Staring into economic abyss

Aunindyo Chakravarty
Senior economic analyst

PM Modi took a leaf out of the e-commerce playbook. E-commerce packages always look much bigger than the product inside. And, by now we know, Mr Modi’s much-vaunted economic package is exactly that. Instead of the promised 10% of GDP, in reality what we are getting is just a little over 1%. Also, like e-commerce packages during the lockdown, this one too was massively delayed. What should have come before the lockdown, was announced six weeks into it.

The government’s fiscal fundamentalism has already cost the economy dearly for the past several years. Continuing with it, in the midst of a global recession amounts to choking any chance of an economic revival. This is an assessment shared by experts as politically varied as Prabhat Patnaik and the official economists of Goldman Sachs. In fact, Goldman has predicted that India’s economy will shrink by 5% this fiscal, which will be its worst performance since the oil-shock year of 1979.

The impact will be much worse on India’s middle class than the poor. The Modi government has directed most of its spending towards keeping the poor afloat at a bare subsistence level. Team Modi’s calculation is that this gives the biggest bang for the buck when it comes to winning votes. Even now, the only substantive part of the economic package has targeted the poorest Indians. India’s consuming classes — the middle and affluent sections — have been left to fend for themselves.

A new survey, conducted by Credit Vidya confirms this last point. The survey restricts itself to about 535 million people, leaving out what it calls the ‘struggler’ segment. This consuming section of India’s population is then divided into three segments — affluent, mid-market and mass-market.

Those who earn more than Rs 60,000 a month have been categorised as affluent. Credit Vidya says they make up 10% of the population they are covering. People who earn between Rs 20,000-60,000 per month have been categorised as mid-market. They make up 20% of the survey group. And, finally, at the bottom of the pyramid comes the mass-market group, made up of those with a monthly income of Rs 10,000-20,000. They account for 70% of the survey population.

The survey says that there has been a massive drop in earnings and consumption across the board in this group. In April, the average income of affluent people dropped by 15 % compared to March. And, 15 % of people in the affluent category earned nothing in April. Those in the mid-market category saw a 25% drop in income in April, and about 10% had zero income in the first month of the lockdown. The biggest income drop came in the mass-market segment. On an average, incomes dropped by 56% in April, and 15% people had no earnings.

Do note that these are not the poorest ‘strugglers’ of India’s people. They are the top 40% of Indians who buy most of the goods and services produced in the country. The survey shows that their spending dropped by 43% in April compared to the previous month. One big reason for this is the lockdown itself. Given that shops, malls and restaurants are closed, and even ecommerce deliveries are restricted, consumption was bound to take a massive beating. However, the survey argues that there has been a deliberate cut in spending as well, because consumers have lost confidence in the economy. Clearly, India’s buying classes are not sure whether they will continue to earn at their pre-lockdown levels in the coming months. That is why they are trying to reduce their consumption and increase savings.

Understandably, the biggest impact has been in the mass-market category, where spending has dropped by 54 %. Consumption has fallen by 24% in the mid-market segment and by 26% in the affluent segment. Even though this has largely been driven by the lockdown, consumption is unlikely to return to its pre-lockdown levels anytime soon. This is likely to affect discretionary and luxury spending the most, as households restrict their spending to absolute essentials.

The loss of confidence in India’s economic future is also showing up in the increased level of household savings. Even though incomes have dropped, people have actually increased their monthly savings. The biggest increase is in the mid-market section — even though average incomes dropped by a quarter, savings increased by 34%. Even the lowest mass-market segment saw a 10% increase in monthly savings. These are clear indications that households are curtailing expenditure and saving for the future, in anticipation of worse days to come.

What is worrying is that a large chunk of people in the mass and mid-market categories are left with very little money to cover their EMIs. Credit Vidya estimates that many people are left with just one to two months of savings to cover for their EMIs in case they become unemployed. This could leave India’s financial sector with a massive bad-loan problem in the personal loan space. Bad loans or NPAs could triple in the mass-market segment, go up 1.8 times in the mid-market segment and increase by 50% in the affluent segment.

In other words, we are staring at a huge consumption and credit collapse in the consuming section of India’s economy, made up of the top 40% of our population. The only way to stop this is for the government to open its coffers and hand money directly to consumers and corporates. Otherwise, India’s economy will slide into its Paatal Lok.