Budget must address falling incomes

RBI controlling the economic front in India.

These estimates from publicly available data raise serious concerns about the aggregate demand in the economy, the primary reason for the slowdown after 2016-17 but before the pandemic; available data suggests that the situation may have worsened after the pandemic.

Calling India the fastest growing economy is a deceptive claim. It hides the impending economic crisis.

Written by HIMANSHU
January 13, 2023 07:15 IST


The latest estimates of Gross Domestic Product (GDP) released by the National Statistical Office (NSO) suggest that the Indian economy grew by 6.3 per cent in the last quarter compared to last year, with full-year growth expected to be around 7 per cent. This forms the basis of the government’s claims that India may be the fastest-growing economy in the world. But then annual growth rates are notoriously deceptive given the choice of base year. More so when the economy has seen a sharp slowdown in growth rates since 2016-17, followed by the pandemic. Any euphoria based on year-on-year growth rates is not just deceptive but also hides the reality of an impending economic crisis.

The same national accounts data shows that average income in India is lower in 2021-22 compared to the pre-pandemic year of 2018-19 with per-capita income declining at 0.25 per cent per annum.

Take the case of farmers, the largest occupational group. In February 2016, Prime Minister Narendra Modi announced that farmers’ incomes will be doubled by 2022. The reality is that farmers’ income declined by 1.5 per cent per year between 2016-17 and 2020-21. In 2021-22 data, one only hopes that it at least remains at the level it was five years ago.

The second largest group is casual workers. Based on the monthly data from the labour bureau, real wages in non-agricultural occupations between September 2017-2022 declined by 0.9 per cent per annum whereas it remained almost stagnant for agricultural occupations with real wages rising by 0.1 per cent per year. Together, cultivators and rural wage labourers account for 78 per cent of all rural workers; their share in the economy is 53 per cent. In other words, almost four-fifths of rural workers have not seen any increase in their incomes in the last five years.

But it is not just the rural households and the poor that have seen a decline in incomes. Better-protected regular workers in urban areas have not fared better. Employment-Unemployment Surveys of the National Statistical Office (NSO) and the Periodic Labour Force Survey (PLFS) suggest that real earnings of regular workers have declined across categories, male and female, rural and urban. Between 2011-12 and 2017-18, earnings of rural regular workers declined by 0.3 per cent per annum while it declined at a faster pace of 1.7 per cent per annum in urban areas. Between 2017-18 and 2020-21, these further declined by 0.7 per cent in rural areas and 1.3 per cent in urban areas. In 2020-21, an average rural regular worker was earning only 96 per cent of the salary in 2011-12 in real terms, whereas it was only 86 per cent in urban areas. For comparison, regular worker earnings increased at 3 per cent per annum in rural areas and faster at 3.9 per cent in urban areas during 2004-05 to 2011-12. Together with cultivators and rural casual wage workers, these account for 83 per cent of all workers in the country and all of them have seen their real earnings decline in the last five years.

Not surprisingly, the PLFS data confirms that the real earnings of households from all forms of employment declined between 2018-19 and 2020-21, confirming the trend in decline in per capita incomes reported by the national accounts. While rural-urban break-up is not available from the national accounts, the PLFS provides it. As per the PLFS estimates of earnings from employment, the decline was largely in the urban areas where earnings declined by 4.2 per cent per annum. Rural areas did better with per capita earnings from employment actually rising by 2.7 per cent. That these are not anomalies is further confirmed by estimates of consumption expenditure from the PLFS. While not comparable with the usual consumption expenditure, these are internally comparable and these also confirm that the consumption expenditure of the urban areas declined by 4 per cent whereas it increased in rural areas. Within the urban areas, it is the highly educated among the regular workers who have seen faster decline in real earnings compared to illiterates and bare literates. As against the decline in real earnings of around 1 per cent per annum for illiterates and semi-literates, those who are at least graduates saw a decline in real earnings of 3 per cent per annum.

These estimates from publicly available data raise serious concerns about the aggregate demand in the economy, the primary reason for the slowdown after 2016-17 but before the pandemic; available data suggests that the situation may have worsened after the pandemic. While the rural economy has been in distress for sometime now, there is now increasing evidence that the distress has spilled over to urban areas and possibly, a large section of the middle classes. It is the discretionary demand from the middle classes, which is crucial for aggregate demand. The data from the Consumer Confidence Surveys (CCS) of the RBI further lend credence to the distress in the urban economy. The surveys, which track the economic situation in 13 major urban centres, seek the perception of respondents on the current as well as future economic situation. For most of the last five years, the net response to the economic situation has been negative. That is, more respondents report a worsening of the economic situation than those who see it favourably. The same is the case with incomes with more respondents reporting a decline in incomes compared to those who report improvement. Despite claims of recovery, the net response in the case of non-essential spending continues to remain negative until the last data.

Clearly, the distress in the economy is no longer a rural phenomenon. It is far more widespread with even the better protected and middle classes in urban areas experiencing it due to declining incomes. The challenge for the government is not just to protect the poor and vulnerable through increased spending on social protection given the inflationary spell, it also needs to raise incomes for the majority of rural and urban population. Increasing disposable income among the middle classes is the only way to increase discretionary demand in the economy. Given the state of the economy, this budget has the unenviable task of reviving the economy even at the cost of the short-term objective of fiscal management.

The writer teaches at JNU


© The Indian Express (P) Ltd


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