From April to June 2020, India’s GDP dropped by a massive 24.4%. According to the latest national income estimates, in the second quarter of the 2020-’21 financial year (July-September 2020), the economy contracted by a further 7.4%, with the third and fourth quarters (October 2020-March 2021) seeing only a weak recovery, with GDP rising 0.5% and 1.6%, respectively. This means that overall rate of contraction in India was (in real terms, adjusted for inflation) 7.3% for the whole 2020-’21 financial year.
Worst ever economic performance
In the post-Independence period, India’s national income has declined only four times before 2020 – in 1958, 1966, 1973 and 1980 – with the largest drop being in 1980 (5.2%). This means that 2020-’21 is the worst year in terms of economic contraction in the country’s history and much worse than the overall contraction in the world (Figure 1). The contraction is solely responsible for reversing the trend of global inequality, which has now started to rise after three decades (Deaton, 2021; Ferreira, 2021).
Figure 1: Economic Contraction in India and the World during Covid-19
What do macroeconomic indicators say?
While economies worldwide have been hit hard, India has suffered one of the largest contractions. During the 2020-’21 financial year, the rate of decline in GDP for the world was 3.3% and 2.2% for emerging market and developing economies. Table 1 summarises macroeconomic indicators for India, along with a reference group of comparable countries and the world. The fact that India’s growth rate in 2019 was among the highest makes the drop due to Covid-19 even more noticeable.
If we compare India’s unemployment rate in 2020 with other countries, India has performed relatively poorly – both in terms of the world average and compared with a set of reference group economies (with similar per capita incomes to India’s). Unemployment rates were more muted within the reference group economies and were also kept low by generous labour market policies to keep people in work.
Despite the scale of the pandemic, additional budgetary allocation to various social safety measures has been relatively low in India compared with other countries. Although India might look comparable to the reference group in non-health sector measures, the additional health sector fiscal measures are less than half those in the reference group. More worryingly, the Indian government’s announced allocation in the 2021 budget for such measures does not show an increase, once inflation is taken into account.
Table 1: Summary of key macroeconomic indicators
Income, consumption, poverty and unemployment
While the macroeconomic statistics provide a snapshot of India’s economic position, they hide the large and unequal impacts on households and workers within the country. Both wealth and income inequality has been on the rise in India. Estimates suggest that in 2020, the top 1% of the population held 42.5% of the total wealth, while the bottom 50% had only 2.5% of the total wealth. Post-pandemic, the number of poor in India is projected to have more than doubled and the number of people in the middle class to have fallen by a third.
During India’s first stringent national lockdown between April and May 2020, individual income dropped by approximately 40%. The bottom decile of households lost three months’ worth of income. Microdata from the largest private survey in India, the CMIE’s Consumer Pyramids Household Survey or CPHS, shows that per capita consumption spending dropped by more than GDP.
GDP recovery did not follow the bounce back in consumption during periods of reduced social distancing. Mean per capita consumption spending continued to be over 20% lower after the first lockdown (in August 2020 compared to August 2019) and remained 15% lower year-on-year by the end of 2020.
Official poverty data are unavailable and the CPHS data come with a caveat of “top” and “bottom exclusions”. For example, official statistics show a rural headcount ratio of 35% in 2017-’18. But the CPHS data estimate it at 25%, which suggests exclusions at the lower end of the consumption distribution.
Despite these statistical concerns, CPHS does provide consumption numbers for a large sample of individuals, which can provide insights into changes in consumption levels arising from the pandemic.
Table 2 reports the percentage of people who have monthly consumption expenditure below different cut-off values. The different cut-offs encompass the official poverty lines (which, in any case, have been considered too low by some commentators). The rural poverty line is set at Rs 1,600 per month or over. The urban poverty line is Rs 2,400 per month or over.
Based on the latest CPHS data, rural poverty increased by 9.3 percentage points and urban poverty by over 11.7 percentage year-on-year from December 2020 to December 2019. Earlier months of the CPHS show that rural poverty increased by 14.2 percentage points and urban poverty by 18.1 percentage points. Yet the actual increase in poverty due to Covid-19 is likely to be higher than what the CPHS data suggest, as indicated by other surveys.
Table 2: Percentage of Individuals by Monthly Consumption Expenditure
Taking into account the general trend of reduction in poverty, an estimated 230 million people in India have fallen into poverty as a result of the first wave of the pandemic.
