India recovery to be K-shaped on rising inequality: Subbarao

The Indian economy’s recovery is likely to be shaped like a K rather than a V, as rising inequality is poised to hit consumption and growth prospects, the country’s former central bank governor said.

“An important consequence of the pandemic has been the sharpening of inequalities,” Duvvuri Subbarao said in an April 9 interview. “Growing inequalities are not just a moral issue. They can erode consumption and hurt our long-term growth prospects.”

The country’s gross domestic product is forecast to grow by as much as 12.5 per cent in the present fiscal year, which would make it the world’s fastest growing major economy.

While that prediction followed a string of fiscal and monetary steps that stoked economic activity once pandemic curbs were eased, a new surge in Covid-19 cases has raised fears that any potential new restrictions could cripple an economy that relies on domestic consumption.

On Monday, economists at Nomura Holdings downgraded their forecasts amid the second wave of virus cases.

They cut India’s GDP estimate for 2021 to 11.5 per cent growth, from an earlier forecast of 12.4 per cent.

This time around policy makers will have limited options, said Subbarao, who helmed the Reserve Bank of India during the global financial crisis, for five years beginning from September 2008.

“AN IMPORTANT CONSEQUENCE OF THE PANDEMIC HAS BEEN THE SHARPENING OF INEQUALITIES” DUVVURI SUBBARAO Former RBI governor

While worries about ballooning public debt may could restrict fiscal support, concerns about inflation could keep the central bank from cutting interest rates, he said.

These limitations could drag on the recovery, with a K shape representing an uneven rebound compared to a V shape that suggests a quick return to growth.

Rising inequalities are “particularly painful” for a low-income country like India, where upper segments of the population have seen their wealth rise while lower sections have lost jobs, incomes, savings and purchasing power, Subbarao said.

Close to 122 million people — mostly daily wage earners and those employed by small businesses — lost their jobs to one of the world’s strictest lockdowns around this time last year.