How does the budget address income and wealth inequality, which is the elephant in the room?

Almost a third of the Prime Minister Narendra Modi’s second term is over and the economic miracle he had promised, is nowhere in sight. The government may blame the COVID pandemic for the economic mess the country finds itself in, but fact is that the impact of Modi government’s economic policies is for everyone to see.

The jobs that the BJP promised never happened, economic growth had come down to 3.1% in March 2020 and a leaked NSSO survey indicated that inflation-adjusted consumption declined for the first time in the last four decades. The only thing that went up, and went up dramatically, was income and wealth inequality as India’s 100 billionaires saw their wealth rise by an astronomical Rs 13 lakh crore, enough to give the poorest one percent almost a lakh Rupees each.

This budget, like any other, would be measured not by its optics, but by its outcomes. Will it lead to a revival in consumption growth, will it help create new employment opportunities for our youth and more importantly, will it help the people recover from the massive disruptions caused by the pandemic? In short, will it bring real growth to real people?

Three years from now, the country would be already in the campaign mode for the 2024 Lok Sabha elections and it seems unlikely that the Prime Minister would be able to fulfil the promises he made to the youth of the nation. In many speeches before the 2014 Lok Sabha elections, the Prime Minister indicated that providing jobs to the youth was the biggest national priority.

Before we go deeper into understanding of what is wrong with the economy and if a redemption is even a possibility, it is important to understand how bad the hit from the pandemic really is?

Despite the government’s all-out effort to raise tax collections though an unjustifiably high tax rate on petroleum products, the government’s revenues are expected to be short by roughly Rs 7 lakh crore , which would be about 1/4th less than the Rs 26.33 lakh crore that the government had estimated at the start of the year. This is despite an additional Rs 2.5 lakh crore the government is expecting to earn from sky-high taxes on petroleum products.

There is no doubt that the economy and government revenues would rebound in the coming fiscal but there is also no doubt that India’s growth engines have suffered serious damage.

You could blame COVID for this mess but the everyone knows that the economy was already in a slowdown when pandemic induced lockdowns were announced. Growth had slipped from 8.2% in March 2018 and to 3.1% in March 2020  and there were no signs of a revival on the horizon when the lockdown when the lockdown was announced.

The economic demons unleashed by the COVID brought in bad news by the buckets and while the markets recovered and are prospering again, real people continue to feel the pain. The markets were around 38,000 at the beginning of March last year but crashed to 26,000 around the time lockdown was announced. In the 10 months since, the markets have recovered and even kissed the 50,000 mark before settling at just about 49,000 points.

CMIE’s analysis of quarterly financials of listed companies indicated an interesting trend- while incomes, expenses and profits of listed companies showed a decline in declined for the March and June quarters, the trend changed in the September quarter. While incomes and expenses continued to decline in the September quarter, the net profit of the companies zoomed by a massive 45.3%.  Early trends from the December quarter continue to show the same trends, reducing expenses and rising profits. Nothing wrong with companies making money but expenses and profits going in opposite directions perhaps needs a more detailed look later.

Unsold inventory finding its way into the markets could be one explanation but companies are also reporting a reduction in wage costs. “Of the 4,234 companies in the sample, 2,150 companies, or 50 per cent of the companies, cut their wage bill in the September 2020 quarter compared to their levels a year ago. Another 463 did not show any increase in the wage bill. And, another 339 grew their wage bill by less than 6.92 per cent, which was the inflation rate in the quarter ended September 2020. Therefore a total of 2,952 companies, or 70 per cent of all listed companies recorded a fall in wages in real, inflation-adjusted terms,” CMIE reported.

While the markets have recovered, and both companies & investors continue to make money on Dalal street, the working population has been hit hard and continue to suffer from the long-term impact of the lockdown. The Mint reported that the bottom 10% of Indians lost a fourth of their income last year  and India is already way past China is income inequality- the share of richest 10% in the national income in India was 56%, while it was only 41% in China.

Then came the Oxfam’s report, which was interestingly called the ‘The Inequality Virus’. The report notes that the wealth of India’s 100 billionaires went up by a massive Rs 13 lakh crore during the pandemic. “The rise in wealth of Indian billionaires was so overwhelming that the top 11 billionaires of India during the pandemic could sustain the National Rural Employment Guarantee scheme for 10 years or the health ministry for 10 years with their increased wealth,” the Financial Express reported.

Rising income and wealth inequality have been long term trends but there is little doubt that it has gathered momentum over the last six and half years of the Modi government as the center of gravity of economic growth has shifted from bottom to the top. Trickle down economics in the time of COVID surely means it would be a long time before consumption recovery reaches the people on the ground.

Notwithstanding claims by the government that things will back to normal in the next six months or so, there is no denying that our economic story has been derailed and it would take a few years for ground level consumption to get back to where things pre demonetization and GST. And the bad news is that our young women and men would have to wait a few more years before they are able to find well paying jobs than can help them lead better quality lives.

The bigger question, however, is how this is going to shape the political agenda of the nation in the years to come? Will India go back to issues that really matter or will we remain focused on distractions that have defined Indian politics over the last seven years?

The BJP government was elected in 2014 on their plans to make India an economic powerhouse and the Prime Minister claimed to make India a US $ 5 trillion economy by 2025. The leap to $5 trillion  needed a difficult 9% growth before the pandemic  and the asking rate has now climbed to an impossible 11.5%  and this means that the ruling party would have to keep the national discourse away from economics and jobs.

No matter which side of the political divide you stand on, fact is that the next few years are going to be painful as new jobs are going to in short supply and businesses should be happy just to stay afloat. Companies would stay profitable, the stock markets would continue to rise, cant say the same about wage growth and actual consumption. All this would impact long term consumption and would ultimately hurt the economy.

We are all heading to a point where we would no longer be able to afford to be in denial about the true state of the economy and it is only a matter of time before it becomes the central issue in our politics. It is not a question of it, it is when.

Brace for impact.

( This assessment was written just before the budget for 2021-22 was presented today)