Gaurav Kumar Sharma is a heartbroken man. After the lockdown upended his livelihood for more than two months, he was relieved when things slowly returned to normal: shops and markets reopened, and people began stepping out of their homes. But as food inflation spiked due to supply chain disruptions caused by the lockdown, Sharma, 43, who drives an autorickshaw in New Delhi, said that all his hope has turned into gloom.
In October, prices of most essential vegetables such as tomatoes, cauliflowers and potatoes had increased considerably in most parts of the country.
“I drive from morning to night, and all I save [these days] is Rs 200 to Rs 250 a day after paying for fuel and rent for the rickshaw,” Sharma told IndiaSpend. In December 2020, when he went to the Mohammadpur mandi near RK Puram in South Delhi, he was surprised that tomatoes were selling for Rs 80 a kilogram.
That day, he did not buy his essential groceries. “We stopped eating vegetables for some time and got by, eating just rice. On some days, we would eat parathas with salt. I hope the prices come down soon; else there is only one way for poor people like us: we will die,” Sharma said. “I have four daughters to feed.”
Sharma’s agony is shared by tens of millions of low-income and poor households in India as they grapple with a cocktail of economic woes. After the pandemic disrupted India’s economy and led to increased unemployment and slashed wages, a sustained period of higher food inflation is now pushing millions of families to cut back on food expenditure, threatening a spell of nutritional poverty and malnutrition among children.
As households dip into their savings because of either stagnating or no running incomes, economists warn that India’s gross household savings could decline, thereby denting future consumption and jeopardising economic recovery.
This could lead to a lowering of investor sentiment as India’s consumer market would get narrower with constricted household savings, warned economists. For instance, global investors would be discouraged to put their money into a market where consumers have less disposable cash to spend, thereby leading to reduced investments into new projects, which would dampen job creation.
Rising poverty, hunger
In October, food inflation surged to 11%, but it came down only marginally in November to 9.43%. Even before the pandemic, India’s consumer price inflation hovered above the Reserve Bank of India’s mandated 6% upper limit, as the country’s economic growth slowed down to record lows.
After the pandemic hit India, Prime Minister Narendra Modi’s sudden announcement of a total national lockdown disrupted the agricultural supply chain. This resulted in the spike in food inflation that India has witnessed during the last few months, experts said.
A sustained spike in food inflation could have a damaging effect on India’s poor, according to economists, who said that higher food prices would put pressure on earnings, which are already very low, and decrease household savings at a time when there is widespread economic pain in the country.
“This rise in prices is coming at a time when employment and livelihoods have collapsed,” Jayati Ghosh, a development economist and executive secretary of International Development Economics Associates, told IndiaSpend. “Many people who lost their jobs during the pandemic, and even before because of the economic slowdown, have not been able to find new employment. Those who have jobs are often working at significantly lower wages while the incomes of most self-employed people are a fraction of their previous levels. There is no doubt that there has been a significant increase in poverty and hunger.”
Tax on fuel fuels inflation
The government’s policy of increasing taxes on fuels was a big factor behind higher inflation, said economists, which would have a negative bearing on millions of self-employed Indians and small businesses, who, along with tens of millions of informal sector workers, have been the worst hit from economic damage.
The current trend of higher inflation is “in the nature of cost-push inflation”, which is a result of some supply chain bottlenecks, and the government’s attempt to increase taxes on fuel in order to increase its tax revenues during an economic crisis, said Ghosh.
Even though the government is desperate for tax revenues at the moment, increasing taxes on fuel is not the right policy instrument, cautioned Santosh Mehrotra, an economist at New Delhi’s Jawaharlal Nehru University, and former head of development policy-making in the Planning Commission.
“Tax revenues have not taken a hit only after the pandemic,” he said. “They have been shrinking even prior to it because the economy was slowing. The fact that the government keeps raising taxes on diesel and petrol is a hugely important contributory factor to inflation across the economy because diesel is an input into everything.”
Mehrotra cited the example of India’s transporters, most of whom fall under the purview of micro and small businesses. “Either they have very few trucks or they are self-employed with a single truck. When you raise taxes in the way you do on oil, these transporters who are working on wafer-thin margins are severely impacted. It has a very damaging effect on these people,” he said.
