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Post-Covid Economic Recovery: Can the Rich Also Hurt Growth? – news from india

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Although it sounds counterintuitive, this question is important from a macroeconomic perspective. There are two ways this can happen.

Because the rich save more, they contribute most of the national investment sources, especially stocks and debt. The Indian equity markets are extremely overvalued if the current price-earnings multiple is any indicator. Undoubtedly, this rebound has also been favored by an increase in inflows from advanced countries, where interest rates have plummeted to a record low and investors are looking for more attractive options globally. This inflow has led to an increase in India’s foreign exchange reserves. Because these dollar reserves can be moved in a very short time, they cannot be invested for long-term productive purposes and must be held in risk-free and highly liquid forms. In an Indian Express column on December 15, Jahangir Aziz, JP Morgan’s chief emerging markets economist, underscored the economic headwinds that these reserves have created for India by undermining fiscal space (https://bit.ly/ 2M4BwaG).

Consequently, despite the apparent lack of fiscal space at home, the RBI has been financing the fiscal deficits of other countries. Since April of this year, RBI has bought $ 70 billion in foreign assets, presumably mostly US government bonds. That is about 2.7 percent of GDP. In other words, while the government has limited its support to the national economy, through the RBI, it has invested almost 3 percent of GDP in foreign assets in the first half of this fiscal year alone, ”Aziz wrote.

If the Reserve Bank of India did not hold these reserves in this way, the appreciation of the rupee could cause Indian exports to lose competitiveness. To be sure, imposing controls on the movement of that money could remove these political pressures, but it would also mean that stock market rallies like the one we are currently witnessing, and the growth in income they bring to the rich, would be a lot. greater. off.

Another way that a pro-rich income distribution negatively affects growth is the trade route. The rich, because they consume more sophisticated products, tend to have a greater propensity to import demand than the poor. If all remains the same, a change in the distribution of income from the rich to the poor can lead to an increase in imports, reducing net exports and therefore GDP. Without doubt, this process has been going on in the Indian economy for a long time. A 2015 Economic and Political Weekly article by Zico Dasgupta and Subhanil Chowdhury explored this question by examining imports from India (https://bit.ly/2WEuI5w). The paper found that the increase in India’s current account deficit was due to an increase in the ratio of imports to GDP, leading to an increase in the trade deficit. The document disintegrated “the increase in the ratio of imports to GDP in terms of three main commodities: gems and jewelry, capital goods and petroleum” and found that “the increase in imports of commodities is the result of the demand pattern in the economy “. “Even with an increase in inequality, the increase in the growth rate (of GDP) is considered to be mainly due to higher consumption by the rich. This consumption is mainly driven by intensive import commodities, there is an increase in imports, ”the authors pointed out.

Of course, the two trends explained above are not new to the Indian economy. However, if income inequality were to rise further due to the pandemic, which is what the evidence so far suggests, one would expect these growth headwinds to get stronger.

Important to avoid losing the forest for the trees.

This does not mean absolute pessimism in the Indian economy going forward. It is highly likely, as Neelkanth Mishra, Co-Director of Asia Pacific Strategy and India Equities Strategist at Credit Suisse, has pointed out, the economy will see patches of brilliance in sectors where the wealthy use their accumulated savings to offset stifled demand or even transformed. People who opt for larger homes as working from home becomes the norm could be an example of the latter variety. A Bloomberg Quint story using CIBIL data showing that home loans are leading the revival of personal loans supports these anecdotal accounts (https://bit.ly/2M58KGV). However, it is important to note that it will take some time for the overall macroeconomic picture to emerge clearly. Given the widespread consensus on the damage to income and employment of the non-rich, it would be premature to cancel the long-term damage to the economy.

This is the second in a two-part series. The first part (https://bit.ly/3mRPFo7) they discussed whether the wealthy can boost economic growth in post-covid India.

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