COMMENTARY
off worse off than two years back. Further,
Durable Growth Revival
Changes in Income Distribution and
Widening of Inequality Are a Major Hurdle
M Suresh Babu
The recent growth recovery has
been uneven as is visible across
different sectors of the economy
and different segments of the
population. This unevenness is
hurting the consumption of
lower-income households
and private investments,
which are vital for sustained
or durable growth.
M Suresh Babu (sureshbabum@iitm.ac.in)
teaches economics at the Indian Institute of
Technology Madras.
16
I
ndia’s gross domestic product (GDP) is
projected to grow at 9.2% in 2021–22,
according to the first advance esti-
mates released by the National Statistical
Office (NSO). In 2020–21, after the nation-
wide lockdown imposed by the outbreak
of COVID-19, the GDP contracted by 7.3%.
The NSO estimate is a little lower than
the Reserve Bank of India’s (RBI) GDP
projection in the December 2021 policy
review, which had projected that the
economy might grow at 9.5%. The RBI’s
projections also showed that the growth
rate for the third quarter (October–
December 2021) and fourth quarter
(January–March 2022) would be 6.6%
and 6%, respectively. The real GDP
growth rate was 8.4% in July–September
2021, after a sharp acceleration of 20.1%
in April–June 2021. The implicit assump-
tion in many of these projections is that
there would be no resurgence of the pan-
demic on the scale of that in 2020–21.
The spread of the Omicron variant of the
virus has now cast shadow on some of
these projections and in reality the year
might end up with lower growth, par-
ticularly in the fourth quarter of the
fiscal year (FY).
At the sectoral level, agriculture is
growing at 3.9% in FY 2022 as against
3.6% growth in the FY 2021. Manufactur-
ing sector is to register a turnaround,
growing at 12.5% as against a 7.2% con-
traction in the last fiscal year. Electricity
generation is estimated to grow at 8.5% as
against 1.9% in FY 2021, trade, hotels,
and transport services are projected to
growth at 11.9%, which in 2020–21 had
contracted sharply by 18.2%. In absolute
terms, the services sector is still estimated
to be below the pre-pandemic levels. Per
capita net national income in real terms
is estimated to be `1,06,975 in FY 2022,
lower than `1,07,589 in FY 2020, sug-
gesting that the average citizen is worse
MARCH 5, 2022
the change in stocks is expected to be at
`1.67 lakh crore in FY 2022, higher than
`1.54 lakh crore in FY 2021 and valuables
as part of GDP is estimated to be `2.94
lakh crore in FY 2022 as against `1.67
lakh crore in FY 2021.
Implications of the Numbers
These first advance estimates, obtained
by the extrapolation of seven months’
data, assume significance for the foll-
owing reasons. First, they set the broad
contours of the union budget 2022–23, as
revenue projections are based on these.
An increase in the nominal GDP at 17.6%
provides additional expenditure space
for the government. It also shows that
despite the shortfall in disinvestment
proceeds, the fiscal deficit target of 6.8%
of GDP is likely to be achieved in FY 2022.
and would result in a substantial decline
in the estimated debt to the GDP ratio.
Second, the expansion of the economy,
lower than the forecast by the RBI, also
shows that the estimated GDP growth
rate of 9.2% for FY 2022 is the highest in
at least 17 years. It should be noted that
this has been aided by an extremely
favourable base effect, with the GDP
having contracted by a record 7.3% in
FY 2021. Third, the implicit GDP growth
of 5.6% for the second half of financial
year 2022 built in by the NSO may not have
fully factored the evolving impact of in-
flationary trends. The GDP in nominal
terms, which factors in inflation, is esti-
mated at 17.6% for 2021–22 as against a
contraction of 3% in 2020–21. The dif-
ference bet ween the nominal and the
real GDP is 8.4%, which indicates the
prevailing higher prices in the economy.
Finally, the advance estimate of GDP is
more optimistic considering the persis-
tent supply bottlenecks and shortages of
coal, power, and semiconductors.