In August, ICRA, a ratings agency, reported that India’s transport sector would contract by about 20%. But with diesel prices set to climb to an all-time high, the operational costs for most small transporters are likely to go up significantly at a time when the sector is slowly beginning to show signs of recovery. This, Mehrotra said, could result in many small transporters even folding up their businesses as profit margins continue to shrink.
Inflation, contraction and food distribution
The spike in consumer food price and retail in the past few months has coincided with a record contraction of the Indian economy, and many economists have criticised the government for not spending enough to placate tens of millions of poor and low-income households.
In December, the Finance Ministry said that the government could not spend more because it was concerned about a higher fiscal deficit, and it defended its decision to cut spending by about 22% in the September quarter.
However, the failure to spend more is one of the bigger factors behind India’s record economic contraction, economists told IndiaSpend.
“We are a country that has hundreds of millions of poor people and that makes us quite unlike most other countries,” Mehrotra said. “We account for the biggest number of poor people in any country of the world. So, for the Indian economy to contract is a complete disaster for them. Compared to other G-20 nations, India’s contraction is the worst. So there must be something very seriously wrong with the way the government has managed the economy.”
Even as food inflation has remained high in the months after the lockdown – this has coincided with a trend of unemployment and depressed rural wages – the government did not continue its free grain distribution scheme under the Pradhan Mantri Gareeb Kalyan Anna Yojana beyond November. But economists caution that this could lead to a spike in nutritional poverty because high prices would force low-income and poor households to cut back on food expenditure.
“The government’s attitude to both public spending and to food distribution is a complete mystery,” said Ghosh of International Development Economics Associates. “Why spend less during the pandemic when the government is the only agency in the economy that can actually spend freely? Even the International Monetary Fund has called on the Indian government to undertake more spending.”
The government should immediately release excess food grains with the Food Corporation of India, which was set to have more than twice its buffer stock in January, Ghosh told IndiaSpend.
“Some stocks are probably rotting as we speak in the face of such massive increases in hunger,” Ghosh said. During the lockdown, between April and June, about 1,500 tonnes of grains were damaged in Food Corporation of India godowns. In comparison, the grain wastage at the Food Corporation of India was reported to be 2,000 tonnes for the entire 2020 fiscal year.
“It is almost impossible to imagine a democratically elected government behaving in this way, with so little concern for the basic well-being and even survival of its citizenry,” Ghosh added.
More might be pushed below the poverty line
One day, after weeks of hustling to find a way to pay for his family’s expenses, Sharma did something that he had rarely done before: He went to his bank and withdrew most of his life’s savings of about Rs 20,000. “Was there any other way?” he said with sadness, adding, “I do not talk about these things… not to my family, not to anyone, but many times I have felt like crying.”
This is a big worry among economists, who fear that rising prices at a time of widespread economic pain could force poorer households to dip into their savings, thereby denting household financial savings – which form a large chunk of the overall savings in the economy – and slowing down future consumption.
“I think two different things are happening with savings simultaneously: To put it bluntly, people who have reasonably high income and are working from home, their savings are going up while the poor are taking the economic hit and are more likely to dip into their savings,” Sabyasachi Kar, who holds the Reserve Bank of India chair at the National Institute of Public Finance and Policy , told IndiaSpend.
“I would be very worried in case their dissavings increase and these households get into a debt trap,” Kar said. “Even when we are talking about people dipping into their savings, I think we are still talking about people who are not very poor, because the poor do not have any savings. So any major shock is going to push a lot of these people below the poverty line.”
Even before the pandemic, India’s economy was slowing down and none of the four engines –consumption, investment, exports and public expenditure – that drive economic growth was firing strongly, said Mehrotra. “The more important point is that household savings as a proportion of GDP [gross domestic product] have come down from [about] 24% in 2012 to 17% in 2018, he said. “This is a catastrophic fall. On top of this, household savings at 17% is just about half a percentage point higher than it was in 1991.”
