The Falling Arm of K: Part (1 of 2)

“The hard times are here, yet again. And we are not even through one-quarter of this decade. After Covid, come the layoffs. I can’t even find friends to empathize with when I tell them that I am fearful of losing my job and not having enough savings. Looks like everyone is in the same boat and they are desensitized to this persistent anxiety”

Dinnertime rant by a friend, a garden variety Bitsian, living in the concrete suburbs sprawled along the edges of the Garden City of India

It is hard not to turn millenarian if you live in the eastern suburbs of Bangalore - the home to companies whose contribution to India’s reputation as a tech start-up hub dwarfs their actual contribution to the GDP. As the tidal wave of easy money recedes, it carries in its wake the sandcastles of lofty valuations built around narratives of a billion strong market. A collateral damage- employees recruited for functions/ roles/ projects that were neither very well deliberated nor questioned for their marginal productivity. As of January 27 this year- those amounted to 21532 employees since September 2022 in the start-up sector. Since these are self-reported numbers, actuals are likely to be higher than this estimate.?

As someone working in a start-up myself, it is hard not to extrapolate the fallen fortunes of my immediate circle of friends onto the national economy. And as a part of a tribe that was told that we were the best of the best in our generation, thanks to us having wasted our teenage years ace-ing what were among the toughest entrance examinations globally, it is harder not to imagine how tough things could get for the less gifted among us. After all, didn’t our leaders - in business, in politics and on social media- tell us that we would be at the vanguard, harnessing India’s youth demographic dividend, leading it through Amrit Kaal (immortal times). Living in India, we demanded global salaries because we were worth it. If we eschewed the brain drain and stayed here in this nation, our wealth would trickle down and benefit the masses.?

But even as we suffer, in real or nominal terms, it is imperative to ask these questions - how much of our hard times are representative of the nation as a whole? While we were arguably having a good time cashing in bonuses and working from home, how much of our fortune was trickling down to the masses? On an aggregate level, are we headed for a recession? And if we are not collectively, is that too a reason to rejoice?

To answer some of these questions, it is good to borrow a fashionable post-Covid mental model of the economy - a K-shaped recovery (a brief description for the uninitiated here). In this essay, we will look at how the two arms of this K fared just before the recent spate of layoffs/ funding winter and what the current trends indicate, in my opinion, about the near-term.?

The upper arm of K: The Roaring 20s.?

Of the 476.6 million workforce in India, approximately 18.8 million (3.95%) are employed in what we could consider the tech sector in India (which includes business, IT and financial services).? For nearly 1/4th of this tech workforce, the 18-24 months beginning from H2 2020 were a period of economic prosperity unseen since before the mid-2000s in the run up to the global financial crisis. The closest historical analog for this age would be that of the roaring 20s in the US - an era that inspired classics like The Great Gatsby by F Scott Fitzgerald.?

When it comes to income growth, as per Captable, between Jan 2020 to August 2021, average salaries for engineers and product managers were up 45-50%. The competition for talent from well-funded start-ups, which flush with cash were hiring for moonshot projects of tomorrow - such as building ecommerce stack for Bharat or data analytics for lending applications - meant that salary growth in the broad tech sector handily outpaced its counterparts in major emerging and developed economies, growing by 9-11% over the past two years.?

Nowhere was this prosperity reflected more acutely than in the housing sector, where housing sales in 2022 rose by a massive 54% y-o-y. The share of luxury homes (INR 4 cr+ in the top 7 metros) within the total home sales rose anywhere between 2x (Mumbai, Bangalore and Kolkata) to 5x (NCR, Chennai and Pune), an indirect indicator of how the wealth made in tech sector, especially in start-up hubs, made its way into high-end accommodation.?

India doesn’t publish any standardized, periodic consumption statistics - so it is tough to accurately estimate the impact of a once-in-a -decade growth in income on purchase patterns for white goods. But the numbers on luxury car sales provide a good proxy for the overall purchasing mood of the nouveau riche.? In a statistic that reminds me of the go-go days of consumption from Shanghai, luxury car sales were up 50% y-o-y in 2022. Another interesting data tidbit is a report last year from Mercedes that the average age of an S-class owner fell to under 40 for the first time (crypto millionaires anyone?).?

Therefore, while the downdraft of job losses and a squeeze in income seems steep and suffocating, the bounty that came before that, for a chosen few, had been equally dizzying in its ascent.?

The falling arm of the K: If they can’t afford bread, they can’t have the cake either, Mary

All this while, the average Indian lived in a different country. As per the data on daily rural wages compiled by the RBI, the months which saw a double digit growth in the tech sector between H2 2020 to H1 2022, were also the months where wages for the base and the middle of the income pyramid rose by just 5.44% y-o-y on an average.

Statistical data are not frequently released on this account, but it seems that - pushed away by the degree of informalization and the poor quality of urban sector jobs, an increasing share of people had already taken to going back to rural agricultural jobs as early as 2019-20- a discordant note in our narrative of aiming to become a services and manufacturing led economy.?

Moving slightly up the income chain, while luxury home sales peaked in India, signs of distress were visible when it came to housing affordability in metros.? JLL’s Home Purchase Affordability Index, which measures the ability of an average household to secure a loan for a 1000 sq ft apartment, indicated that affordability sharply declined across metros both in 2021 and 2022, with the average buyer now effectively priced out of the market in Mumbai. That said, home purchase affordability, thanks to a better digital identity for customers and stronger regulation of the real estate sector, had seen a sharp increase through the last decade, before stalling since 2020.?

Even those in the bottom quintiles of the tech sector weren’t privy to the soaring fortunes of their friends and peers working in start-ups. As is commonly perceived, but less widely documented, entry level salaries for the IT sector - whose professionals comprise almost 30% of the IT services workforce - have remained flat on a nominal level since 2010. Ergo, it is not so surprising to note a persistent slowdown in the growth rate of mid-market consumption goods - two-wheelers and entry level cars - from even before the onset of Covid.?

Barring the real top of the pyramid, from the household in the 80th percentile all the way down to the very bottom, the experience of the past few years has been of growth at the margins, a low and sideways movement in consumer confidence and a persistent anxiety about financial future. The only respite, in these tough times has been the direct state support and the lagged effects of the infrastructure spending by the government which have kept wage growth levels from declining.?

In the next part of this essay, we will make a brief detour to the geography of the oceans and try to explain why did the prosperity of the past few years at the top never translated into economic gains for the bulk of the Indians, and what does it say about the near-term prospects of the economy as incomes at the leading arm of the K start falling.