Pandemic has led to rise in poverty, inequality; don’t be complacent: JNU prof
As India battles the second wave of Covid-19 infections, questions about the pandemic’s economic impact have gained salience. Last year, in order to curb the spread of the pandemic, a 68-day long strict lockdown was imposed on March 25, 2020 — this led to the most severe GDP contraction in post independence-India. This year, while there is no national lockdown, a large number of states have imposed mobility restrictions and economic activity has taken a hit.
To understand the possible impact of the pandemic’s second wave on the Indian economy, HT spoke to Himanshu, an associate professor of economics at Jawaharlal Nehru University. Excerpts:
The second wave of Covid-19 is far more severe than the first one. There is a view among many economists and institutions that its economic impact will not be as bad as the first one. What do you think?
It depends on where you are looking at the economy from. We had a very severe impact last year itself. So obviously compared to last year, the growth rate will not be so bad. But if you compare to 2019-20, we are in a situation where our economy will not recover, in terms of per capita income even to 2019-20 levels. The optimism that you see is based on the fact that we had a contraction of around 8.5%-9% last year, so a similar level of contraction is not possible. But it is a false optimism.
Our aggregate GDP numbers are not reflecting the level of stress we are dealing with in the economy, whether in terms of health expenditure, normal expenditure of households or distress in rural areas. But there are pressure points, pain points which are very much visible.
Any complacency on that front can be far more disastrous than the complacency which led us to believe that we have conquered the pandemic. Policymakers should be far more cautious than they are appearing that this time.
If GDP numbers do not capture the real pain in the economy, what are the numbers we should we looking at?
Let us take the GDP numbers first. If we have an 8.5%-9% contraction in 2020-21, which is what is expected, you need at least a 9.5% growth this year to bring per capita income levels to 2019-20 levels, because our population would have increased. We are certainly going below 9.5%.
Everybody has started a downward revision of GDP projections and I think this process (of downward revision) will continue. Even these are overestimates, because we still do not have full data for 2020-21. For example, for non-banking financial companies, we still have data until September-October 2020. Once these numbers come in, we will see some kind of sharp downward revision in 2020-21 GDP estimates. This is a trend (downward revisions in GDP numbers) which has been seen in the last four-five years.
What we are missing out is that wage recovery has still not happened. If you compare real wages in both agriculture and non-agriculture, real wages in March 2021 (latest available data) are still lower than March 2019 levels. That is the reality we are talking about. Even private surveys such as the Centre for Monitoring Indian Economy (CMIE) show that employment has not recovered to pre-pandemic levels.
In 2017-18, we had the last consumption expenditure survey (CES). But it was junked by the government. That (CES) data itself showed that poverty levels had gone up. After that, we have only gone backwards. Level of misery has increased. I think there are pressure points which are very much visible.
As far as inflation numbers are concerned, and I have been pointing this out for some time, we are still not out of the woods. We need to be looking at it much more carefully. So, I think we are in a much more precarious situation than we were in April 2020. In April 2020, whatever you say, the economy was slowing down, but we still had positive growth. Today, the economy is not in a position to take two back-to-back years of stress.
Last year, the rural economy provided an important cushion to aggregate demand. The pandemic has proliferated in rural areas in a big way. The terms of trade have moved against farmers due to increase in prices of diesel, fertilisers etc. Can we take rural demand for granted going forward?
This is precisely the point I was talking about. The last time we were in a similar situation vis-a-vis the rural economy was in 2011-12. Even though food prices were increasing at a sharp pace, because input prices started rising at a faster pace, by 2013-14, agricultural incomes had collapsed. This is something the NITI Aayog has also pointed out.
We are now seeing a situation now where demand has already contracted due to the pandemic’s distress. The ability of the government to pump-prime the rural economy through massive stimulus is also curtailed. And now, we have rising input prices. Last year, even though the benefit of fall in petroleum prices was not passed on to consumers, fertiliser and diesel prices did not go up. Since January 2021, there has been a massive increase in petroleum prices. Complex fertiliser prices have already gone up. Experience tells us that urea prices will also follow the same trend. Already fertiliser consumption has declined as per the daily tracker that we have from the Fertiliser Association of India data.
We also need to remember the pandemic has led to a sharp increase in out-of-pocket health expenditure for a lot of households. Most of the rural households will start with a net debt, and the bulk of it will be from non-institutional sources at very high interest rates.
I think rural areas are no longer being seen as something which will lead a recovery in the economy. The question is whether the urban sector can now pull-up the rest of the economy? My own understanding is that is not the case.
The April Consumer Price Index (CPI) numbers show a 3% contraction in cereal prices. The government is claiming that it has done record procurement. What explains this trend?
