Second Wave, Indian Poor, Basic Income, Income Destruction

A woman makes a thumb print impression on a device to attain free ration.


As India is engaged in a grim, sometimes visually apocalyptic battle with the second wave, a grimmer (but under-the-radar) battle is going largely un-fought. The battle of income destruction, where the expected respite (of which there were seeming green shoots till March 2021) has quickly given way to uncertainty and fear. Growth estimates for 2021—both macro aggregates like GDP and earnings estimates of the private corporate sector—are being furiously re-visited. Mostly downwards.

Some context is in order. COVID-19 has presented a massive shock for the world. No country is left unscathed. But there is a remarkable divergence in which economic agent—between households, private corporate sector and government—has borne what proportion of the pain.

Some context is in order. COVID-19 has presented a massive shock for the world. No country is left unscathed. But there is a remarkable divergence in which economic agent—between households, private corporate sector and government—has borne what proportion of the pain.

Source: Motilal Oswal

As can be seen in the chart above, households in India bore a massive 61 percent of the income loss due to COVID-19, one of the highest in the world (second only to South Africa in this cohort). On the other hand, the government bore one of the smallest relative losses, at only 20 percent. This is astonishing at several levels, not least the fact that the economic agent with minimum access to resources has been saddled with the maximum pain. Some of the countries show a stark contrast—governments took the pain (sometimes pain in the future via massive borrowing programmes) while households and the private corporate sector actually improved their income position.

India’s dispersion of the national pain was not an unexpected outcome—the fiscal backstop made available in India was one of the lowest in the world.

Source: ASKWA Research

Discounting liquidity support made by central banks (like RBI in India), the direct fiscal support provided, expressed in terms of  percentage of GDP, was one of the lowest in the world for India in 2020. As a result, the economic pain engendered by national (and state) lockdowns have invariably fallen mostly on households.

Discounting liquidity support made by central banks (like RBI in India), the direct fiscal support provided, expressed in terms of  percentage of GDP, was one of the lowest in the world for India in 2020. As a result, the economic pain engendered by national (and state) lockdowns have invariably fallen mostly on households.

Tyranny of legacy and apprehensions of the present

India was coming off a massive slowdown just before the virus hit us last year. Household income levels were stressed, a large leverage-fuelled consumption cycle had started unwinding on the back of multiple non-banking financial firms (NBFC) failures and private corporate sector investments were weak anyway. With weak starting balance sheets and anaemic fiscal support, the second wave has acted as the third whammy in terms of disrupted businesses and income streams. Add to it the spread of infection in rural India, which was relatively immunised during the first wave, and we also have a sentiment issue. The sentiment issue is likely to be resolved only with a larger coverage of vaccination across the country—currently, the pace of coverage has slowed and there are uncertain assumptions behind many of the coverage speed estimates. With 16 percent of the eligible population getting a first jab while three percent is fully vaccinated, India is still quite far away from having a critical mass inoculated enough for a confident opening-up.

Exporting our way out of trouble—plausible, but narrow base issues

Much of the globe, especially countries with larger economic footprints like the US, China, and (parts of) Europe, are opening up rapidly. Global trade has marked a smart pickup on the back of a sharp V-shaped economic recovery in these countries. With trade routes and logistics lines largely open in the second wave, exports could, plausibly, provide a ballast to the Indian economy. Some of it is already visible in trade data. However, both in terms of depth and spread, it won’t solve India’s macro stress issue. Firstly, protectionism is here to stay, and trade battles (if not wars) are going to remain ubiquitous. Secondly, as the large economies re-open, there is likely to be a shift from consumption of tradables to non-tradables, taking some of the tailwinds off export momentum. Lastly (and most importantly), the breadth of coverage for India will be naturally quite narrow, given our export basket (comprising mostly large, capital-intensive sectors rather than labour-intensive ones).

Capital markets—flattering to deceive (on macros)

It is easy to be deceived by the momentum in capital markets—select companies are doing very well and Indian start-ups are converting into unicorns by the boatloads. The correlation between macro aggregates and capital market performance has been weakening rapidly in India for quite some time, and COVID-19 has exacerbated the gap between the economic haves and have-nots. The disconnect between macro aggregates and capital market performance, however, embeds another serious risk—that of India’s R (return on legacy wealth) getting to be higher than G (growth in per-capita income). R>G is usually a developed country syndrome, where growth is low, and average income levels are high. In developing countries, with good population growth and significant slacks on productivity, the expectation is for R to be lower than G (RG trap would have serious socio-political repercussions going beyond the extant crisis.

Government needs to pick up the pain

There are very few “do it yourself” options left on the table. A large fiscal support programme is no longer a question of when (it was never a question of if)—the time for it is now. A mix of direct cash transfers to support consumption and public capital expenditure to try kickstarting an investment cycle would be required to prevent India from slipping into a structural R>G trap and exacerbate inequalities.

There is a well-embedded, and largely illogical, fear of inflation and bond market reaction. With macro-aggregates weak and large income losses being an established fact, the only material inflationary pressures are to do with imported commodity prices, which is not something that monetary policy has a great handle over anyway. To fear a few basis points of incremental inflation (“transient” in the words of the RBI, in its latest monetary policy statement) and trade it off for a much larger macro crisis of income destruction, has no logical legs to stand on either politically or economically.

With almost 100 percent of India’s sovereign debt being locally funded, government can afford to run a much larger expenditure programme via a mix of market borrowings and direct monetisation by RBI.

With almost 100 percent of India’s sovereign debt being locally funded, government can afford to run a much larger expenditure programme via a mix of market borrowings and direct monetisation by RBI.

History has shown that the only market-clearing price for macro stability globally has been external account stability—very rarely, if ever, do sovereigns blow up on domestically-funded debt. For example, the crisis in 1990 was triggered, not because of an expanded fiscal deficit, but by the source of funding the same. Between 1985 and 1990, external debt, a bulk of it funding the fiscal deficit, had doubled. As a result, when a temporary current account issue hit us post-Gulf War I, the “crisis” was one of sourcing enough foreign exchange. India continued to run similar, even larger, fiscal deficits in the years that followed, without there being a major “crisis”.

India’s external account today is in good shape, despite a spike in oil prices (a traditional marker of external account health). A weaker macro economy typically tends to depress non-oil imports and a strong global macro is expected to sustain a reasonable growth in exports—both are favourable for a benign level of current account deficit. Add to it a record US $600 billion foreign exchange reserve kitty and global Central Bank approach towards liquidity, and “Fx constraint” is not a material policy condition.

RBI has enough leeway to manage a higher borrowing programme without the country slipping into any serious crisis.

The Government of India has been cautious in terms of playing its fiscal hand till now. However, time is running out for India’s poor. A delayed (or absent) intervention would likely cause many more deaths due to poverty than those who have succumbed to the virus. The time to act is now.

The views expressed above belong to the author(s).

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Somnath Mukherjee


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