Containment distress: a saga of growing household debt and falling income

OOn March 24, 2020, Narendra Modi announced that the country would enter confinement after four hours! This nationwide lockdown was expected to last until the end of May, after which there were local but not general lockdowns. It has caused serious hardship for millions of working poor, among whom the plight of migrant workers has captured worldwide attention.

What was striking about the Indian lockdown was that, unlike virtually everywhere else, including the United States under Donald Trump, no compensation was offered to people (except paltry amounts for a few specific target groups) for their loss of income due to the lockdown. They were pushed into a situation of loss of income, destitution and hunger, from which they had not recovered even months after the lockdown was lifted.

This phenomenon of non-recovery is documented by a survey called Hunger Watch, carried out by several civil society organizations that carried out a survey in October. This is not a survey based on a representative sample; nor does it record spending statistics. It simply questions people, chosen because of organizations’ access to them, about their own impressions. And these impressions are telling.

More than half (53.5%) of nearly 4,000 people surveyed said their household rice and wheat consumption decreased in October compared to March. The percentage reporting a decrease in household consumption of pulses, green vegetables, eggs and meat was even higher.

This is consistent with the survey’s other finding that more than 62% of respondents believed there was a drop in monthly household income between before the lockdown and October. It is for this reason that there had also been an increase in the activity rate compared to before the confinement: more people were forced into the workforce in search of work due to the deterioration of their material conditions.

It can be argued that the sample of respondents is not representative, so no general conclusions can be drawn from these findings. The important point, however, is that even if there is an increase in hunger due to the confinement for certain particular groups, then that in itself is of great importance; in fact, Hunger Watch has focused particularly on vulnerable groups.

The other surprising finding from Hunger Watch is that the percentage of respondents reporting a decrease in consumption between the days before the lockdown and October is higher in urban areas than in rural areas. This is contrary to expectations. In general, acute hunger and malnutrition are more associated with rural than urban areas, just as poverty defined in nutritional terms has historically been consistently higher in rural areas than in urban areas of India. So, to find that the increase in hunger due to the lockdown was greater in urban India, is a surprise.

There are two obvious answers to this conundrum. One is the lack of ration cards among the urban poor who have therefore been denied access to the public distribution system. The other is the fact that the MGNREGS (Rural Employment Guarantee Program) provided some support to the rural population in this time of acute distress, but the absence of such a program in urban India meant that the distress was unmitigated and therefore greater.

A number of important conclusions can be drawn from the Hunger Watch report. Due to the lack of almost any support during the lockdown period, distress and destitution during the lockdown itself was inevitable. What is striking, however, is that this distress continued and remained acute even after confinement ended. The usual belief is that a lockdown disrupts production, but when lifted, production should return to normal; but this, while valid if workers’ incomes are maintained during the lockdown through tax transfers, is false when they are not, as in the case of India.

Assume, to begin with, that workers’ incomes are maintained during lockdown. So their demand for food grains and other consumer goods does not decrease; neither does their debt increase to maintain their demand. And this demand is satisfied by the sellers by reducing the stocks of goods since the shutdown of production. Therefore, when the lockdown is lifted and income from productive activities flows back to workers (eliminating the need for tax transfers), consumption demand remains unchanged; in addition, the replenishment of stocks is added to the normal level of demand, so that production would be even greater than before.

On the other hand, if the income of the workers becomes zero during the lockdown, then they have to reduce their consumption, and also borrow to cope with this lower level of consumption. And when the lockdown is lifted, even if we assume that production returns to the previous level, the demand will be less because what the workers had borrowed must be repaid with interest on their income. Demand therefore does not return to the old level (as long as the debt has not been repaid).

For this same reason, however, production, which meets demand, will itself never return to the initial level before containment. The economy then never returns completely to the old level of production and consumption. Not only are people suffering distress as their incomes remain depressed and debt rises even as their consumption remains below what it was before the lockdown, but the economic recovery remains stunted.

Economic recovery and alleviation of economic distress therefore require the maintenance of workers’ incomes through tax transfers during the lockdown. The Modi government, in its utter oblivion, not only failed to do this, but reduced the incomes of the great mass of workers to zero. The Hunger Watch findings are important precisely because they establish the consequences.

Finance Minister Nirmala Sitharaman said economic recovery will be boosted by the centre’s spending on the backlog of unfinished infrastructure projects. The real question here is: how much to spend? If the level of spending is the same as before the containment, then, because the consumption of the assets must drop in the post-containment period compared to before the containment (due to their need to repay the debt), the level overall demand in the economy will be lower than before. Therefore, the level of production will also be lower than before the lockdown, i.e. the recovery will remain truncated.

For a full recovery, therefore, it is necessary that the level of spending on infrastructure and other such projects be much higher than before the lockdown, to compensate for the decline in demand from workers (due to their need to repay their debts incurred due to loss of income during confinement).

However, it is far better to stimulate the economy, not through infrastructure projects, but by providing direct cash transfers to workers even after the lockdown ends. And the amount of transfers must be such that at the old level of production, the income generated for workers by productive activity plus the fiscal transfers granted to them correspond together to the old level of consumption expenditure plus their payment of interest. Only in such a case can the economy return to the old level of production. In other words, not making such transfers during containment also leaves its mark later: transfers must also be made after containment if recovery is to be stimulated.

Giving cash transfers is a better way to stimulate recovery because, in addition to alleviating distress, these transfers are also spent on simple goods produced in the country with lower import content; this generates, per unit of public expenditure, greater domestic demand and therefore production and employment.

Public spending in this context should not be interpreted as what is necessary to provide free food grains to workers. The free food grains, although beneficial, do not stimulate the economy at all, since their distribution is done by de-accumulating the stocks of the Food Corporation of India. It is the extra cash transfers that stimulate the economy.

The letter from opposition leaders to the prime minister demanded Rs 6,000 per month in cash transfers per household to all unemployed. Even assuming that every working household in the country receives this amount for a period of three months, the total expenditure would amount to less than 2% of GDP, which is perfectly manageable.

The Modi government, however, is as timid as it is foolish. He persists in his fiscal conservatism even when the economy is in acute crisis and people are in great distress.

(This article was first published by Newsclick)


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