Double helix: The Booming Parts of Our Economy Can Help the Bottom 20 Percent

An edited version of this article was published as an op-ed in the Economic Times on 11 July, 2024.

In many ways India’s economy is at its zenith. A world beating GDP growth, macro- economic stability, and the cynosure of foreign capital. This is all true. But this overall picture contains within it two contrasting trends: of the top 20 percent of India growing at much faster rates than the next 80 percent.?? ?

For evidence that low rural growth and unemployment can coexist alongside high overall growth, consider that while our GDP growth is at 8 percent for the financial year 2024, domestic consumption growth is only 4 percent.

Along with being the largest component of GDP, domestic consumption growth is the best proxy we have for income inequality. The rich invest most of what they earn, while the poor consume everything they earn. The richest 20% of Indians account for 50% of household income but almost all (92%) of India’s savings. Since individual household changes in savings and consumption ratios are gradual, sharp differences between investment and consumption growth give you a clue to which segment of India is growing faster – the rich savings class or the poorer consuming class. ????

Some simple math will show you that (even adjusting for government expenditure and net exports) if GDP is growing at 8%, consumption is growing at 4% and individual savings rates don’t change, it probably means that the top 20% of Indians are growing income by around 10-11% and the next 80% is growing by about 4%. In fact, with real SENSEX and gold price growth at 20%, and 13% respectively and agriculture growth of 1.4% it’s even possible that the top 5% of Indians are growing income at 15-18% and bottom 20% are not growing at all.

There is a lot of anecdotal evidence that while the top end of India is booming, the rest not so much. Many mass consumption sectors like Fast Moving Consumer Goods are reporting low volume growths. On the other hand, more ‘premium’ sectors like SUVs, modern retail and luxury goods are doing very well.

Like a double helix it appears that the Indian economy has a top end boom cycle intertwined with a bottom end stagnation cycle. ???Why is it that the top of the Indian economy is growing faster than the middle which is probably growing faster than the bottom?

One reason could be structural changes in the nature of the global economy.? As I travel the world as the CEO of a global FMCG company, I observe that this divergence of two arms of a country’s economy – what economists call ‘K’ shaped growth’ – is not unique to India; it is a global trend. A lot of growth in the world in the last two decades has happened in the information services sector where value creation is much more than employment generated. On the back of this value creation, is asset price inflation benefiting those who own assets. Across the world, knowledge workers and asset holders are doing well and the rest not so much. The Indian story could well be part of this structural transformation of the global economy.? ?

Another reason for why the bottom 80 percent is growing less than it could is perhaps cyclical – i.e. inevitable fluctuations in a business cycle. Soon after the second wave of COVID-19 in 2021, I met a consumer whose husband was a wedding photographer in Hyderabad.? She told me that COVID had wiped out her savings, and she would now cut back on discretionary expenses like eating out on Friday evening. When millions do the same, restaurants shut down, the waiters spend less on weddings and the wedding photographers get less work. By consuming less, she may think she is securing her future but when many more do the same she’s mortgaging it. A late and continued COVID impact is a more cyclical explanation for the parts of the economy that are stagnating.

Structural and cyclical illnesses require different medicines. The good news is that India can today afford to prescribe both pills, just to be on the safe side.

Cyclical problems take a long time to solve themselves and a quick fix medicine for a downturn, as the economist John Maynard Keynes said, is to ‘dig trenches and fill them up’. An additional Rs. 1 lakh crore in a sharply targeted rural programme like PM Kissan followed by lower interest rates could kick start the rural economy. If the issue is more structural, then capital spending focused only on the knowledge economy, a universal basic income and a transformation in the agri and food processing (i.e. potato chips along with silicon chips) sectors may be the medicine. ?

If the glistening parts of the Indian economy can shine light on the darker side, we may just have the ability to have our revadi and eat it too!