The NSO data suggest that the GDP and
the gross value added (GVA) could get
back and even surpass the pre-COVID-19
levels of 2019–20, mainly supported by a
consistent growth of agriculture produc-
tion and modest revival of mining and
manufacturing sector outputs. Growth
of 9.2% during the current fiscal would
translate to just around 1.3% over FY 2020,
which indicates that the economy has
vol lVii no 10 EPW Economic & Political Weekly

just about recouped the loss in GDP in
the first year of the pandemic. This posi-
tive output recovery path is based on the
assumption that the government spend-
ing will remain buoyant and investments
would pick up momentum in the re-
maining months of the current fiscal
year. Both of these are estimated to be
more than in the pre-COVID-19 year
(2019–20). However, there is a possibility
that growth in consumption and invest-
ment is likely be revised downwards
once there is more clarity on the full im-
pact of COVID-19 in the last quarter of
the fiscal year. The estimate that could
go off the mark could be that of capital
formation. It is assumed that the capital
formation would increase from 27.1% to
29.6%. Investing activities are expected
to pick up as reflected by the buoyant
gross fixed capital formation (GFCF),
which is to grow at 14.9% in FY 2022 as
compared with 2020–21. This is 2.6%
higher than the pre-pandemic year of
2019–20. However, the sluggish growth
of private investment and with the states
curbing their capital expenditure, achi-
eving this looks difficult.
Consumption demand, which is 55% of
the GDP, is estimated to remain sluggish,
below the pre-COVID-19 year (2019–20)
levels. The government final consumption
expenditure is expected to be at 7.6%
higher than FY 2021 and 10.7% higher
than FY 2020. The lingering impact of the
COVID-19 pandemic is still visible in the
private final consumption expenditure
(PFCE), a proxy for private spending. The
PFCE is expected to growth at 6.8%; but
in absolute terms, it will be `80.80 lakh
crore for FY 2022, which is lower than
the pre-pandemic level of `83.21 lakh
crore. This indicates that consumption
is down economy-wide. This decline in
private consumption could be attributed
to the changes in income distribution.
The lockdown and associated job losses
have resulted in a shifting of income from
higher consumption sections of the pop-
ulation to higher saving section in the
population. This results in lower consump-
tion coexisting with high-income growth
along with increased savings. Data on
change in stocks, which reflects invento-
ries held by producers, also point to this
as there is a higher part of production,
Economic & Political Weekly EPW MARCH 5, 2022
which is not getting sold. These are clear
signs of changes in income distribution
and widening of inequality.
Employment and Distribution
The Central Statistics Office’s growth
projections have to be seen in light of
two important indicators to assess its
quality and durability. First, is the im-
portant indicator of employment gener-
ation in the economy, and second, the
state of distribution. These two indica-
tors would give us the plausible direc-
tion and magnitude of demand, savings,
and investments.
When we examine the employment
rate, which is the ratio of the employed
to the total working age population,
India’s performance is low. According to
the World Bank, while the global rate
was 55% in 2020 and 58% in 2019, India
recorded a low of 43%. Only the Middle
East and North Africa by the World Bank
classification have a lower employment
rate than India.
The employment rate in Bangladesh is 53%,
in China it is 63% and in Pakistan it is 48%.
It boggles the mind that India has such a low
employment rate. This data is from the World
Bank. According to CMIE’s relatively stringent
definition of employment, the employment
rate in India is even lower at 38%. If only
38% of the working age population is em-
ployed and only another 3% wants to work
vol lVii no 10
COMMENTARY
but cannot find work (unemployed as percent
of population), then implicitly 59% of the
working age population do not want to work.
India’s path to prosperity is in finding em-
ployment for not only the 3% who are unem-
ployed but also a significant chunk of the re-
maining 59% of the population. To reach
global employment rate standards India needs
to employ an additional 187.5 million people.
Given the current employment of the order
of 406 million, that is a tall order.
According to the Centre for Monitor-
ing Indian Economy (CMIE) data with an
unemployment rate of 7.9%, as many as
35 million people were without jobs in
December 2021. These people were not
employed and they were actively looking
for employment. Further, there is another
important challenge of providing em-
ployment to an additional 17 million who
were also not employed and were willing
to work if work was available, although
they were not actively looking for work.