This, according to Mehrotra, indicated that if people were maintaining consumption over the last six years or so, then they were doing so by spending their savings already – a trend that had worsened after the pandemic led to job losses.
“So if you have a combination of job losses and low wages in the organised sector, then you can imagine what is happening in the informal sector,” Mehrotra said and pointed out that even if a lot of jobs have come back, most of these workers are either self-employed or in the informal sector, who are working for fewer hours owing to less demand for work.
All of this, according to Mehrotra, will have a huge bearing on India’s household savings. “I do not expect household savings to be more than 15% of GDP for this financial year,” Mehrotra said. This, according to him, is a big worry for future economic recovery.
In November 2020, a study by the Rustandy Center for Social Sector Innovation at the Chicago Booth School of Business found “signs of continued duress for many households in India months after the lockdown was put into place, and that employment and income losses are having: real negative welfare consequences for Indian households”.
According to the study, households were slashing expenditure on cereals and pulses because of job losses and reduced wages.
Tax rich, spend more
According to Ghosh, by not spending enough, the government is taking a wrong approach.
“As the government attempts to keep its fiscal deficit to GDP ratio under control by reducing its own spending, it is actually doing the opposite,” she said. “It will get low tax collections than it would have if it had spent, and therefore the fiscal deficit will still be large, and because GDP will fall (especially relative to what could have been), and the fiscal deficit to GDP ratio will increase,”
The government should immediately ramp up spending toward state governments and on central schemes that have a high multiplier effect such as on employment programmes, health and education, suggested Ghosh. But most importantly, the government must fix the supply chain bottlenecks that would bring down cost-push inflation. Even though the government is concerned about the fiscal deficit, it should find alternative ways to finance the extra spending, she noted.
“Some of this increased spending will be automatically financed by the increased tax revenues from the increase in economic activity that will result. Some of it can be financed by bringing in wealth taxes on the super rich who have gained during the pandemic (as is being considered in the United States and the United Kingdom), and some by changing the tax rules to force MNCs to pay at the same rate as domestic companies, without shifting their profits to low tax jurisdictions,” Ghosh said.
But forcing higher taxes on global firms could jeopardize the government’s current push to attract foreign investments at a time when firms moving out of China are increasingly shifting base to Vietnam.
However, economists said that a more serious worry for the government should be falling household savings – which would discourage investments in the economy – and the government should bring in a variety of policy fixes to reverse the trend.
India’s economic growth since liberalisation in 1991 has been powered by a tiny minority at the top rung of the pyramid, as economists such as Rathin Roy, a former member of the Prime Minister’s Economic Advisory Council, have pointed out.
Consumption by the top 100 million Indians has driven India’s growth story, which is indicative of a much smaller middle class in India than it has been projected, Roy had said in September 2018. But with the pandemic-led economic damage leading to a fall in India’s gross household savings, there is a threat to a narrowing of this group too.
The government needs to intervene at the household level to cushion the pain in the economy, said Mehrotra. One way to do so, he suggested, was by going ahead with the promise of the social security code and bringing in an old-age pension scheme for unorganised workers who are already over 60 years of age. “There is a large cohort of workers past the retirement age who do not receive anything and have no source of income, said Mehrotra. “Give them some money; this will not cost the government a lot.”
What this policy measure would do, according to Mehrotra, is that it would force the older workers out of the labour force and make way for younger workers to enter at a time when labour force participation rate is falling.
The potential of India’s economy to get back on the pre-Covid growth path is a big concern for Sabyasachi Kar of National Institute of Public Finance and Policy. It would take about 13 years for India to get back on that growth path provided the economy clocks a growth rate of about 7%, according to one of his models.
But with declining household incomes and savings, there is a real threat of a future consumption slowdown in the economy, which could lead to another spell of the economic slowdown. For instance, a dip in household savings and lack of government spending – which would result in shrinking of India’s already tight domestic market – could lead to negative investor sentiment, hurting the investment cycle, which, in turn, could begin a slowdown in the economy.
“I am very worried about India’s growth,” Kar said. “The redistribution of income will be skewed against poor people.”
This article first appeared on IndiaSpend, a data-driven and public-interest journalism non-profit.
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