By Parth Chhajed | Edited by Khushi Shah
One of the biggest factors driving growth in an economy is demand. This facilitates India’s greatest strength, its 1.4 billion population that relies on domestic consumption largely contributing to its economic growth. But it has been observed over the past few years, the demand in the economy has taken a hit. By looking at the numbers we can identify a disjoint when it comes to consumption-demand expenditure between high-income and low-income individuals.
Wealth Inequality in India (1961-2021)
[Source: The India Forum]
The sale of new two-wheelers is one indicator of how the lower middle class is doing, particularly among urban residents. According to researched data, domestic two-wheeler sales have decreased by 36% since 2018–19. In contrast, domestic passenger automobile sales which are primarily made by upper-middle-class households, declined only 9% during that time. On the other hand, luxury automaker Mercedes Benz recorded a sales growth of 64% in the first nine months of 2022 compared to the same period in the previous year and anticipates matching its previous sales record set in 2018–19. This not only reflects the hard reality that demand has been hit more severely in lower-income households but also emphasizes upon the exploding inequality.
Strained households will certainly borrow money to meet their everyday consumption expenses. Even individuals with low incomes have gold jewelry that can be pawned. According to the RBI’s monthly bulletin, commercial bank loans secured by gold jewelry rose substantially by 143% between February 2019 and March 2021. Household borrowing for reasons other than houses, cars, investments, or education surged by 80% during this time, indicating that consumers at large were borrowing for consumption.
If one cannot borrow, one tends to sell. Land sales seem to be the consequence for farmers. The average land holdings were 22% lower in the most recent round (2019–2021) than they were in the previous round (2015–16), according to the National Family Health Survey. Even while the land holdings of households in the lowest wealth quintile were increasing between 2 and 5% annually in the surveys spanning 2004-05 and 2015-16, the decrease in land holdings for these households has been an alarming 8.5% yearly since the past round. The poorest landowners appear to have been heavily involved in distress sales recently.
The hyper-business optimism would make one believe that low-income rural households are migrating from villages and moving to cities for better work opportunities. But the data suggests otherwise. Contrary to the continuously declining labor share before 2020, the labor share in agriculture has climbed in recent years. India is merely not producing enough jobs in manufacturing and services. Moreover, there has been a surge in the need for MGNREGA jobs from 1.64 crores in 2015 to 3.07 crores in 2022, adding to the bleak image and obscene employment proportions in rural areas.
It is therefore clear that some parts of the economy are doing better than others which is determinative for driving growth in the economy. However, this growth is not uniform and leaves out a large chunk of the population ignorant to the majority. It is predominantly the informal sector of the economy that has faced considerable thwack from the ill effects of demonetization and poorly implemented goods and services tax. To add to the pain, the covid-pandemic came in as a surprise.
The domestic supply chain disruptions in the manufacturing and services sector, especially at the informal level haven’t been fixed. This has led to the formalization of the economy and big corporations taking away market share from the smaller players in the market. In due process, they are also gaining pricing power in the market. Small businesses that are unable to cope with the abrupt increase in input costs are closing, and the resulting disruption in supply is driving up prices. Large companies’ growing price dominance has increased profits, which has increased tax revenue for the government.
Many experts suggest that the increased tax collections are a by-product of high domestic inflation. This high inflation scenario is also playing out negatively for low-income households in the economy. Governments all over the world must adopt a growth-driven policy to deal with the crisis wherein they increase the supply of money in the economy by printing more and cutting down the interest rates. This situation played out during the COVID 19 pandemic as well when governments all over the world were printing mountains of money. The US Federal Reserve itself pumped $13 trillion into the economy [ $5.2 for COVID + $4.5 for quantitative easing + $3 for infrastructure]. This liquidity creates a divide in society, the high-income individuals who have invested in growth assets make multifold returns whereas the low-income households suffer the burden of inflation. Resulting in the rich getting richer and the poor getting poorer.
This reflects a K-shaped economy, in which the negative effects of the covid pandemic are having varied effects on the economy’s various sectors.The economy is doing well in some areas but failing in others. As a result, the structure has a K-shape with portions that rise and fall.
This K-shape can be found in the most unexpected places.
[Source: Business Insider]
Consider the purchase of individual life insurance coverage. The Life Insurance Corporation (LIC) of India’s total number of policies sold plummeted by 4.2% in 2020-21 from the prior fiscal year. It’s interesting to note that private life insurers sold 2.9% more plans overall. This is because private insurers primarily sell insurance to affluent individuals with higher salaries.
On the other hand, the typical LIC customer is less wealthy than the typical client of private insurance firms. In reality, this pattern is also evident in the typical premium that policyholders pay. In the case of LIC, ₹12,651 was the average premium paid on a policy (both new and existing) in 2020–21. In 2021–2022, this decreased by 11% to ₹11,260. (April 2021 to December 2021). In terms of private businesses, the typical premium paid in 2020–21 was ₹52,040. In 2021–2022 it decreased by 0.7% to ₹51,676.
Again this explicitly reflects the disequilibrium in different parts of the economy. The solution lies in accepting that there is a problem to be addressed. It is clear that a certain segment is being starved of resources, so it is critical that we start looking at better resource mobilization.
We will depend more heavily on domestic demand as the global economy weakens owing to the Russia-Ukraine war, the supply chain crisis in China, and the high inflation scenario in the US. Spending on infrastructure by the government is good but insufficient. Unfortunately, the continuing strong demands of our wealthy people favors imported items disproportionately, while the purchasing power of the masses is limited. We need a more aggressive business environment and tariff reforms so that both domestic and foreign investment increase to create jobs. We need to address these contradictions by realizing our united ideal of prosperity by restoring the lower middle class’s well being, which can only be done by creating more high-quality jobs.
- Ghatak, M., Raghavan, R., & Xu, L. (2022, November 14). Trends in economic inequality in India. The India Forum. Retrieved January 16, 2023, from https://www.theindiaforum.in/economy/trends-economic-inequality-india
- http://www.ETAuto.com. (2022, April 13). FY22 two-wheeler sales: Two-wheeler sales crash to 10-year-low in FY22; motorcycles fall below 9 mn, Auto News, et auto. ETAuto.com. Retrieved January 16, 2023, from https://auto.economictimes.indiatimes.com/news/two-wheelers/two-wheeler-sales-crash-to-10-year-low-in-fy22-motorcycles-fall-below-9-mn/90822035
- India total passenger vehicles SalesDecember 2022 data – 2002-2021 historical. India Total Passenger Vehicles Sales – December 2022 Data – 2002-2021 Historical. (n.d.). Retrieved January 16, 2023, from https://tradingeconomics.com/india/total-vehicle-sales
- India’s K-shaped economy: Why rich get richer and poor poorer. mint. (n.d.). Retrieved January 16, 2023, from https://www.livemint.com/mint-top-newsletter/easynomics18052022.html
- Staff, S. (2022, August 3). MGNREGA: Demand for jobs under rural employment scheme doubled in seven years, Centre Data shows. Scroll.in. Retrieved January 16, 2023, from https://scroll.in/latest/1029637/mgnrega-3-07-crore-jobs-demanded-in-2022-under-rural-employment-scheme-says-centre
- Kumar, K. R. (2021, December 5). Gold loans – a win-win for banks, customers. Gold loans – a win-win for banks, customers – The Hindu BusinessLine. Retrieved January 16, 2023, from https://www.thehindubusinessline.com/money-and-banking/gold-loans-a-win-win-for-banks-customers/article35137763.ece