Post-Covid economic recovery: Can the rich also hurt growth? – india news

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Even though it sounds counter-intuitive, this question is important from a macroeconomic perspective. There are two ways in which this can happen.

Because the rich save more, they bring in the bulk of domestic sources of investment, particularly fairness and debt. Fairness markets in India are extremely overvalued whether the current price-to-earnings a couple of is any indicator. To make certain, this rally has also been aided by a surge of inflows from advanced countries, where interest rates have plummeted to an all-time low and investors are on the lookout for more appealing options globally. This influx has led to a surge in India’s foreign exchange reserves. Because these dollar reserves can move at a very short notice, they cannot be invested in long-term productive purposes and will have to be held in risk-free and highly liquid forms. In an Indian Express column on December 15, Jahangir Aziz, the chief emerging markets economist at JP Morgan, underlined the economic headwinds these reserves have created for India by undermining the fiscal space (https://bit.ly/2M4BwaG).

“As a result, despite the obvious lack of fiscal space at home, RBI has been underwriting other countries’ fiscal deficits. Since April this year, RBI has bought $70 billion of foreign assets, presumably mostly US government bonds. That’s kind of 2.7 per cent of GDP. Put in a different way, while the government has limited its enhance to the domestic economy, it has, via RBI, invested nearly 3 per cent of GDP in foreign assets just in the first half of this fiscal year”, Aziz wrote.

Whether the Reserve Bank of India were not to hold these reserves in this manner, rupee appreciation could make Indian exports lose their competitiveness. To make certain, imposing controls on movement of such money could eliminate these policy pressures, but it would also intent that inventory market rallies like the one we are witnessing currently, and the income growth they bring for the rich, would be far more muted.

In a different way in which an income distribution in favour of the rich adversely affects growth is the commerce route. The rich, because they consume more sophisticated products, have a tendency to have a higher import-propensity of demand than the bad. All things remaining the same, a shift in income distribution from the rich to the bad, may end up in a rise in imports, bring down net exports and due to this fact GDP. To make certain, this process has been underway in the Indian economy for a very long time now. A 2015 Economic and Political Weekly paper by Zico Dasgupta and Subhanil Chowdhury looked at this question by examining India’s imports (https://bit.ly/2WEuI5w). The paper found that the upward thrust in India’s current account deficit was once as a result of an increase in import-GDP ratio driving up the trade-deficit. The paper disintegrated “the upward thrust in the import–GDP ratio relating to three main commodities—gems and jewellery, capital goods and petroleum” and found that “the upward thrust in the imports of commodities is a result of the demand sample in the economy”. “Even with an increase in inequality, the upward thrust in the (GDP) growth rate is seen to be chiefly as a result of higher consumption by the rich. This consumption being chiefly driven by import-intensive commodities, there is a rise in imports” the authors famous.

Granted, both the tendencies explained above don’t seem to be new in the Indian economy. Then again, whether income inequality were to increase further because of the pandemic, which is what the evidence suggests so far, one would expect these headwinds to growth to turn into stronger.

Important to guard against lacking the woods for the tress

This doesn’t intent absolute gloom and doom in the Indian economy going forward. It is entirely likely, as Neelkanth Mishra, the co-head of Asia-Pacific strategy and India fairness strategist for Credit Suisse, has pointed out, that the economy will see patches of brilliance in sectors where the rich deploy their accumulated savings to compensate for pent-up or even transformed demand. People opting for bigger houses as do business from home becomes a norm could be an example of the latter variety. A Bloomberg Quint story the use of CIBIL data showing that housing loans are leading the revival in personal loans, supports such anecdotal accounts (https://bit.ly/2M58KGV). Then again, you will need to understand that it’ll take a little time for the overall macroeconomic picture to emerge clearly. Provided the widespread consensus on the damage to the incomes and employment for the non-rich, it would be untimely to write-off long-term damage to the economy.

This is the second one of a two-part series. The first part (https://bit.ly/3mRPFo7) discussed if the rich can drive economic growth in post-covid India.

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