

Looking ahead

While the initial turnaround in the economy is encouraging, its overall distribution and sustainability remain a concern. Positive consumer confidence and animal spirits are a result of higher vaccination coverage in richer States, a decline in the number of infections, and the fading threat of the new Covid wave. These along with past precautionary savings and deferred consumption boosted economic confidence. The private investments and job loss are yet to recover.

Any resurgence of new cases due to lagging vaccination can reverse the economic trends. Concerns about regional inequities over access to vaccines are a problem. The vaccination rate in richer States is over 48 per cent and for low-income States, the rate is less than 30 per cent. If the vaccination rate in poorer States, home to the largest labour force, is not increased, we may not be able to reach the pre-pandemic growth phase.

Sooner or later, the unvaccinated workers from poorer States will migrate to richer States, leading to the resurgence of cases. Therefore, the focus must be on addressing the equity concern and speeding up vaccination rates in low-income States.

For an even recovery, the economic duality needs to be rectified. The people in the bottom 50 per cent income quintile are still in doldrums and require income and consumption support.

Fiscal policy needs to be prioritised over monetary policy; targeted demand push in the form of extension of the free ration scheme, financial support to struggling SMEs and increased outlay for MGNREGA may help sustain the economic recovery.

The writer is an economist. Views expressed are personal

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