The latest CSO estimate that the Indian economy shrank by 7.3% in FY21 caused many economists to heave a sigh of relief. It could have been worse—the CSO had earlier estimated that the GDP would fall by 8%.
The discussion now is about how the economy will do in the current financial year. The optimism at the beginning of the year has given way to a more cautious outlook because of the havoc wreaked by the second wave of the virus. Most observers are now resigned to the fact that the GDP will grow in single digits—and not in double digits as had been predicted earlier. That too, if no fresh crisis erupts.
The bigger worry is the nature of the recovery. It seems very likely that India will exit the pandemic with a sharp increase in the number of poor and a much higher wealth disparity. A minuscule slice of the population would increase their net worth while many in the middle class will be pushed into the ranks of the poor. The already poor would slip further down. This will have ramifications for society and India’s economic growth over the medium term.
Not everything should be blamed on the pandemic—the economy began slowing and unemployment started rising a good two years before the virus came visiting.
By the middle of 2020, it was already clear that the pandemic had increased inequality. A handful of big, well-capitalised firms were doing better than ever even though the market had shrunk. They gained market share, cut costs and squeezed out smaller rivals.
In a strong economy, there are often opportunities even for small and medium-sized enterprises (SMEs) to do well. In a contracting economy, the financially strong eat the lunch of the weaker firms.
A study by a newspaper showed that the combined net profit of the listed firms was up 57.6% in FY21—the corporate profit share in India’s gross domestic product (GDP) hit a 10-year high of 2.63%. The stock markets have cheered this by rising to new highs despite the overall economic gloom. This has increased the wealth of promoters and smart investors.
But SMEs are suffering. A survey of over 6,000 SMEs and start-ups by a social media platform found that many of them were scaling down. Over 40% of the entrepreneurs surveyed said that they were running out of cash.
Rising inequality could also be seen in the simultaneous rise in the number of billionaires as well as the unemployed. Half-a-dozen billionaires have joined the ranks of those already perched on the top of the wealth ladder. Meanwhile, the number of unemployed has been rising relentlessly in both the formal and informal sectors.
Once economic activity resumed last year after the lockdown ended, not all jobs that had been lost came back. In 2020, Covid pushed nearly 23 crore people into poverty, a study by Azim Premji University had estimated. In the second wave, things have been worse. CMIE estimates that over 10 million jobs vanished in this round and 97% households saw their incomes drop.
Many of these jobs will not return soon either. Both big and small companies are managing with fewer employees. The smaller ones are doing this because they are cash-strapped while the richer ones are simply fattening their profit margins.
The saving grace of the first wave of the pandemic last year was that rural areas were left largely unscathed and there were fewer deaths. The second wave has left a trail of death and debt in both urban and rural India.
Officially, deaths due to Covid total around 3,35,000. Unofficially, it has been estimated at anywhere between 5 and 10 times the official figure. The second wave has also resulted in deaths of younger people, often sole breadwinners of their households. Households have also been pushed into deep debt by the pandemic.
Some of this pain will not be easily captured by government statistics though the story can be derived from other data. For example, gold loans have shot up as more households pawn their ornaments to get cash for immediate needs. This happens only during the worst of times. Also, many who had pawned gold in the first round are failing to redeem it. Delinquencies in the microfinance sector tell a similar story. Personal debt, both through formal as well as informal means, have risen sharply. And this in turn is showing up in the way households are spending less.
In normal times, private consumption is a big driver of the Indian economy. But it was slowing even before the pandemic struck. And though it showed a marginal uptick when the lockdown was removed, it is slowing again.
The government’s ability to spend is not infinite despite increased borrowings and asset sales. Private investment into new fixed assets has been sluggish and with capacity utilisation around 60%, it is not going to improve quickly unless private demand increases. And that in turn won’t happen unless jobs and incomes grow once again.
The government may console itself that big companies are still making big profits and the stock markets are still rising. But that does not solve the basic problems facing the economy.
Prosenjit Datta
Senior business journalist
(prosaicview@gmail.com)