India’s Worsening Income Problem
India faces a vicious cycle of lower income → lower consumption → lower investment → lower job and income growth, writes Ira Dugal
Trends in income and income growth are always tough to judge in India. You can assess this top-down by looking at trends in per capita income, or you can look at it bottom-up based on data from different slivers of corporations and industries. Put together, the two give a reasonable picture.
At the current juncture, no matter which way you look at it, all signs point to a worsening income problem for the Indian economy.
The Top-Down View
The top-down view comes from per capita income. As has been widely reported, India’s per capita income will fall below the $2,000 mark this year as the economy shrinks from the Covid-19 hit. Per capita incomes will start to revive starting next year but it will take until FY23 to just go back to FY20 levels.
Simply put, this means that the income of Indians will hit status quo only after a three-year period. Over this time, there will be some inflation in the economy. Say, its 4%, going by the inflation target given to India’s central bank.
The Bottom-Up View
But that’s the top-down view. Within that there will be many subsets – those who will see incomes fall, those that will be protected from salary cuts but see stagnant incomes and, those that will see a rise in income. Trends will vary in the informal sector and the formal sector. Workers across different industries will face varying fortunes.
For many of these, particularly across the informal sector, we will not have timely data. But we do have reasonably current data for a subset of 2,531 listed non-government, non-financial firms put out by the Reserve Bank of India.
This data showed that staff costs were cut by 3% overall in the April-June quarter with a sharp divergence between manufacturing and non-IT services, which saw double digit declines, and IT services, which saw a continued increase.
How quickly staff costs will normalise is anyone’s guess at this stage. A few companies have announced reversals of salary cuts but a broader trend will only emerge over the next few quarters.
Fair to assume here that a material subset of India’s urban, formal sector workforce will continue to live with lower or stagnant incomes for some time.
This will be especially be true for sectors ravaged by the Covid-19 crisis.
In a report dated Oct.28, Kotak Institutional Equities assessed sectors that employ the largest share of urban workers and where they stand on the vulnerability scale. The research led by Sanjeev Prasad showed that sectors seen to be severely impacted by Covid-19 crisis offer nearly 45% of urban jobs.
This includes construction, hospitality, retailing and travel and transportation, to which the government has not provided any special support.
You can also try and slice the data from an urban and rural lens. There you may come up with a relatively positive view for the latter.
The support to rural incomes has risen this year, via increased spending on MGNREGA, small cash and food transfers when the Covid-19 crisis hit. Also, the first post Covid-reading on rural wage growth was positive, with both agricultural and non-agricultural occupations showing a stronger pick-up in nominal terms in May.
Since these are still early reads on this data, it is difficult to judge whether the higher rural income growth will sustain, particularly for non-agricultural categories given that supply of rural labour may have risen due to the reverse migration.
What It Means For Consumption
If we go with the institutive belief that it will take two to three years for incomes to climb back, and combine that with the post-Covid trend of increased precautionary savings, you get a double-whammy for the economy.
Kotak Institutional Equities expects this to play out in a few ways: There will be a drag on overall consumption; there could be down-trading by consumers in certain sectors; but consumption in certain segments could rise as consumers seek convenience, hygiene and safety.
The Kotak report cited two studies on near-term trends – one from Nielsen and the other from Euromonitor.
The report cited Nielsen research which showed that the Indian consumption basket is witnessing a reset weighed by affordability resulting in:
- Down-trading in certain segments,
- Shifting towards value-for-money large packs,
- Increasing share of private labels in modern trade.
Separately, data from Euromonitor, cited in the report, showed that only eight categories will show positive growth in 2020, led by toys and games, retail tissues and hygiene, soft drinks, hot drinks and packaged foods. The categories that will see the steepest decline include luxury goods, apparel and footwear, consumer appliances and personal accessories. To be sure, these are trends for the year in which the Covid impact was at its worst and patterns may slowly reverse.
Still the economy may not escape the consumption impact of weak income growth.
The Indian economy went into the Covid-19 pandemic with faltering growth led by declining investment and weakening consumption and high fiscal deficit, wrote Prasad, reiterating that private consumption was partly being ‘funded’ by falling household savings rate. “A combination of decline in household income due to the Covid-19 pandemic and limited fiscal support for households will hurt consumption further, thereby forcing households to rebalance consumption,” he said.
What can break this vicious cycle of lower income → lower consumption → lower investment → lower job and income growth? The answer is not clear at this stage.