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The myth of a K-shaped recovery


Earlier this week, gross domestic product (GDP) data for 2020-21 was released. This confirmed a widely-anticipated decline, with output shrinking 7.3%, hurt by India’s lockdown and other restrictions imposed to contain the covid pandemic. Although the contraction figure was smaller than expected, it is a gross underestimate of the real crisis in the economy, partly because official numbers do not capture the performance of the informal sector, which has been badly hit by covid curbs, and a broader decline in demand.

Apart from their methodological weaknesses, official estimates also fail to correctly depict the true scale of India’s crisis. Our economy has been slowing down for some time now, with GDP growth decelerating to an unimpressive 4% in 2019-20, the pre-pandemic year. In the last three quarters of that year, manufacturing output declined 3%, 3% and 4.2%, respectively. This means that better manufacturing growth in the last three quarters of 2020-21 is largely a statistical mirage, rather than a reflection of any real revival in the sector. Hence any sense of complacency that might creep in based on these seemingly positive numbers would be bad news, especially since economic activity is likely to have got disrupted by the reimposition of various local lockdowns at the start of this financial year. Given the severity of the second wave, India’s economic recovery, which has already been delayed, will be even slower.

But it is the nature of growth rather than its level that we need to worry more about. The national accounts data sets are unhelpful on this score. Other figures, however, on employment, income and profits, do offer us a view. In the very period that our economy contracted sharply, the stock market saw its fastest rise in recent years, with its key indices almost doubling in the past year. This may partly reflect a rapid rise in corporate profits even as the economy slid. The corporate tax cuts announced in September 2019 also helped cushion the finances of large firms, but didn’t help revive investment or private consumption demand.

This improvement in corporate profitability has come alongside a decline in real wages for a majority of casual-wage workers. With India’s unemployment rate back to the level seen during the strict lockdown period of April-May 2020, a majority of those at the bottom of the income pyramid have suffered the twin blows of job and wage losses. Several private surveys have reported that a significant section of those who saw their incomes decline last year are yet to see them recover. Some of the profit rise, thus, can be traced to the misery of workers left jobless.

However, unlike the corporate sector, which received tax subsidies and other incentives, such as easier access to domestic and international capital, there has been less-than-commensurate support for those at the bottom of the income pyramid. The government’s reluctance to increase income transfers or its allocation for crucial social security schemes, despite the second wave proving far more severe, will only make matters worse. Government granaries have more than 100 million tonnes of foodgrain in stock. Still, the additional foodgrain allocation has been limited to just the two months of May and June. With the second wave affecting rural areas more, important interventions such as the rural jobs guarantee scheme have seen 20% lower employment generation compared to last year.

It is this divergence between two sections of India’s population that should worry policymakers. The fact that this divergence is as much a result of the existing nature of inequality as it is of flawed government policies is not just a matter of academic relevance, but is at the heart of any discussion on an economic recovery. With our rural areas ravaged by the second wave of infections, the growing divergence also risks worsening already weak demand in the economy. Additionally, rising inflation threatens to erode the real incomes of most wage workers. This would give demand a further battering, the consequences of which are likely to be serious for the country’s economy.

Much of this is known to policymakers and some talk of a ‘K’-shaped recovery. In reality, though, there is no such thing as a ‘K’-shaped ‘recovery’. Any economic growth accompanied by a widening divergence between labour and capital, the earnings of wage workers and those of corporations, and between rural and urban areas, is a sure sign of a worsening crisis. Calling it a ‘recovery’ is a faulty proposition, for such a divergence will have serious consequences for the lives and livelihoods of most citizens.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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