State of the economy

HIMANSHU     

THE Covid-19 pandemic led to unprecedented devastation in many countries. While the major impact was on health and wellbeing of citizens, its impact on the economy has led to serious clouds of recession globally and also in India. Most of the global economies are suffering from high inflation driven by supply shortages and are likely to witness recession or at the least deceleration in economic activity. The Indian economy was also affected by the Covid pandemic, particularly due to the sudden lockdowns and disruptions in economic activity caused by arbitrary rules and regulations under the guise of curbing the spread of the pandemic. This year is finally seen as the year of recovery with the economy finally open and most restrictions having been withdrawn or eased to a large extent.

It is in this context that one needs to ask the question of how the economy has performed and impacted different sectors of the economy, and above all, different strata of the society. Preliminary estimates available from the official data suggests that the recovery has been uneven with differential impact on the various sectors of the economy. Matters are complicated as far as the impact on income distribution is concerned. While there appears to be some evidence that inequality at the aggregate level may have come down, a detailed and disaggregated analysis suggests that it may not be the best outcome given the state of the economy.

The decline in inequality has come at a time when most other indicators point towards worsening of the living standards of households at the bottom end of the distribution. In other words, the decline in inequality seems to be driven not so much by rising incomes of the poor as a result of redistribution, but largely a reflection of much greater decline in income of the better-off households. Such a process of ‘levelling down’ is unlikely to be a favourable outcome not only for income distribution and inequality but also a worrying sign for the sustainability of the nascent recovery in the Indian economy.

This article is a preliminary exploration of the underlying trends in growth, inequality and poverty in recent years. Preliminary, partly because the full impact of the pandemic is yet to play out given the uncertainties of the major drivers of the Indian economy but also the global economy. But also, largely because recent years have seen an absence of reliable data on crucial aspects of the state of the Indian economy. The latter, is not just restricted to withdrawal and suppression of crucial data on aspects of the economy but also attempts at interfering with the autonomy of the statistical system. Nonetheless, whatever little data is available in the public domain, it confirms the broad assessment of an uneven economic recovery with rising misery for a majority of the households.

Perhaps the easiest (and laziest) way to assess the state of the economy would be to look at the growth numbers which are presented every quarter. While the aggregate growth estimates are the most popular, they are also the least transparent. However, given the obsession with growth, the starting point of any exercise has to begin with growth estimates. Briefly, Gross Domestic Product (GDP) of the Indian economy grew at an annual rate of 5.4% during the last decade of 2011-12 to 2021-22. For comparison, based on the new series of GDP estimates from the national accounts based on the 2011-12 series, the Indian economy grew at 5.1% per annum during 1981-82 to 1991-92, at 6% between 1991-92 to 2001-02 and 6.8% between 2001-02 and 2011-12. That is, this is the lowest rate of decadal growth after the economic reforms and only marginally higher than the pre-reform decade.

The GDP growth after 2014-15 was lower than the pre-reform decade of 1980s at 4.9% per annum between 2014-15 and 2021-22. Per capita incomes of Indians increased at 3.7% per annum in the last decade with growth in per capita income after 2014-15 at 3.3%.

The deceleration in economic activity is partly a result of natural shocks such as droughts in 2014 and 2015 and the Covid pandemic during 2020-2021. But it also suffered from several man-made shocks, two of them being the demonetization of 2016 and the hasty roll-out of the Goods and Services Tax (GST) of 2017. In fact, the Indian economy had started slowing down even before the pandemic hit the country. The growth rate of the economy had declined to less than half from 8.3% in 2016-17 to only 3.7% in 2019-20. Incidentally, this was not a period of any catastrophic natural event domestically or any major financial shock or otherwise globally which explains the sharp deceleration. In fact, the only two events during this intervening period are the demonetization and the GST roll-out which contributed to the sharp slowdown in the economy.

The pandemic after that contributed to a further worsening of the economic situation due to the sudden and strict lockdowns and the disruption in economic activity. The end result, even after the recovery from the pandemic is that per capita income of Indians in 2021-22 is lower than the levels in 2018-19. Per capita incomes have declined at 0.25% per annum between 2018-19 and 2021-22.1 Quite simply, the average Indian is poorer in 2021-22 compared to 2018-19.

The aggregate estimates are clear indicators of what happened to the economy in the immediate medium-term and particularly in the short-term of the last five years. Growth rates are an important metric of what is happening to the larger economy. But not everyone benefits from economic growth in the same way. One way to look at it is to examine the incomes of various groups of workers in the economy. We do not have information for every occupational group, but there are robust and reliable indicators of wages for a majority of workers. Among them, the most vulnerable are the wage workers or daily wage labourers. Table 1 gives the rate of growth of wages of rural casual workers in agriculture and non-agriculture.

