Policy shocks and pandemic have damaged the economy
This month marks eight years of the National Democratic Alliance (NDA) government. Prime Minister (PM) Narendra Modi inherited an economy growing at 7.4% in 2014-15 with per capita income growing at 6.2%, having recovered from a low Gross Domestic Product (GDP) growth of 5.5%, and per capita income growth of 3.3%, in 2012-13. The economy continued to accelerate to reach the highest GDP growth of 8.3% in 2016-17 with per capita income growing at 6.9% – the highest level in the decade. This happened despite 2014 and 2015 being drought years, a rare double drought, only the third time after Independence. The luck primarily came from the sharp collapse of petroleum prices in August 2014.
However, since then, the economy has only decelerated, with almost all indicators of economic activity plunging to their lowest levels in a decade, even before the Covid-19 pandemic hit the country, bringing further devastation and misery. The slowdown was not the result of an external shock or any internal natural shock – the monsoon recorded its best showing and agriculture continued to perform better than average. The sharp slowdown was primarily the result of the government’s hubris and policy missteps, the after-effects of which are being felt even now.
Two of these happened to be demonetisation in November 2016 and the roll-out of the Goods and Services Tax (GST) in 2017. Since then, per capita income has declined at 0.2% per annum between 2017-18 and 2021-22. The last time per capita incomes declined for a five-year period was five decades ago. It was the unorganised and informal sector of the economy that bore the brunt of these two policy shocks.
The macro aggregates are telling, but in all likelihood are still underestimates of the gravity of the crisis. The new series of GDP estimates are particularly problematic given their dependence on data from the organised sector, which was more insulated than the unorganised one. Nonetheless, the real question is what this means for people, more so for those at the bottom of the income distribution chain.
Perhaps the best metric is poverty estimates. Unfortunately, the last estimates are more than a decade old, from 2011-12. Consumption surveys, which form the basis of poverty measurement, were conducted in 2017-18. But were shelved by the government, citing methodological inconsistencies, after the leaked report showed a sharp rise in poverty. Attempts to estimate poverty using proxy data for national accounts, as was done in a recent paper by Surjit Bhalla et al, lack credibility either on statistical grounds or evidence from other official sources. Even others who use different consumption aggregates from other national surveys confirm that there was a marked decline in the pace of poverty reduction, if not an outright rise in poverty.
Two of the strongest proxies for poverty are employment and earnings from wages. On wages, data from the labour bureau suggests a decline in real wages of non-agricultural workers at 0.2% per annum since May 2014 and only a marginal growth of 0.4% per annum for agricultural workers. Since 2016-17, the wages of non-farm workers declined at 0.7% per year.
This is the longest spell after Independence in which wages in real terms are negative. The same is the case for employment statistics, which show the highest rate of unemployment since the early 1970s. But what is often missed is the decline in employment quality with the increasing informalisation of the workforce and lower earnings even for good quality regular workers.
The crisis is so acute that the latest estimates of the Periodic Labour Force Survey (PLFS) show a reversal of the trend of structural transformation and a decline in nonfarm jobs, again a first in five decades. Most of these indicators predate the onset of Covid-19, but it will not be an exaggeration to say that the situation has only worsened since the pandemic.
Surveys by Azim Premji University and Hunger Watch by the Right to Food campaign have highlighted rising vulnerability across states, with a majority of the population losing jobs and incomes. These surveys also underline a precarious food security situation, with almost everyone reporting declining food consumption after the pandemic.
The devastation has only been accentuated by the pandemic and is likely to worsen, given that the country is in the midst of a spell of rising inflation. Even by official estimates, inflation is likely to persist with serious consequences for economic revival and more so for those at the bottom. The rise in prices of essentials is not only likely to have a shortterm impact on the decline in economic activity and consequent job losses, but the longerterm impact will also be felt in terms of deterioration of nutritional status and several human development indicators. It is yet to be seen what impact the government’s recent steps to tackle inflation will have.
The challenges are not restricted to providing immediate relief from raging inflation and a declining economy, but also to changing the paradigm of policymaking to prioritise the welfare of the poor, unorganised sector, and wage workers, including farmers. This is not just necessary in a democratic society, but is also the only way out of the situation that the economy finds itself currently in.