Good news: The Rich are spending

Data shows India’s top 10% in brisk consumption mode. Trend will likely hold post-festivals

Neelkanth Mishra | Oct 19, 2021, 19:14 IST

This appeared in the Times of India on October 20, 2021 (link).

Our mobility-based estimate of GDP suggests the rate of output last fortnight was where it would have been had there been no Covid: 13% above the GDP of the fiscal year ending March 2020 (FY20).

This is remarkable, not just because it seems to suggest that aggregate output is unaffected by the economic scars from lockdowns, but also as some parts of the economy are still not fully functional.

International tourism is yet to start (their total spending used to be 1% of GDP), passenger traffic on railways is still restricted (including travel to-and-from railway stations and passengers spending during travel, it added half a percent to GDP, and enabled other productive activities), state government spending on infrastructure is restarting only now (government operations were among the worst affected by lockdowns as they are not geared for ‘work-from-home’), and events involving large gatherings (like marriages and conferences) are still restricted. Car manufacturing, which is a large part of industrial activity, is also not functioning at capacity given parts-shortages. When these activities resume fully, output may rise further.

This suggests forecasts for economic growth would need substantial upwards revisions. Consensus and RBI expect GDP in the quarter that just ended to be unchanged from two years back (July-Sep 2019), and Oct-Dec 2021 quarter GDP to be just 7% higher. In the next fiscal year (FY2022-23), consensus expects output to be 8% higher than in FY2019-20, whereas output today might already be 13% higher.

Mobility-based GDP estimates have obvious limitations, but tend to be in the right ball-park. Further, several other indicators are also showing good growth, and consumption is clearly recovering. Sales of jewelry and consumer durables are seeing strong compounded growth over the same months in 2019, hotels at tourist locations have high occupancy, there is chaos and crowding at airports, heavy footfall at restaurants (some in Kolkata ran out of food during Navratri), and people are queuing up to buy houses.

This should not be surprising. Despite lockdowns, productivity-boosters like formalisation, digitisation and construction of national highways (20% growth in the last fiscal year) continued. Unlike recessions caused by the bursting of financial and real-estate bubbles, the recovery from which tends to be painful and slow, the drop in output last year was primarily due to activity restrictions. Once these are lifted, the resumption in activity should be faster.

Further, we estimate nearly 90% of the lost income during the lockdowns was either socialised over current and future taxpayers (higher sovereign debt), or borne by wage earners, which was of the ‘did not earn, did not consume’ nature. The challenge of course is that the folks who did not consume (mostly upper-income households), and were thus left with excess savings, are different from the folks who did not earn (mostly lower-income households), who ended up with more debt or fewer assets.

To address this, some unwisely advocated an increase in taxes and then a redistribution to the poor. A less disruptive approach is to get them to spend, which then generates income and jobs. It was uncertain if this would happen: What if the rich held on to their savings, scarred by the pain of the second wave?

It appears these apprehensions were misplaced: Upper-end hotels are seeing stronger business than two- and three-star hotels; larger TVs and refrigerators are selling better than smaller ones, and demand for cars is strong (seen in sales where there is supply and in orders where supply is constrained), but not for no-longer-supply-constrained-two-wheelers, even after adjusting for the switch to electric vehicles. Loans to smaller firms are seeing more distress than those to larger firms.

Spending by the rich is an important part of the healing of the economy. Not only does total spending of the top 10% of India’s households equal spending by the bottom half, the latter group’s discretionary demand, which is understandably subdued, is much smaller. Consumption of services by the former, like in tourism, hotels or restaurants is a transfer to (generally lower-income) service-providers. Purchase of consumption goods like apparel drives jobs in manufacturing, and purchase of houses helps clear inventory, triggering new construction, and hence generating jobs.

The economy needs this spending. After all, 10 million more people demanded NREGA jobs last month than in Sep-2019: one crore more people wanting to work for 200 rupees a day (and possibly many more wanting to work at 300 or 400 rupees per day). Separately, in surveys many more people now say their primary activity is agriculture, likely due to lost jobs in transportation (jobs in and around railway stations or intra and inter-city road transport), recreation (including hotels and restaurants), education (shut private schools), and personal services (my barber left Mumbai for his hometown of Kolhapur).

Formalisation of sectors, as prolonged business stress forced weaker firms to close, has also caused job losses, but in our view this is more displacement and less a loss of jobs in aggregate. For example, online grocery firms supplying daily essentials instead of the regular milk-packet distributor is a change of delivery person with possibly better efficiency: The delivery is still manual.

In manufacturing, automation may mean fewer works, but most job losses have been in services. Many of the lost manufacturing jobs are also likely to recover as the economy opens up. For example, the neighbourhood ‘Masterji’ saw weak demand for 18 months, but should do better now (in 2012, 90% of apparel producing jobs were informal).

The momentum in aggregate consumption should sustain even after the ‘revenge spending’ binge of the rich gets over. Job creation, though, as we aim for poverty reduction and less income and wealth inequality, is likely to remain a challenge for policymakers for many years, like it was pre-pandemic.