Why poverty rose in 2020

The Indian economy contracted (6.6%), more than twice the global economic contraction (3.1%), in FY2020-21

A World Bank report (‘Poverty and Shared Prosperity 2022’) has concluded that 70 million people fell below the $2.15/day poverty line in the world in 2020, and of that 56 million (or 80 per cent) were in India. Indians can legitimately ask the question: Why did India’s poverty rise so sharply for the first time ever since Independence?

The foundational reason is that the Indian economy contracted (6.6 per cent), more than twice the global economic contraction (3.1 per cent), in FY2020-21. India’s contraction followed an already sharply slowing growth rate for the nine quarters preceding March 2020. Unemployment was already at its highest in 48 years in 2018-19; the economic contraction caused further unemployment, leading to income collapse and poverty for millions of people.

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There were two parts of the response of the Government of India to the pandemic: the administrative response to a health crisis; and the economic policy response to it, both of which contributed to the increase in poverty. Each is discussed in turn.

The government’s administrative response was to impose a sudden national lockdown, with damaging consequences. First, announced with a four-hour notice on March 24, 2020, it gave very little time to either the central or state governments to plan. South Africa, a country with one-tenth India’s territory and one-twentieth our population, gave four days’ notice, allowing for some planning. The Government of India issued its first detailed instructions to the police and bureaucrats as to what was permitted and what was not during the lockdown only on April 15. By that time, millions of migrant labourers were walking back home.

Second, the lockdown was national in scope in a continent-sized country. China, in contrast, did not impose a national lockdown but confined it first to Wuhan (the capital of Hubei province) and then to Hubei province; travel to Shanghai or Beijing was banned, but not to the rest of the country, nor between other provinces. This calibrated lockdown did not bring economic activity to a complete standstill across China, unlike in India.

Third, according to the University of Oxford Blavatnik School of Government’s metric to measure the strictness or stringency of lockdown, India’s was among the strictest in the world.

The effect of the sudden and strictest national lockdown was to cause a collapse in supply chains and a contraction in aggregate demand (as unemployment mounted to a calamitous 122 million, or a quarter of the workforce, from about 30 million who were openly unemployed in 2019). The IMF had in late 2020 estimated in a cross-country analysis that “…countries with a tighter lockdown stringency experienced larger output losses”.

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Economic Response

The administrative response was further complicated by the economic response, i.e., the design of the monetary and fiscal policy response to the economic shock.

This can best be understood by comparing India’s ‘stimulus’ package with that of other emerging markets/developing economies (EMDEs) and with those of rich countries. There are three differences between India’s economic response and that of EMDEs. First, the size of the ‘fiscal’ stimulus for India was much smaller (2.2 per cent of its GDP) than that of even EMDEs (4.7 per cent) and, of course, much smaller than that of the developed countries (8.5 per cent). This fiscal stimulus was even smaller as a share of GDP than in 2008 when the global financial crisis broke out, itself not as severe an economic crisis as that caused by the pandemic.

Second, the size of India’s ‘monetary’ policy stimulus (6 per cent) was much larger than that of the other EMDEs (1.6 per cent). Third, the ‘credit’ stimulus (7 per cent) was also much larger than that of other EMDEs (1.9 per cent). The developed economies had much larger monetary and credit stimulus as well than India (14.2 per cent and 10.8 per cent, respectively).

Notice that India’s economic measures (total 15.2 per cent of GDP in three ‘Atmanirbhar Bharat’ packages in 2020) could be claimed to be much larger than that of EMDEs (7.5 per cent of GDP). However, it was heavily skewed.

In the early stages of the pandemic response, above-the-line expenditure measures focused primarily on social protection and healthcare. These included in-kind (food; cooking gas) and cash transfers to lower-income households (1 per cent of GDP); wage support and employment provision to low-wage workers (0.5 per cent of GDP); insurance coverage for workers in the healthcare sector; and healthcare infrastructure (0.1 per cent of GDP).

The measures announced in October and November 2020 included additional public investment (higher capital expenditure by the central government and interest-free loans to states, of about 0.2 per cent of GDP) and support schemes targeting certain sectors. The latter includes a Production-Linked Incentive scheme targeting 13 priority sectors and cost about 0.8 per cent of GDP over five years. These are more in the nature of structural reforms to stimulate investment in 13 manufacturing sectors, with effects in the medium to long run, rather than to revive aggregate demand immediately or even in the short run. There was a higher fertiliser subsidy allocation benefiting the agriculture sector (0.3 per cent of GDP) and support for urban housing construction (0.1 per cent of GDP). Included in these numbers, however, were such measures as income-tax refunds and payments to MSMEs of outstanding government dues – all of which are citizen entitlements, with no additional spending on the part of the government. Tax measures were miniscule.

Measures without an immediate direct bearing on the government’s deficit position aimed to provide credit support to businesses (1.9 per cent of GDP), poor households, street vendors, especially migrants and farmers (1.6 per cent of GDP), distressed electricity distribution companies (0.4 per cent of GDP), and targeted support for the agricultural sector (0.7 per cent of GDP).

However, thousands of MSMEs were shutting down. Nearly 35 per cent of MSMEs and about 37 per cent of self-employed persons were considering shutting down their operations despite the financial packages announced by the Centre, according to a survey (of 46,525 self-employed, MSME owners, corporate CEOs, employees, and experts) by the All-India Manufacturers’ Organisation, during May 2020. Naturally, unorganised sector activity collapsed.

The reverse migration to villages raised the numbers of those dependent upon agriculture by 45 million in 2020 alone, an increase of over 20 per cent, reducing real wages in rural and in turn in urban areas.

Therefore, if poverty rose so sharply in 2020, should we be surprised?

(The writer is Visiting Professor, Centre for Development Studies, University of Bath, UK)