Table 3 shows that households in the middle of the pre-Covid-19 CPHS consumption distribution saw large drops in consumption after the first wave of the pandemic, helping create a new set of people entering poverty. The percentage of poor people in the 2nd lowest quintile of pre-Covid-19 consumption jumped from 32% to 60% within a year.
This was driven largely by rural areas, where the headcount ratio for the 2nd quintile almost doubled. In urban areas, the poverty line is set higher due to greater living costs and 72% of people in the 2nd quintile of the urban income distribution were below this poverty line before the pandemic. Within a year, they were joined in urban poverty by many who earlier had higher incomes before. Fifty percent of people in the 3rd quintile and 29% of people in the 4th quintile fell below the poverty line after the pandemic.
This sharp rise in poverty after the first lockdown is consistent with a variety of surveys that highlighted the depth of the crisis. Year-on-year urban unemployment rate jumped from 8.8% in April to June 2019 to 20.8% in April to June 2020.
Table 3: Percentage of Individuals Who Are Below the Poverty Line in Middle Quintiles of pre-Covid-19 Consumption Expenditure, August 2019 to August 2020
Hitting the young
The pandemic has brought severe economic hardship, especially to young individuals who are over-represented in informal work. India has a large share of young people in its workforce and the pandemic has put them at heightened risk of long-term unemployment. This has negative impacts on lifelong earnings and employment prospects.
A recent study by the Centre for Economic Performance at the London School of Economics analyses the depth of continuing joblessness among younger workers in the low-income states of Bihar, Jharkhand and Uttar Pradesh (Table 4).
The survey randomly sampled 18-40 year old urban workers during the first lockdown quarter, finding that a majority of them who had work before the pandemic were left with no work or no pay. After the first lockdown in April to June 2020, 20% of those sampled were out of work, another 9% were employed but had zero hours of work and 81% had no work or pay at all.
Ten months on from the first lockdown quarter (January to March 2021), 8% of the sample continued to be out of work, another 8% were working zero hours and 40% had no work or no pay. The rate of no work or no pay was higher (at 47%) among the youngest low-income individuals (those aged between 18-25 years who had below median pre-Covid-19 earnings).
Table 4: Crisis Labour Force Status of Individuals Who Were Employed Pre-Covid: Recontact Sample of Individuals Interviewed during the First Lockdown (April to June 2020) and before the second wave (January to March 2021)
The recovery after the first wave was too muted to get many young Indian workers back into employment. For example, rural migrants continued to be reluctant to return to work in urban areas even before the second wave hit. And the second wave, which started in mid-February and appears to be flattening out in June 2021, heightened these risks of long-term unemployment by increasing the spells of economic inactivity.
What public health indicators reveal
To avoid another livelihood crisis, India turned to local lockdowns during the second wave of the virus. Before the second wave, India’s public health performance (in terms of confirmed cases and confirmed deaths), while not the best, was ahead of several reference group countries. But the second wave has made India’s position significantly worse. The total confirmed cases per million now are comparable to those in the rest the world and the rate of vaccination is lower in India.
While death rates seem lower in India, there is massive underreporting. After accounting for the underreporting within official statistics, India’s total confirmed cases and deaths might exceed that of the rest of the world by a large margin.
In the conservative scenario, the total confirmed cases per million are about 13 times larger than in the rest of the world and the total confirmed deaths per million are about 85% of that in the rest of the world. In the worst case scenario, India is far behind the rest of the world. There is an important caveat: while the focus of this article is on India, underreporting of Covid-19 cases and deaths is prevalent globally (Institute for Health Metrics and Evaluation, University of Washington, 2021).
How has India fared so far?
More than a year has passed since India’s first national lockdown was announced. There was talk of a trade-off between lives and livelihoods when the Covid-19 crisis erupted last year. As India struggles under the second wave, it is clear that the country did poorly in both dimensions.
India’s policy response, while high in terms of some aspects of lockdown stringency, was neither effective in dealing with the public health and economic aspects of the crisis, nor the impact of the crisis on the most vulnerable sections of the population.
The authors would like to thank Ramya Raghavan and Fjolla Kondirolli for research assistance.
This piece was first published in Economics Observatory.
Swati Dhingra is an Associate Professor of Economics at the London School of Economics. Maitreesh Ghatak is a Professor of Economics at the London School of Economics.