It’s official. The economy has just dived off a cliff without a parachute. The State Bank of India’s research arm estimates that India’s GDP could shrink by a staggering 40 per cent in the current quarter ending June 30. Credit rating agency CRISIL is a bit more circumspect, but it still estimates a shrinkage of 25 per cent as the catastrophic impact of the world’s most stringent Covid-19 induced lockdown starts to bite.
With little clarity on how we are going to get off this particular tiger, and with States locking horns with both the Centre and each other on how to tackle the ever-rising number of cases, the exodus of migrant workers (from producing States) and the consequent influx into supplier States, even as the number of new cases reported hit a new peak on Thursday, it is clear that some form of rolling lockdown will continue for the immediate foreseeable future, even as businesses struggle to survive.
This means that the knock-on effects of the lockdown on growth are likely to continue for much longer — perhaps forever. Back to CRISIL. It starts its latest report on the economic outlook with this stark headline: “India’s fourth recession since Independence, first since liberalisation, and perhaps the worst to date is here.”
CRISIL estimates that the 70 days of lockdown have already caused a “permanent loss” of 10 per cent of the GDP, and that the ongoing fiscal may also see a negative growth of 5 per cent in the baseline case. They expect it will take three more years for growth to catch up with the pre-Covid era.
Even that, in my view, is optimistic. Several important assumptions need to hold for this catch up to happen — the monsoons should not desert us, policy support should continue, crude prices need to stay soft and most importantly, the rest of the world also needs to recover — and more crucially, open up the gates to trade, something which looks increasingly unlikely amidst the wave of atmanirbharta (self reliance) sweeping the globe. Which means the “new normal” will be long-term low growth. The trend line will shift permanently down.
Scrambling for relief
Meanwhile, the clamour for assistance to survive the immediate term has grown louder. As the government frantically regroups and readjusts its first, blundering attempts to come up with a “stimulus package” — by now, there is near universal consensus that the “₹20-lakh crore” number is just smoke and mirrors — some course corrections have been made. Some attempts have been made to convert the notional liquidity injected by the RBI into actual lending which reaches those who need it the most — India’s millions of MSMEs, which account for about a third of Gross Value Addition, about a quarter of Services GDP, more than 35 per cent of exports and critically, employ more than 11 crore people. The MSME sector is the largest employer in the country after agriculture.
Some attempts have also been made to address the humungous human tragedy of migrant workers — special trains are being run (even if some meant to reach Chapra end up in Bengaluru!), universal access to basic PDS rations has been enabled. On the agriculture front, the Centre has seized the moment to ram through certain long-pending reforms, notably taking many key agricultural crops out of the ambit of the Essential Commodities Act and ending the monopoly of APMCs. Organised, large businesses have got several boosters, from loan moratoriums to TDS and PF contribution cuts to suspension of the Insolvency and Bankruptcy Code provisions.
But there is one segment which has completely missed out on any kind of support — and I am not even talking freebies here — the great Indian Middle Class. India’s aspirational, hard-working middle class has been largely driving the consumption story in the country. They are the ones buying the millions of automobiles every year, which has made India one of the biggest car markets in the world. They are the ones who powered the pre-lockdown explosive growth of the Indian civil aviation sector, which had made India the fastest growing air travel market in the world before getting grounded. They are the ones driving India’s stupendous retail story — both online and offline. They are the ones powering the explosive growth in data consumption and funnelling billions of dollars of investments into Mukesh Ambani’s Jio platforms.
‘Aspirational’ middle class
A 2019 report by Bain and Company for the World Economic Forum ( Future of Consumption in Fast-Growth Consumer Market – INDIA) estimates that by 2030, India will have more than 700 million millennial and Gen Z consumers — aspirational, connected and better skilled than their parents — who will transform India into the world’s third-largest consumption economy.
According to the report, as “140 million households move into the middle class and another 20 million move into the high-income bracket, they will spend 2-2.5x more on essential categories (food, beverages, apparel, personal care, gadgets, transport and housing) and 3-4x more on services (healthcare, education, entertainment and household care). Upper-middle-income and high-income entrants will drive a 15-20 per cent increase in the ownership of durables (washing machines, refrigerators, TVs and personal vehicles).”
The report concludes, optimistically, “India in 2030 will be a playground for growth and innovation for consumer businesses — both Indian and global, established and emerging. The transformations in the Indian consumer’s income, propensity for consumption, awareness and tech-savviness will create massive opportunities.”
That was pre-lockdown, pre-pandemic. But if we get it right, it can still happen. The consumers are there. The aspirations are there. The only thing missing is policy attention on the middle class, recognising them for what they truly are — the heart of India’s consumption-led growth story.
No respite seen
Unfortunately, policymakers haven’t looked at the middle class as anything other than a milch cow. The last time they got a genuine tax break was when Chidambaram gave a tax set-off for home purchase loans and set of a construction boom that transformed urban landscapes.
Worse, policymakers appear to be caught in some kind of socialist time warp. Finance Minister Nirmala Sitharaman, while announcing a small interest subsidy for affordable housing, made the astonishing statement that the “lowest rung” of the middle class earns “ ₹6-18 lakh”. In other words, you are rich enough to pay — pay more taxes, pay more for consumption, pay for others; remember the PM’s call to continue paying salaries during the lockdown, which big business has ignored but the middle class largely observed?
Meanwhile, this middle class is staring at job loss (permanent for many in the 40-plus age group), sharp erosion in incomes (pay cuts have averaged 25-40 per cent) and ever-rising prices. If this continues, the return to a higher growth trajectory, driven by consumption, can be pretty much written off.
It’s high time we gave the middle class a break.