India’s New Deal Moment

Context:  The economy needs to be carefully nurtured and stoked to deal with K-shaped recovery.

Concerns that remain despite signs of economic recovery:

• Labour market hysteresis:
  • Centre for Monitoring Indian Economy (CMIE)’s labour market survey reveals, 18 million fewer employed (about 5 % of the total employed) compared to pre-pandemic levels.
  • Demand for Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) jobs are 50 % higher than the previous year. 
  • Increased risks of medium-term economic decline: since recovery appears to be led by capital and profits, not labour and wages.
• Substitution effect: Large firms have endured the crisis better and are gaining market share at smaller firms' expense.
  • There is a migration of activity from the informal/Small and Medium Enterprise to larger firms
  • Impact: Though greater scale and formalization augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.
• Prospects of K-Shaped recovery: Households at the bottom of the pyramid are suffering, while households at the top of the pyramid are in a better position (increased their savings)
  • E.g. Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 %since October while two-wheelers have contracted 15 %.
  • Macro-implications -
    • Permanent hits to jobs and incomes: for households at the bottom and increased future consumption due to households' savings at the top.
    • Recurring drag on demand: if the labour market does not heal faster.
    • Demand may impede in the steady-state: since the marginal propensity to consume at the bottom is higher than that at the top.
    • Hurt productivity and tighten political economy constraints: due to reduced competition or increasing inequality of incomes and opportunities.

Way Forward: To deal with K-shaped recovery.

• Take steps to encourage the private sector to re-invest and re-hire:  thereby setting the economy onto a more virtuous path.
• Budgetary support:
  • Replicate New Deal in 1935 of the United States: which created millions of jobs and regenerated regional economic development.
  • Physical and social (health and education) infrastructure push: will boost near-term demand, crowd-in private investment, create jobs, and improve the economy’s external competitiveness.
  • Aggressive asset sales: To finance the public investment push.