How wealthy can they help the economic recovery after the pandemic?
2020 was a year of unprecedented economic turmoil globally. Thanks to a near-total 68-day national lockdown to prevent the spread of Covid-19, the Indian economy suffered an even greater disruption. This is why India’s June quarter GDP contracted 23.9%, more than the decline seen in other major economies. Things improved with the easing of lockdown restrictions. Nomura India’s Business Resumption Index (NIBRI) hit 90% in December, just 10% below the pre-lock period. Many forecasters have made favorable revisions to their estimates for India’s 2020-21 gross domestic product (GDP). The Reserve Bank of India (RBI), for example, revised its projections for a contraction in GDP from 9.5% to 7.5%. The GDP growth figures will take a big leap from the June quarter of next year as a favorable base effect takes place. As 2020 draws to a close, the big question is not what the GDP growth figures will be for the December or March quarter, but the long-term growth prospects for the Indian economy. A section of economists believe that the pandemic, while it has hurt the poor enormously, may not cause significant long-term damage.
Speaking to Ira Dugal of Bloomberg Quint, Neelkanth Mishra, Co-Head of Asia Pacific Strategy and India Equity Strategist at Credit Suisse, explained the rationale for this opinion (https://bit.ly/3hhdiFr).
“Pain has dropped to the bottom 30% -40% of companies and individuals. While from an inequality perspective it is a disastrous result, from an economic momentum perspective it is actually the best possible result… The top 10% of the Indian economy consume more than the bottom 50%. The top 10-20% have come out of the lockdown with a better balance than before, because their consumption was more affected than their income. It is the bottom 50% whose income has been affected more than their consumption … their balance sheets are much worse. But as we go out and the incremental savings that the rich had unfurl strongly, (and) the economic stimulus that has come … the lasting damage to the economy is much less, ”he said (https: // bit .ly / 3rmV2zk).
If the normative question of rising inequality is left aside, will the Indian economy see a growth boom driven by the rich in the medium term? This question is worth examining seriously, and number theory will do so in two parts. First, can the rich help growth? .
How big is the income / consumption inequality in India?
India does not have a complete income database and consumer spending is the best indicator of income data. Because the government removed the Consumer Expenditure Survey (CES) 2017-18, we have no recent data on consumption inequality in India. However, the CES 2011-12 data and the latest income tax statistics can give us an idea on this question. CES 2011-12 shows that the richest 20% of the population had a share of almost 50% in total consumer spending. It also tells us that the poorest 80% of the rural population and almost half of urban households spent half of their budgets buying food. Private Final Consumption Expenditure (PFCE) has a share of more than 50% in India’s GDP.
These numbers suggest that Mishra’s forecast of the top 10-20% is the one that matters most when it comes to boosting the PFCE and growth is correct. However, there is good reason to believe that CES, like other National Office of Sample Surveys surveys, underestimates the rich and thus the degree of income inequality in India. A comparison of the wage data from the latest available Periodic Labor Force Survey (PLFS) for 2018-19 and the income tax data for the 2018-19 assessment year (fiscal year 2017-18) proves this point.
Salaried workers are at the top of the heap in the PLFS database. Their average monthly earnings (Rs 16,160) are much higher than those of casual workers (Rs 8,340 for 30 days for non-public works work) or self-employed (Rs 10,725). The PLFS estimates that of 356 million workers in India, 90 million were wage earners. According to PLFS 2018-19, the average monthly wages for even the top 10% of salaried workers in India were below Rs 50,000. Even for the top 5%, this number is Rs 61,334; 80% of salaried workers do not even earn more than Rs 20,000 a month, the data shows. The maximum income for a salaried worker in the PLFS data is Rs 12 lakh per month. The maximum monthly salary captured by the PLFS is Rs 60 lakh for a self-employed worker.
See Graph 1: monthly salaries by deciles of salaried workers.
The landscape changes dramatically when one looks at the most recent data from income tax returns (ITR). Because detailed ITR data is not available, it is necessary to work with middle income levels. Of the 58.7 million ITR presented by wage earners; a number that is approximately two-thirds of the number of salaried workers estimated by the PLFS, 78.5% reported monthly earnings below Rs 45,000. The monthly income does not exceed the Rs 1 lakh mark for 97% of the salary income class presented by ITR. Anyone earning no more than 1 lakh rupees per month can hardly be considered rich today. It is the top 3% of wage earners earning 28% of total wage income reported in ITRs in India. Inequality becomes even more acute if all ITRs are analyzed instead of those presented by wage earners, showing that the top 0.7% earn almost 40% of total income declared in ITRs in India.
See Graph 2: Participation of employees in the income declared in the ITR
How important are the salaried and non-salaried rich for the macroeconomy?
Modern economies are deeply interconnected by nature. This makes it dangerous to speculate on the economic importance of the different classes. The income of a well-paid executive may depend on a very low-priced consumer product that his company sells, and a relatively low-paid worker at a high-end resort or restaurant depends on the wealthy coming and spending there. With this caveat in place, you can try to provide a rudimentary answer to the question posed above. The share of total revenue reported in ITRs in 2017-18 GDP was 30%. Of this, the income declared by wage earners was 11.7%. As a PFCE share, the share was 19.9% for all reported wage income. The top 8% of wage earners had a share of only 14% in the total PFCE. This is even less than 10% of total GDP. Even if one were to assume that this class spends all its revenue, it is unrealistic to assume that it can generate significant tailwinds for the economy on its own. In other words, the rich cannot drive growth on their own.
See Graph 3: Income declared by ITR as a percentage of GDP and PFCE