Many experts, including the Reserve Bank of India’s Monetary Policy Committee (MPC), believe that the Indian economy is doing relatively less badly than it was expected to at the moment. In its December meeting, the MPC said that the economy is already out of contraction mode and would shrink by only 7.5% in 2020-21, a full two percentage points better than its own September projection. This better-than-expected sentiment is also shared by a lot of private forecasters. The latest among them is Fitch Ratings, which has projected a contraction of 9.4% in 2020-21, instead of the earlier estimate of 10.5%. Economic sentiment might strengthen further after the initiation of the vaccination programme against Covid-19. However, this does not mean that the economy will not have to deal with post-Covid challenges, many of which were present in the pre-Covid phase as well. Here are four charts which describe these.
Investment demand looks bad even with a favourable base effect
Unless there is a revival in investment activity, there cannot be sustained growth. The Indian economy was facing an investment problem even before the pandemic disrupted economic activity. Gross fixed capital formation (GFCF), the investment component of GDP, was contracting at an increasing rate for three consecutive quarters (September 2019 to March 2020) even before the lockdown. To be sure, the lockdown included six days of March as well. The capital goods component of the Index of Industrial Production (IIP) was contracting continuously in every quarter from March 2019. And imports of engineering goods have been contracting continuously in each month since June 2019 until November this year, except in July 2019 and February 2020.
Are inflationary headwinds overpowering the rural economy’s tailwinds?
The lockdown triggered a huge reverse migration. The exact estimates of changes in income and employment due to this are difficult to ascertain. The sudden announcement of a lockdown is bound to have led to significant short-term pain. However, some of it might have been compensated by the low cost of living in villages and a relatively better social-security infrastructure than cities, especially the rural employment guarantee programme and the public distribution system. Bountiful back-to-back summer and winter crop harvests proved to be an additional boon. That rural India did not face a very severe economic distress immediately after the lockdown is supported by the fact that rural wages did not collapse in the post-lockdown period. In fact, rural wage growth increased significantly; both in real and nominal terms, in the month of May. Wage data for April is not available. However, rising inflation seems to have neutralised the gains in nominal wages. By August, the latest period for which wage data is available, real wage growth had turned negative even though nominal wage growth was significantly higher compared to a year ago. With even nominal wage growth decelerating and inflation rising further, the positive impact of the rural economy is likely to get muted.
Has economic inequality worsened post-Covid?
The pandemic’s economic shock has not affected everyone the same way. The relatively rich are more likely to have escaped its worst affects. An HT analysis of more than 2,000 companies found that profits went up compared to last year in the quarter ending September 2020 even though sales went down. This was achieved via a cut in costs including salaries. India had very high levels of economic inequality even before the pandemic. An analysis of (latest) I-T data for Assessment Year 2018-19 (fiscal year 2017-18) shows that out of the 58.7 million I-T returns filed, 29mn were filed by salaried individuals. Among them, the top 15% earned more than 40% of the total salary income. To be sure, not all workers file tax returns in India. There were over 350mn workers in India according to the 2017-18 PLFS, the official source of employment statistics in India. Salaried workers are the top layer of this group. If the pandemic’s disruption has led to a further shift in favour of highly paid workers – anecdotal evidence points towards such a trend – then demand for low-income but mass-demand goods and services could take longer to revive.
Will corporate health and concentration worsen further?
Not all companies would have been able to salvage their profits by cutting costs during a pandemic. India’s corporate health was worsening even before the pandemic struck. According to a research note by Zico Dasgupta from Azim Premji University, a fourth of non-financial firms in India were unable to earn enough to even meet their interest payments in the quarter ending December 2019. India’s corporate sector incomes were heavily skewed in favour of a few companies even before the pandemic. An HT analysis of more than 3,000 companies from the Centre for Monitoring Indian Economy’s Prowess Database shows that top 1% companies account for more than half of sales and more than 100% of profits (a lot of firms make losses as well) in India in 2019-20. Niranjan Rajadyaksha, an economist and senior fellow at IDFC institute, warned about growing market concentration in his Mint column on Oct 14. “There are already growing concerns about increasing concentration in several sectors of the economy, though these are for now more focused in non-tradable areas such as telecom and airports. An inward turn because of protectionism could lead to further concentration of economic power in India”, Rajadyaksha wrote. Economic consequences aside, such concentration of economic power will also increasingly unleash its own set of political disruptions as the material interests of haves and have-nots will diverge drastically — and the latter will resort to their democratic right to challenge policy.