Remember that because of the lockdown we did not have proper inflation data in April 2020. What we had were imputed numbers. So that is one factor. But we also have to look at what is happening to international food prices. The Food and Agricultural Organisation’s (FAO) food price index shows a similar trend for cereal prices. But at some point, cereal prices will start firming up. As of now, disinflation in cereal prices is a result of demand deflation, but international factors are also playing a role. But we should not get complacent about it. Food inflation can go up.
We do not have a Consumption Expenditure Survey after 2011-12. This means our GDP and CPI series etc. have not been updated. How bad is it from a policymaking perspective, in your view, to be dealing with the biggest ever economic disruption with a set of obsolete statistical database?
The fact that most of the data is faulty led to a sense of complacency as far as the government’s response to the pandemic is concerned. The fact that data is not available makes it difficult to even formulate policy. We are not going to come out of this situation. The problem of lack of data is not going to be taken care of in the next year or so. The situation is so bleak because the government has stopped releasing data. A good example is the Situation Assessment Survey of farmers which was completed in 2019 but has still not been released. We are creating a feel-good situation, but the reality cannot be hidden. Just as dead bodies cannot be hidden even if you try and hide the number of infections and cases.
Last year’s recovery was seen as profit-led rather than wage-led, where companies squeezed labour costs to maintain profits even though revenues fell. Is this sustainable anymore?
No. You must also take into account that the profit-led recovery was also aided by the corporate tax cut in September 2019. So, profits had a god run for last two years. Whatever cost reduction could have been achieved with cutting employee costs has already been reached. With rising commodity prices (which will affect costs) this channel of profit-led growth is not feasible. It is just a matter of time before the chain breaks.
There is a legitimate concern about rise in poverty due to the pandemic. What about its impact on the non-poor? They have a disproportionate importance in driving India’s consumption story.
Overall, the pandemic has led to an increase in poverty. We might not have the official numbers about increase in poverty, but at least, nobody disagrees on that fact that poverty has increased. Similarly, the impact on inequality is also very clear. That in a way is coming from the nature of recovery. What is not documented is that a large number of middle class, regular employees have moved to the ranks of self-employed workers. Their incomes have declined. There is a shrinking which is happening in the middle (class).
Income inequality is going to increase across all dimensions. This is not going to be a one-off impact. It will feed into inter-generational inequality. Access to education itself is determined by what kind of resources you have. A lot of students are falling behind on this count. The effects of this will show five or ten years down the line.
What will suffer because of rise in inequality is not essential spending, but discretionary spending. Discretionary spending is what drives economic growth in the long run. It will create a vicious spiral of further generation of inequality.
There is a view that the economy bottomed out in 2020-21. We have heard this logic earlier too. Are you saying that the pandemic’s impact could be structural rather than cyclical shock on India’s growth prospects?
It is precisely the point that I am talking about. We had these structural factors building up, because the nature of demand itself was skewed in favour of a certain section of the population and their ability to drive the economy was limited.
Those structural factors have been widened by the pandemic. We are in a situation where if we do not correct these structural bottlenecks, then we can forget about getting into a sustainable growth rate of 7% GDP growth. Unless of course, there is a big export boost. We should be worried about the policy response to these structural challenges, and if we do not do this, then any recovery might not be sustainable.
I do not think our policymakers are even thinking about these issues at the moment. We are just hoping against hope that anything that comes down has to go up. We are in a situation where the ship itself is sinking unless the loopholes are plugged in.
Going forward, what do you think needs to be done?
I can list three things.
One, there here has to be a change in the policy paradigm. It is no longer a cyclical shock. It is something which has basically raised questions on the way the economy is structured. Those questions can no longer be avoided. For the last 30 years, most governments have basically tried to push the more difficult questions to subsequent governments and take easy decisions themselves and claim credit for reforms. We have to rethink where the economy is going. That will require an understanding of from where the revenue is to be generated, where demand will come from, what is the role of fiscal policy or inflation management etc. I am talking about broader questions. Many of us do not have the answers, but we have to start talking about these questions.
Two, states have to be given their due share, and not just their due share in Goods and Services Tax but also the flexibility of taking their decisions to revive the economy. I think unlike the current centralised approach, a federal approach is needed.
Third, the government should pump a lot of money in the economy, whether it is in rural or urban areas. Right now, the economy is in an ICU.
Should we forget about the fiscal deficit at the moment?
Forget about the fiscal deficit. I really think that monetary policy and fiscal policy do not have a contradiction as long as the objectives are not very clear. The problem with this government is its objectives are not very clear. And if that happens, then fiscal policy will keep on blaming monetary policy and monetary policy will keep on blaming fiscal policy.
The objective should be ramp up income, create demand in the domestic economy and provide protection to large majority of the population. These sections will drive our growth in the next decade or the decade after that. We cannot simply hold the assumption that private corporate sector profits are going to drive the economy. That understanding has to change.
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