The Great Gatsby Curve

Context: Analysing the recent growth rates to predict the economic growth in the post-pandemic phase.

Digging under the recent growth rates:

• The system was slowing even before Covid hit: Growth having halved from 8% in the peak of the Modi years to barely 4% in 2019-20.
• Growth in the last three years primarily based on government consumption:
  • Public consumption grew 30% in this period compared to 2.1% for private consumption.
  • Investment in fixed capital has done much worse, shrinking by 8.7% compared to the level three years earlier.
  • Government consumption cannot be sustained without risk - Public debt has already climbed from two-thirds of GDP to 90%.
• Trends in declining employment and growing inequality: Make it hard for private consumption to recover quickly.
  • Those who are actually working, those engaged in agriculture (i.e. low-wage employment) have grown in number, while millions of industrial and service sector jobs have disappeared.

Silver linings to India’s growth:

• Rising export demand: The world economy is recovering momentum, trade is growing well, and the western economies want to diversify supply lines away from China.
  • Policies have to help exporters cash in on the opportunity, and it is not clear that the aatmanirbhar campaign fits the bill.

Challenges to India’s growth:

• While the exports have provided some room for growth, domestic market has to grow also; otherwise, India will become like Latin America, with extreme levels of inequality.
• A buoyant stock market fuelled by a small, vibrant set of large companies is good optics but contrasts with the morass trapping the rest of the system.

Way Forward: Policymakers should look for Great Gatsby Curve:

• It tracks the intersection of two measures. One is inequality; the other is inter-generation mobility (the likelihood that the next generation will move up the economic ladder).
• The Nordic countries do best on the Curve. East Asia does not score very well, but the big Latin American economies are the worst.
• If India combines great inequality with poor inter-generation mobility, it risks becoming not like East Asia with its rapid growth rates, but like under-performing Latin America.
• Poor outcomes can be avoided if fiscal management is done in a proper way –
  • More expenditure should be backed by revenue-raising measures.
  • Invest in improving school education across the board.
  • Create labour-intensive but value-adding employment.

Conclusion: If the measures are not taken, it will create social and political pressures that lead to what Latin America has seen in abundance: Populist and authoritarian democracies.