Can the rich aid post-pandemic economic recovery

Hindustan Times, New Delhi | By
Dec 29, 2020 12:40 PM IST

As 2020 comes to end, the big question is not what the December or March quarter GDP growth figures are going to be, but the long-term growth prospects of the Indian economy.

2020 was a year of unprecedented economic disruption globally. Thanks to a near total 68-day nationwide lockdown to prevent the spread of Covid-19, the Indian economy suffered an even bigger disruption. This is why India’s June quarter GDP shrank by 23.9%, more than the drop seen in other major economies. Things improved with the easing of lockdown restrictions. The Nomura India Business Resumption Index (NIBRI) has reached 90% in December, just 10% below the pre-lockdown period. Many forecasters have made favourable revisions to their estimates for India’s 2020-21 gross domestic product (GDP). The Reserve Bank of India (RBI), for example, revised its projections from a 9.5% GDP contraction to 7.5%. GDP growth figures will take a big jump from the June quarter next year as a favourable base effect kicks in. As 2020 comes to end, the big question is not what the December or March quarter GDP growth figures are going to be, but the long-term growth prospects of the Indian economy. A section of economists believes that the pandemic, even though it has hurt the poor in a big way, might not cause significant long-term damage.

The Reserve Bank of India (RBI) revised its projections from a 9.5% GDP contraction to 7.5%.(AP)
The Reserve Bank of India (RBI) revised its projections from a 9.5% GDP contraction to 7.5%.(AP)

Speaking to Ira Dugal of Bloomberg Quint, Neelkanth Mishra, the co-head of Asia Pacific Strategy and India Equity Strategist for Credit Suisse, explained the rationale for this view (

“The pain has gone down to the bottom 30%-40% of the enterprises and individuals. While from an inequality perspective that is a disastrous outcome, from an economic momentum perspective that is actually the best possible outcome... The top 10% of the Indian economy consumes more than the bottom 50%. The top 10-20% have come out of the lockdown with a better balance sheet than earlier, because their consumption was more impacted than their income. It is the bottom 50% whose income has been more impacted than their consumption...their balance sheets are much worse. But as we come out and incremental savings which the rich had is deployed with a vengeance, (and) the economic stimulus which has come through...the lasting damage to the economy is much lower”, he said (

If one were to set the normative issue of rising inequality aside, will the Indian economy see a growth boom driven by the rich in the medium term? This question is worth examining seriously and Number Theory will do this in two parts. First, can the rich aid growth? .

How big is the income/consumption inequality in India?

India does not have a comprehensive income database and consumption expenditure is the best proxy for income data. Because the government scrapped the 2017-18 Consumption Expenditure Survey (CES), we do not have recent data on consumption inequality in India. However, the 2011-12 CES data and the latest income tax statistics can give us some idea about this question. The 2011-12 CES shows that the top 20% of the population had a share of almost 50% in total consumption expenditure. It also tells us that the bottom 80% of the rural population and almost half of the urban households spent half of their budgets on buying food. Private Final Consumption Expenditure (PFCE) has a share of more than 50% in India’s GDP.

These numbers suggest that Mishra’s prognosis of the top 10-20% mattering the most when it comes to driving PFCE and growth is correct. However, there is good reason to believe that CES, like other National Sample Survey Office surveys, undercounts the rich and, therefore, the extent of income inequality in India. A comparison of salary data from the latest available periodic labour force survey (PLFS) for 2018-19 and income tax data for the Assessment Year 2018-19 (fiscal year 2017-18) proves this point.

Salaried workers are at the top of the heap in the PLFS database. Their average monthly incomes ( 16,160) is much higher than that of casual workers ( 8,340 for 30 days for non- public works related work) or self-employed workers ( 10,725). The PLFS estimates that out of 356 million workers in India, 90 million were salaried workers. According to the 2018-19 PLFS, average monthly wages for even the top 10% of salaried workers in India were below 50,000. Even for the top 5%, this number is 61,334; 80% of salaried workers do not even earn more than 20,000 per month, the data shows. The maximum income for a salaried worker in the PLFS data is 12 lakh per month. The maximum monthly wage which the PLFS captures is 60 lakh for a self-employed worker.


The picture changes drastically when one looks at the latest income tax returns (ITR) data. Because granular ITR data is not available, one has to work with average income levels. Of the 58.7 million ITRs filed by salary income earners; a number which is about two-thirds of the number of salaried workers estimated by the PLFS, 78.5% reported monthly incomes below 45,000. Monthly incomes do no rise above the 1 lakh mark for 97% of the salary earning class which files ITRs. Anyone who does not earn more than 1 lakh per month can hardly be termed rich today. It is the top 3% of the salary earners who earn 28% of total salary income declared in ITRs in India. The inequality becomes even more acute if one looks at all ITRs rather than the ones filed by salary earners, which shows that the top 0.7% earn almost 40% of the total income declared in ITRs in India.



How important are the salaried/non-salaried rich for the macro economy?

Modern economies are deeply inter-connected in nature. This makes it hazardous to speculate on the economic importance of different classes. A highly paid executive’s incomes might depend on a very low-price mass consumption product her company is selling and a relatively poorly paid worker in a tourist resort or a high-end restaurant is dependent on the rich coming and spending there. With this caveat in place, one can try and provide a rudimentary answer to the question posed above. The share of total income declared in ITRs in 2017-18 GDP was 30%. Of this, income declared by salary earners was 11.7%. As a share of PFCE, the share was 19.9% for all salary incomes declared. The top 8% of salary income earners had a share of just 14% in total PFCE. This is less than even 10% of the overall GDP. Even if one were to assume that this class spends all of its income, it is unrealistic to assume that it can generate significant tailwinds for the economy on its own. Put otherwise, the rich can’t drive growth on their own.


Abhishek Jha contributed to data analysis for this story.

This is the first of a two-part data journalism series, the second part will look at can the rich hurt growth?

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    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

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