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Count your blessings

A better-than-expected Q2 GDP growth estimate may not capture the pain felt by various sections of the economy and social classes

Count your blessings

Interpreting a GDP growth figure is not easy as it reduces the entire economy's performance to a single statistic that by itself does not inform about the material condition of the diverse multitude of individuals and sectors in the country. It is entirely possible that a class of people may have lost their livelihoods, earned nothing consequently and become poorer, and yet the GDP growth for this period comes out looking good. This can happen when people in other sectors, which have a much larger share in the GDP, are doing well. Therefore, economists study distributions of incomes over time and also the impact of policies and economic shocks on these distributions.

The COVID crisis has hit the economy in such a big way that it is also likely to impact income distributions. Economists are already warning that the economic recovery around the world, including in India, is being driven disproportionately by capital (relative to labour) and that is going to have implication for inequality going forward (see for details, https://bit.ly/3nx7LgC). In the US, for instance, corporate profits in the July-September quarter grew four times as strongly as the country's GDP. In India, the net profits of listed companies grew 25 per cent, although their revenues reduced. Profits grew because firms aggressively cut costs, including employee compensation. What this suggests is that incomes out of profits and dividends are recovering, but salary and wage incomes are bearing the brunt of this resilience. The much higher demand than same time last year for NREGA jobs and unemployment data from CMIE support this view.

In light of this information, how should the GDP estimate for the quarter - of 7.5 per cent contraction - be interpreted? Since the estimate is a preliminary one, computed mainly from large companies (revised estimates will incorporate information on performance of a wider base but those will be released months later), it is plausible that smaller firms are worse off. Not only profit incomes in these are likely to be not as resilient, salaries they pay to their employees may be under tremendous pressure.

Data is not available as yet, but such early-warning signals do suggest that the COVID crisis may deepen inequality in the economy. The reasons are obvious. The distribution of incomes across capital and labour - and in the labour market, across different classes of employees - may change in irreversible ways. Many classes of people have not endured any salary-income losses due to the pandemic the way the rest of the economy has. An obvious example of such a class of people is of the employees and pensioners in the government and related sectors, while the private sector has axed jobs and slashed salaries. There are of course exceptions in the government sector, such as healthcare professionals in a number of public hospitals who have been protesting the - rather tardy and unfair - delays in the release of even regular salaries. But by and large, government pensions and pays remain intact apart from a temporary freeze on dearness allowances. Since the lockdowns and the pandemic limit the scope for discretionary spending, such as on outings, vacations and leisure, the families that do not see any drop in incomes are likely to see increased savings and wealth. This can worsen inequalities.

Inequalities are of many types. The Credit Suisse Research Institute's Global Wealth Report 2020 has come up with an unexpected finding: India's wealth per adult grew during the first few months of the COVID crisis. It was $17,420 as of June-end as against $17,300 at the end of 2019 (see for details, https://bit.ly/3h3SiSM). The report's other findings are not as unexpected, though. It found that 73 per cent of Indians have wealth less than $10,000, about 25 per cent have wealth between $10,000 and $100,000, and 2.2 per cent have wealth in excess of $100,000. This is sharp wealth inequality.

Some people may find themselves worse off. The World Bank has warned that many of the poor who had emerged out of poverty in the high growth years before 2010 could slip back into poverty (see for details, https://bit.ly/37s97Uf). That's not all. The COVID crisis may have permanently altered the future income-earning potential for a whole section of the young population, such as students from underprivileged families with poor or no access to online education. They may not be able to cover up on the learning time lost during the lockdown even after the pandemic is brought under control and normalcy returns to everyday life. The crisis may have depleted their family incomes, forcing these students to drop out from classes and take to working to supplement the family kitty (see for details, https://bit.ly/3aeRjh8). The superior income opportunities that education and skills training could have opened up for them may no longer be within their reach. Not only will this worsen income inequality in the country in the future, the economy's pool of skilled professionals and human capital will be smaller than it could have been in the absence of the pandemic.

Inequalities can trigger insecurities in people in all sorts of ways. More importantly, lower earning potential for a larger section of people means economic potential of the country as a whole lowers. With lower purchasing power, there could be long-term ramifications for demand in the economy and therefore future profitability of firms that seem to be doing fine right now by cutting employee costs. How long can consumption and investments of shareholders of large companies and government employees and pensioners power the economy, especially when tax collections, out of which government salaries and pensions are paid, depend on the wider economy doing well? To guard against these risks, proactive policy support, relief and stimulus for the vulnerable is a must. At all times, but especially in the current phase, just looking at the GDP growth is not enough. The distribution of wealth and incomes, the inequalities become as important, if not more.
Puja Mehra is a Delhi-based journalist and author of The Lost Decade (2008-18): How India's Growth Story Devolved Into Growth Without A Story