FM has to find a way out of ‘consumption inequities’

The nation’s economy is currently in uncharted territory, and the new finance minister Nirmala Sitharaman -- the first woman since Indira Gandhi to head the ministry -- has a tough job on hand steering it towards clear waters.

A macro-assessment of India’s current growth scenario shows that the economy is sliding into a downturn-slippage mode, and a big contributor to this downturn trend is the perpetual, and now exacerbated, ‘consumption (or, horizontal) inequities’ across social and income groups. The nature of the challenge for the finance minister remains deeply structural in nature, warranting a multi-staged, coordinated approach.

Since the early 1990s, the aggregate consumption demand from the top 10-15% income earning classes has been driving India’s growth engine — with incomes of only the top 1% income class seeing an increase vis-a-vis other income groups. The increased ‘horizontal inequality levels’ across medium and lower income groups — further differentiated by other social variables of caste, class, gender — have worsened over the last few years.

At the same time, an overall weakening of macro-economic indicators, and the observed micro-level divergences responsible for disproportionate upward mobility of different social groups, make the current unemployment situation far worse, where unemployment rates among rural females skyrocketed to 12.8% in 2017-18 while the unemployment rate among rural (and urban) males shot up to 8.8% — the highest in the last 45 years or so.

The structural reasons for the rising horizontal inequities (within consumption levels and income growth) go back to the nature of reforms undertaken in the 1990s. Studies attribute the subsequent rise in social-economic divergence levels in terms of access to basic social services to how market-oriented reforms remained ‘spatially concentrated’ in a few regions only without being complemented by substantial public investments in human capital development needs (especially, healthcare and education).

An exclusive focus on ‘liberalising services’ and partial reforms in manufacturing segments (say, in automobiles, pharma), though welcome, could not help uplift the majority of lower-middle income social groups, who are still occupied in farm and medium to low-skill manufacturing segments.

Results from the ‘Palampur’ study validated these observations by providing a worm’s eye view on how radically rising inequities have affected livelihoods at a village-level, with anthropological insights from the last six decades of village-level documentation. A rapid decline in real wages within rural areas in the last five years, too, further authenticate the results from the ‘Palampur phenomenon’ for the macro-rural level.

Any reform-oriented Union government at this point would be wise not to perpetuate these problems further and rather start by trying to address the root causes of these with a policy framework in the years to come. Further, for scholars trying to assess the impact of policy reforms on measures of inequality, a connection between two analytical aspects need closer monitoring (and examination): the role of ‘inter-generational mobility’ for targeted middle/lower-middle income citizens (segregated in terms of income, distance and consumption status), and its relation with their overall ‘consumption inequalities’, to be observed over time.

For the State, to continue the earlier policy mistake of over-emphasising on reforms that help businesses produce what the top 10% consumes in an urban-skewed economic reform strategy will mean that over time a substantial part of India’s lower middle-income consumer classes will find it difficult to even afford basic essentials, say a house, healthcare, education, clean drinking water (and sanitation facilities). It’s already the case, and it will worsen.

To be able to directly address the core macro concerns of generating employment, raising wages and increasing public investments in basic essentials will require synchronous efforts to cultivate an environment in which consumption patterns improve for lower-middle income groups (especially those lying in between the categorised ‘income poor’ and ‘income rich’/ ‘higher middle income’ sections) at a proportional pace with other socio-economic classes.

A targeted rise in public investments on basic essentials, roads, power and irrigational infrastructure networks will help boost productivity of human and physical capital across both rural and urban spaces, where existing consumption divides are at a maximum now.

Commodity-based cooperatives

As a policy measure, a national vision for developing Commodity-Based Cooperatives (CBCs) may add great value for rural populations and lower-middle income groups — that is, for them to have greater agency in driving community-level changes and raising income opportunities across participating groups.

India’s business instincts, historically, can be empirically observed in the organic evolution of cooperative movements. Since Independence, Amul and dozens of other milk cooperatives, Bandhan, Lijjat Pappad, etc — developing from community-level entities and then scaling up to state and national levels — have emerged as successful business cases for middle (and lower-middle) income communities, allowing greater inter-generational mobility for the participating social groups while minimising conditions of (pre-existing) inequities.

Any Union government — especially the finance minister — will need to act as an orchestral conductor or a navigation device for business sentiments to be nurtured and cultivated across (socially and economically) divided communities in semi-urban and rural spaces, and back this effort with a complementary fiscal push to improve access to basic essentials across states.

A combination of these steps in a coordinated policy framework will help citizens across spatial locations to develop inclusively and will address the rising scale of inequities that currently circumscribe people’s possibilities towards a higher state of well-being.

(The writer is Assistant Professor of Economics and Executive Director, Centre for New Economics Studies, Jindal School of International Affairs, O P Jindal Global University)