 

 

 

Casual wage workers, which are among the poorest category of households have seen their daily wages decline in both agricultural as well as non-agricultural occupations. Agricultural wage workers have seen their real wages decline by 0.9% per year compared to last year. While their wages increased marginally in the last two years and the last five years, these have only grown at a low annual growth of 0.11% per year. On the other hand, those in non-agricultural occupations have seen their wages decline by 2.7% in the last one year, 1.3% compared to two years ago, by 0.9% compared to five years ago and by 0.5% during the entire term of this government. The other important category is of farmers. Despite claims by the government of doubling farmers’ income by 2022, official data suggests that farmers’ incomes have declined in the last four years.

Farmers’ incomes were increas-ing at 7.5% per annum between 2004-05 to 2011-12 and at 4.02% between 2011-12 to 2016-17. This was higher than the average per capita income growth during that period. However, farmers have seen their real incomes decline after 2016-17, during the slowdown of the economy, with real income declining by 1.5% per annum. The last time, farmers’ income declined was during the National Democratic Alliance (NDA) government of 1999-00 to 2004-05. This time, the decline is not only almost three times faster but has also come when the rural wages are witnessing a real decline in wage income. The cumulative impact of the decline in wage incomes and the decline in farmers’ income is that more than half of workers in India have seen their real incomes decline in the last five years.

The fact that two of the poorest groups in rural areas have seen their income decline is also strong evidence that poverty may have risen in the recent period. Unfortunately, there is no data on what happened to poverty in India after 2011-12. Poverty in India is usually estimated on the distribution of consumption expenditure from the surveys conducted by the National Statistical Office (NSO). The last consumption survey conducted in 2017-18, however, was discarded by the government for no clear reason. But the basic details were leaked in the public domain and suggest that poverty may have gone up after 2011-12 to 2017-18. Subramanian has used leaked data to estimate poverty and he reported a rise in poverty in rural areas, although urban poverty had declined during the same period.2

On a comparable basis and using the Rangarajan poverty line, poverty increased from 30.9% in 2011-12 to 35.9% in 2017-18 in rural areas, declined to 19.6% in 2017-18 from 26.4% in urban areas and increased for the country as whole from 29.5% in 2011-12 to 30.7% in 2017-18. Note, this is the first time in the last five decades that poverty for the country has increased. While the estimates of poverty based on the leaked consumption surveys suggest an increase of the number of poor by 52 million between 2011-12 and 2017-18, estimates by Mehrotra and Parida based on consumption aggregates from the employment surveys report a rise in number of poor by 78 million between 2011-12 and 2019-20.3 

 

 

These estimates are not an outlier and other estimates from private surveys confirm some of these. Sahasranaman and Kumar4 analyse the Consumer Pyramid Household Surveys (CPHS) data of the Centre for Monitoring Indian Economy (CMIE) and their findings are similar to the trends reported by Subramanian5 and Mehrotra and Parida.6 Even though poverty estimates are not made available by them, their paper does show a decline in income shares of the bottom 5% of the population by 38% between 2014 and 2019 with decline in average real income growth at 4.6% per annum. For the bottom 10% of the rural population, the corresponding decline in income share was 41% with real annual income declining at 4.3% per annum between 2014 and 2019. While these are not estimates of poverty, they do confirm the increasing distress in rural areas.

The decline in incomes of the poorest is further confirmed by the data on incomes by different class of households presented by the People’s Research on India’s Consumer Economy (PRICE) as part of their ICE360 data series.7 This data again reports a decline in incomes among the bottom quintiles with the poorest quintile reporting a decline in incomes by more than 50%.8 That is, the poorest bottom 20% had earning less than half of their income in 2021 compared to its levels in 2016. The only income quintiles which report an increase in income are the top two quintiles.

Most of these trends are prepandemic. But limited evidence after the pandemic suggests further worsening of the situation. Analysis of the CPHS data by Dhingra and Ghatak9 suggests that poverty in both rural and urban areas rose after the pandemic with rural poverty rate rising by 9.3 percentage points and urban poverty rising by 11.7% between December 2019 and December 2020. The State of Working India (SOWI) 2021,10 uses the national minimum wage floor as the poverty line. Their estimates suggest an increase in number of poor by 230 million during the Covid months.

Pew research centre using adjustments in the national accounts data also pointed out to the increasing vulnerability and poverty after the pandemic, although they do not report poverty estimates. Kochar11 reported an increase in the number of poor by 75 million after the pandemic. Even the middle class was not left untouched with a decline in 32 million among middle class households.12

While there is overwhelming evidence that overall growth has slowed down and the most vulnerable have seen their incomes decline confirming the rise in poverty in recent years, there is also evidence to suggest that in recent years, inequality may have come down. The consumption survey of 2017-18 which reported a rise in poverty also reported a decline in consumption inequality. As is seen from Figure 1, inequality as measured by the Gini coefficient of consumption expenditure declined in both rural and urban areas.

