Uneven growth

Income inequality can affect development

The concentration of wealth and an increase in inequality can affect economic development, even if India continues to exhibit robust economic growth. The incoming data suggests that recovery from the pandemic has increased inequality. Subdued demand recovery at the lower end of the income pyramid, depressed wages, and overall employment conditions seem to have made economic recovery rickety and unbalanced. The latest data from the National Statistical Office (NSO), the Reserve Bank of India (RBI), and other sources suggests that rural India is still reeling from signs of stress, while corporate and a part of urban India are doing well. The NSO data, for instance, shows that between January 2022 and October 2023, the rural retail inflation rate remained above its urban equivalent in 18 of the 22 months. Consistently high inflationary trends, largely driven by high food prices, vagaries of the monsoon, and lower production, can severely hurt the rural economy and dampen overall demand.

Depressed rural wages on average and significant inter-state disparities add to the woes of rural India. According to the RBI’s Handbook of Statistics on Indian States 2023, the average daily wage for agricultural labourers in the country was Rs 345.7 in 2022-23, showing a year-on-year growth rate of about 7 per cent, which was marginally above the overall inflation rate. States such as Madhya Pradesh, Gujarat, and Maharashtra recorded the lowest levels of rural wages in the country, for both agricultural and non-agricultural workers. The rural economy is not able to generate enough employment opportunities. As reported by this newspaper recently, job demand under the Mahatma Gandhi National Rural Employment Guarantee Act increased by about 10 per cent till October end, compared with the same period last financial year. According to one estimate, providing just 50 days of employment to active households under the scheme will result in an outgo of about Rs 1.5 trillion, as against the budgetary allocation of Rs 60,000 crore. The employment condition is also reflected in the increase in self-employment.

The income and employment conditions are also being reflected in corporate results. The numbers analysed by Business Standard showed the share of auto companies, including auto ancillaries, in net sales increased to a 10-quarter high during July-September 2023. Meanwhile, the share of fast-moving consumer goods (FMCG) companies showed a marginal decline. Even in the non-listed space, news reports suggest that high-end brands in the auto and other sectors are doing well. The luxury market is also expected to do well in the coming years. This is not to suggest that high-end consumer products should not do well. In fact, in a growing economy of India’s size, it is an expected outcome. However, what is distressing is that the distribution of income and wealth seems to be getting concentrated. The sale of high-end cars or luxury real estate should be accompanied by increasing sales of FMCG companies, for instance, that cater to the mass market.

The biggest downside of the concentration of wealth and income is that it will become more difficult to sustain higher economic growth if demand in the broader market remains depressed. To be sure, there are no easy corrective measures in the immediate short run. The only possible way out could be to increase investment in the economy and direct it in ways that help generate employment for India’s rising workforce. Increasing subsidies and provisions of some cash transfers, as governments at both the Union and state level are doing, is unlikely to help.