Canary in the coalmine

The Indian Express     5th December 2020     Save    

Context:  A recovery led by profits, at the expense of wages, has implications for demand, inequality and policy

Ways in which Gross Domestic Product (GDP) can be reported:

  • The sectoral and production side reporting: Agriculture, manufacturing, services
  • The functional and expenditure side reporting: Consumption, investment, net exports
  • The income side reporting: as the sum of profits, wages and indirect taxes

Issue of skewed economic recovery: 

  • Driven disproportionately by capital than labour: 
  • Increase in profits despite revenue shrinking: on account of cutting costs including employee compensation.
  • E.g. Increase in corporate profits by four times in the US, 25% increase in net profits of listed companies in India.
  • Nominal wage growth across 4,000 listed firms has slowed from about 10 % to 3 over the last six quarters.
  • Increase in labour market pressure:
  • Hiring in the US slowed, and unemployment remains close to 6% and income has contracted in 5 East Asian economies.
  • High demand for Mahatma Gandhi National Rural Employment Guarantee Act(MGNREGA) suggests significant labour market slack.
  • A recovery favouring large listed companies: putting pressure on profits of unlisted Small and Medium Enterprises, wages and employment
  • There was an increase in listed company profits by 25% even when the GDP sees a contraction of 7.5%

The adverse impact of skewed economic recovery:

  • Negative impact on future growth: cutting employee compensation cannibalizes future aggregate demand and profitability for all firms.
    • Weak demand, in turn, will disincentivize re-hiring, reinforces the risks of settling into a sub-optimal equilibrium.
  • Accentuates existing cleavages and inequities: due to technological adoption during the pandemic, and differential productivity impacts on capital, skilled and unskilled labour.
  • Will incentivize households to save: If job-market pressures induce households into perceiving this shock as a hit on income, they will be incentivized to save, not spend in the future.
  • No imperatives for entrepreneurs to invest: Since labour market pressures will affect private consumption.

Way forward:

  • Fiscal policy measures: 
    • Public investment:  will be crucial to boost demand, create jobs, crowd-in private investment and improve the economy's external competitiveness.
  • Doubling-down public sector asset sales: To finance infrastructure projects
  • This helps in reducing headline fiscal deficit 
  • This is the only way to undertake fiscal consolidation without incurring a fiscal drag.

Conclusion: The baton for recovery should pass from monetary to fiscal in order to better target the small and medium enterprises and the labour market.