 

 

The issue of declining inequality at a time when the majority of households at the bottom end of the income distribution report a rise in poverty is puzzling. A disaggregated analysis, however, suggests that this may not be a result of income transfers from the rich to the poor but is more likely to be a result of all-round decline in incomes across all income spectrums. Some evidence in this regard is provided by the Pew surveys which report a decline among middle class households. However, confirmation in this regard is also available from the NSO surveys which report a sharper decline in earnings of regular workers which are among the better protected. While real wages of regular workers declined for all category of workers with only a marginal increase in case of female workers, it was higher in case of urban workers (See Figure 2).

 

While earnings from employment are good indicator of the crisis in the economy, a better indicator is the availability and quality of jobs available. On a broad measure of employment, India employed 472 million workers in 2011-12. By 2020-21, this number has increased to 540 million, increasing by 67 million or 7.5 million per year. This is unlikely to be sufficient to cover the increase in working age population. But it also appears that much of the increase may be distress induced employment.13

It is well known that during a period of extreme distress, there is likely to be increase in employment of the vulnerable population to maintain household consumption. Such a process is not entirely ruled out and the recent rounds of PLFS data confirm this. It is also confirmed by other indicators of employment which suggest that distress has contributed to reversing some of the gains of the process of structural transformation in the case of India. The latest round of PLFS data of 2020-21 suggests movement of workforce back to agriculture along with increasing informalization of the workforce. The percentage of population employed in the informal sector in the non-farm sector increased steadily from 68.2% in 2017-18 to 71.4% in 2020-21 with percentage of regular workers who do not get any social security benefit increasing from 49.6% in 2017-18 to 53.8% in 2020-21.

There is now conclusive evidence that recent years have seen a decline in incomes for the majority of the poor, more so in rural areas. It is also clear that the decline is not just restricted to the poorest sections of the society but has spread to even the affluent sections and the middle class. While the super-rich may be the only ones to have escaped the slowdown and decline in incomes, the consequences of declining incomes are detrimental for the lives and livelihood for the majority of households in the economy.

This, unfortunately, is not just a case in terms of income and consumption but has implications for outcomes on human development as well. The pandemic and its associated disruptions have already led to worsening health outcomes and worsening of educational outcomes with schools and educational institutions remaining closed for a large part. While it certainly excluded the poor from access to basic services such as health and education, there are also numerous reports from independent surveys of slower improvements in nutrition.14 

These trends are also worrying for the sustainability of the growth in the economy. With inflation rising again driven by food prices, there is every likelihood of decline in real purchasing power of the majority of population. In a situation where the Indian economy is also going through a period of declining consumption demand and declining investment demand, even the domestic drivers of economic growth will be unable to provide the stimulus needed for the economic recovery. With global economy also going through a difficult period, Indian economy may be headed for difficult and uncertain times.

Footnotes:

1. For the record, the last time per capita incomes declined was in the earl 1950s. But it has never been the case since independence that per capita incomes have declined in a three-year period.

2. S. Subramanian, ‘What is Happening to Rural Welfare, Poverty, and Inequality in India?’, The India Forum, 27 November 2019.

3. Santosh Mehrotra and Jajati Keshari Parida, ‘Poverty in India is on the Rise Again’, The Hindu, 4 August 2021.

4. Anand Sahasranaman and Nishanth Kumar, ‘Income Distribution and Inequality in India: 2014-19’, SSRN, 30 November 2020, arXiv preprint arXiv:2010.03602

5. S. Subramanian, op cit.

6. S. Mehrotra and J.K. Parida, op cit.

7. See https://www.ice360.in/insights/ for details on the survey and reports.

8. Sandeep Singh, ‘Income of Poorest Fifth Plunged 53% in 5 Yrs; Those at Top Surged’, Indian Express, 24 January 2022.

9. Swati Dhingra and Maitreesh Ghatak, ‘How Has Covid-19 Affected India’s Economy?’ Economics Observatory, 30 June 2021, available at https://www.economicsobservatory.com/how-has-covid-19-affected-indias-economy Also, Himanshu, ‘Employment Trends in India: A Re-examination’, Economic and Political Weekly 46(37), 10 September 2011, pp. 43-59.

10. Azim Premji University, ‘State of Working India 2021: One Year of Covid-19’. Centre for Sustainable Employment, Azim Premji University, 2021.

11. Rakesh Kochar, ‘In the Pandemic, India’s Middle Class Shrinks and Poverty Spreads While China Sees Smaller Changes’. Pew Research Centre, 18 March 2021.

12. The income tiers are defined by the daily per capita income of people in a region as follows: poor ($2 or less daily), low income ($2.01-$10), middle income ($10.01-$20), upper-middle income ($20.01-$50) and high income (more than $50).

13. Increase in employment during times of economic distress is not rare. In the Indian context, such an increase was also seen in case of economic distress during the 1999-00 and 2004-05 period. For details, see Himanshu (2011).

14. Dipa Sinha, ‘Persistence of Food Insecurity and Malnutrition’, The India Forum, 9 March 2022, available at https://www.theindiaforum.in/article/persistence-food-insecurity-malnutrition.