The Great Gatsby Curve

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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.

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