Where’s the V-shaped recovery?

Data on real wages, jobs, savings, consumption, etc, point at a K-shaped rebound

The World Inequality Report 2022 called India “a poor and very unequal country”. The nature of India’s recovery post-Covid India’s has only proven this in the recent changes in consumption pattern data.  The largest luxury and premium watch retailer, Ethos, reported a 44% increase in sales and a 262% rise in net profit in the January-March quarter (2023). At the same time, underwear sales have collapsed (former US Fed chief Alan Greenspan had famously created an underwear growth index because undergarment sales held up even during mild recessions). But when underwear sales start to dip, it is time to worry about the economy.

SUV sales in India are rising while the sales of entry-level cars and two-wheelers are shrinking or are lower than the sales in pre-Covid days. While the government would like India’s citizens to believe that the country came out of the exogenous Covid shock in a V-shaped recovery and has become the fastest-growing large economy in the world, most economists outside the government have repeatedly argued that what India experienced has been a K-shaped rebound. Could the kind of data cited above be the reason India suddenly became the fifth-largest economy in the world, overtaking the UK? There are many dimensions to this K-shaped rebound.

First, the stock market continued to boom through much of Covid—while the real economy was tanking—clearly benefiting the minuscule minority who profit from investing in stocks and bonds. Post-Covid till date, the stock market continues to boom.

Second, listed-company profits rose to a seven-year high, but at the same time real wages and jobs shrank. We have shown (Financial Express, July 11, 2023) that regardless of industry/work, real wages stagnated between 2017-18 and 2022-23. This is true for regular wage/salaried employment, casual wage work, or earnings for the self-employed.

Third, despite the Covid shock, the organised sector of the economy generally performed well except for a limited period of time, while the unorganised sector was already reeling from consecutive shocks inflicted by the government with one policy mistake after another (demonetisation, badly planned GST rollout and then a needlessly strict lockdown of the entire economy and workforce at four hours’ notice in March 2020). The unorganised and MSME sectors have barely recovered from these, making joblessness remain at a 50-year high.

Fourth, 45 million joined agriculture in 2020 and an additional 7 million in 2021, during the first- and second-wave reverse migrations. Even in 2022-23, according to the latest Periodic Labour Force Survey 2022-23, the absolute number of workers in agriculture has not fallen. These increases in farm workforce, amounting to an increase of 60 million workers on farms, reversed a 15-year trend, which had seen an absolute decline in farm workforce since 2004. Demand for work under MGNREGA refuses to fall below pre-Covid levels.

At the same time, manufacturing employment has stagnated at or below 60 million between 2012 and 2021, and only managed to rise to 63 million in the post-Covid recovery. So, the entire process of structural change that had gathered momentum between 2004 and 2014—when the economy grew at 8% a year, an unprecedented phenomenon in India’s post-Independence history—has not only been stalled, but reversed.

As joblessness rose, consumption demand fell or stagnated. In FY23, the Second Advance Estimates for GDP released in February 2023 suggest that per capita consumption, on average, has risen slightly above the 2019 level; that trend is maintained in the First Advance Estimates for GDP for 2023-2024.

There were plenty in the top end of the middle-class and the upper classes who, during Covid, were not eating out, travelling, going on holidays, and hence were saving more. They could now splurge on SUVs or more expensive cars. Meanwhile, most of the population, seriously hit by joblessness, stagnant wages and consistently high inflation—fuelled by government taxes on petrol, diesel and cooking gas—has less disposable income left over.

Viral Acharya, former deputy governor of RBI and a professor at the Stern School of Business, New York University, wrote in a recent Brookings academic paper that the share of India’s Biggest 5 firms in total assets of the non-financial sectors rose from 10% in 1991 to nearly 18% in 2021, whereas the share of the next Big 5 business groups fell from 18% in 1992 to less than 9% in 2021. This growth has been the biggest in the last decade. “In other words, Big 5 grew not just at the expense of the smallest firms, but also of the next largest firms,” Acharya said.

The Biggest 5 industrial groups referred to in the paper are Mukesh Ambani-helmed Reliance Group, Tata Group, Aditya Birla Group, Adani Group, and Bharti Telecom. He said the growth of such conglomerates raises several concerns, like the risk of crony capitalism, related-party transactions within their byzantine corporate organisation charts and overleveraging due to an implicit too-big-to-fail perception among others. This is what drives government spokesmen to claim the importance of ‘national champions’.

This evidence does not deter a recent SBI research report from claiming that because there has been some improvement in the distribution of income among income tax payers, inequality in the economy is declining. However, taxpayers are barely 5% of the country’s labour force, and even among the tax filers, a significant file returns but don’t have incomes large enough for it to be taxable. Hence, an income distribution estimate based on taxpayers, whether an improvement or a deterioration, will be a blip on the radar of a ‘poor and very unequal country’.

Nor does the hard evidence above about growing inequality before and during the K-shaped recovery deter NITI Aayog from coming up this week with an estimate that shows that multi-dimensional poverty in India has fallen by 24.8 crore in the last nine years—even though the estimate is based on a patently weak methodology.

Santosh Mehrotra, Professorial fellow, Nehru Memorial Museum and Library, New Delhi, penned the article for Financial Express.