These two categories of unemployed
population highlight the unique nature
of unemployment in India. We need to
distinguish between those who were ac-
tively looking for work and those who
were not. Their composition is different,
that is, the composition of the 35 million
who are actively looking for work is
vastly different from the composition of
the 17 million who do express their will-
ingness to work but also admit to their
17
COMMENTARY
lack of active effort to find work. The
CMIE data also states that as of
December 2021, of the 35 million unem-
ployed who were actively looking for work,
23% were women. At the same time, of the
17 million who were passively unemployed,
53% were women.
This indicates that, while 8 million
women were actively looking for work, a
larger 9 million were also willing to
work, although they were not actively
looking for work. Further, the age com-
position of the unemployed shows that
those who are actively looking for work
are predominantly in their twenties. In
fact, 85% of such unemployed are in this
age group. It is appropriate to assume
that they do feel the need to work, but
they are not motivated to actively look
for jobs. This points to the creation of a
large pool of discouraged workers. As
the young potential workers seeking for
jobs feel discouraged from actively look-
ing for work, the indication is clear that
there is a lack of adequate jobs being
available for them.
The outcome of modest GDP growth
and sluggish employment growth is
reflected in the levels of inequality.
According to the latest World Inequality
Report 2022, India stands as a “poor and
very unequal country, with an affluent
elite,” where the top 10% holds 57% of
the total national income, while the bot-
tom 50% share is just 13% in 2021. The
report also states that the top 10% and
top 1% hold 57% and 22%, respectively,
of the total national income, while the
bottom 50% share has gone down to
13%. In terms of absolute income levels,
we find that the average annual national
income of adult population is `2,04,200
in 2021, while the bottom 50% earned
`53,610, and the top 10% earned over 20
times more (`11,66,520). It is also inter-
esting to note that India’s middle class is
relatively poor with an average wealth
of only `7,23,930 or 29.5% of the total
national income, as compared with
the top 10% and 1% who own 65%
(`63,54,070) and 33% (`3,24,49,360),
respectively. These trends are corrobo-
rated by the recent multidimensional
poverty index (MPI) prepared by the
NITI Aayog also. The MPI shows that
one in every four people in India was
18
multidimensionally poor with Bihar A more durable growth recovery re-
having the highest proportion of people quires a vibrant manufacturing sector
(51.91% of the state’s population) who supported by infrastructure develop-
are multidimensionally poor, followed ment. This is also crucial for reaping the
by Jharkhand at 42.16% and Uttar demographic dividends by gainfully em-
Pradesh at 37.79%. ploying large sections of the youth popu-
lation and for improving labour pro-
Conclusions ductivity and providing ample addition-
The recent growth recovery has been une- al employment opportunities. Sustained
ven, as is visible across different sectors of increase in capital formation, from both
the economy and different segments of public and private investments, holds
the population. This unevenness is hurting the key in this endeavour. Falling inter-
the consumption of lower-income house- est rates, benign commodity prices, and
holds and preventing a sustained in crease government’s rhetoric about improving
in private investments, which are vital the business climate are not arousing
for maintaining the durability of growth. much enthusiasm among investors as is
Though, there has been a growth recovery visible from the low levels of private in-
after the damage caused by the second vestments. For the global investors India
wave of COVID-19 in the middle of 2021, remains an attractive investment desti-
it still remains below the pre-pandemic nation due to the current global eco-
trend. More importantly, a further re- nomic sluggishness. The hesitation to in-
covery has been hampered by supply-side vest by the private sector can be allayed
bottlenecks. Higher inflation and wider only if the government can match its
current account deficit, have emerged as rhetoric with action and demonstrate its
the side effects of the policies adopted to ability to provide stable and supportive
push growth during the pandemic. This policies, by focusing on economically
would force the RBI to adopt a different feasible projects. These have to be com-
policy stance that would further prevent plemented by abandoning a passive poli-
durable growth. Current growth trends cy approach towards social infrastruc-
are a part of a short-term cycle and not ture, especially with regard to education
an indication of the long-term trend as and by making sure that the masses
mixed growth, high inflation, and wider have decent food and shelter. Such an
twin deficits would pull the economy inclusive growth can only be sustainable
below its potential growth curve. and durable in the long term.
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MARCH 5, 2022 vol lVii no 10 EPW Economic & Political Weekly