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

In the first part of this essay, I tried to show how the economic experience has been vastly different, over the past two years, for the 1 percent and the rest 99 percent in India.

This section talks about why the prosperity seen at the peak of India's wealth pyramid finds it so difficult to diffuse down and what the challenges faced by the elite could mean for those comprising the trunk and roots of India's economic tree.

Phytoplanktons and Chemosynthetic bacteria

If you think this is a post to trivialize the pains of tech sector workers - many of whom are enviable examples of social mobility and a tough but meritocratic system, particularly in South Asia where birth determines destiny - this isn’t so. A number of those who are being laid off spent their entire lives jumping hoops of one entrance exam after another, picking up that last credential to inch ahead of the others in the race. Their story, including that of my exasperated friend, is real; so is their pain. But how much of their pain is likely to be reflected in India’s aggregated GDP, how far will their misfortunes slow down the elephantine march of the Indian economy? Much as their prosperity in the last 18 months did little to trickle down to the bottom, these pains too are likely to remain localized.?

Source: The Center for Monitoring Indian Economy

A good mental model to think about the impact of the recent tech layoffs on the Indian economy is to think of our economy as a large, unfathomably deep ocean. Occasionally, parts of this ocean get covered in patches of bright green, which expand and contract depending upon the mineral content of the water. These patches of green are made of small single-celled organisms like phytoplankton -?they comprise less than one percent of the ocean’s biomass but account for almost half the photosynthesis?and more than half of the oxygen production in the world. In a sense, the top tier tech and start-up workers are like the phytoplankton swimming on the surface of India’s economic ocean - contributing to its luxury goods consumption and income tax collections in the same pattern as those single celled ancestors of ours.?

But the ocean called Indian economy is deep, and there aren’t enough green patches on its surface to drive a food chain and nourish all the organisms way down to the bottom. One of the key models to encourage countries to enact policies that encourage individual enterprise and personal wealth creation relies on the idea of “Trickle down economics”. Lower taxes, deregulation of labor markets and easing of product side restrictions on trade and capital flows are all ways in which wealth creation at the individual level is expected to make a few people richer and then allow them to spend more in absolute terms, engage in more ambitious investment projects and hire the best minds and import the best raw materials from across the world - which is likely to improve the overall levels of productivity in the country, unleash individual enterprise and finally lead to better outcomes for all. Indeed, this is what even Chinese Communist Party leader Deng Xiaoping meant in the 1980s, when he was liberalizing the economy -?Let some people get rich first.?

However, what the trickle-down effect ignores is - while it is good to unleash entrepreneurial energies through deregulation and allow people to jump and soar as high as they can, taking away the safety net in case you fall, or not even teaching the weakest in the economy what jumping high actually means - ends up being even more harmful than deregulation. Renowned economist Anthony Atkinson,?prescribed fifteen proposals?that all free-market, liberal democracies must undertake in order to allow prosperity gained through capitalism to seep through to the most deprived.?

It isn’t difficult then to see why India faces all the harmful side effects of trickle down economics, with the bulk of its gains since liberalization of the economy being limited to the surface. The percentage of?income tax paid?as a share of GDP remains low. We are yet to have a formal way of counting unemployment and then creating specific fiscal and monetary policy to target it. Social security and social insurance schemes in India have just been introduced in the past 10 years and while the early gains have been promising, given the degree of informalization in the economy - they have far to go. Furthermore, given that quality of public infrastructure - healthcare, education and public transport - remains abysmal by international standards - one of the biggest aspirations for us Indians, as we move up the social ladder is to be freed of anything sarkari - and to further move away our consumption spending from government owned and operated institution. Factor in the long-standing reflexes that we have developed after millennia of caste system - a public dialogue about the dignity of labor and minimum wages only goes that far.?

Coming back to the analogy of the Indian economy as an ocean - the specific features of its geography make it very difficult for any nutrients photosynthesized by the phytoplankton to ever float down. It is as if the ocean continues to exist as a fractured biome - fashionably called in conference circles as India and Bharat.?

That said, deep down in the ocean - life continues to thrive, albeit at a lower level of complexity. After having fallen steeply through 2020 and 2021, data shows that both unemployment rate and wage growth in rural and suburban India are showing signs of recovery. We aren’t in the double digit growth territory yet -?but the acute distress of hunger, unemployment and lack of basic necessities seems to have been avoided. It is apt to compare life here to the ecosystems at the?bottom of the oceans?- where the primary producers are not photosynthetic bacteria, but rather a different group of microorganisms that break down chemicals in the minerals produced from below the earth’s surface - gushing out through cracks in its crust.?

Multiple econometric analyses indicate that one of the strongest indicators of growth in suburban and rural consumption and income growth have less to do with the robustness of spending in the urban areas and more to do with direct government spending and monsoonal harvests. The mass of India’s economy feeds on this stream of minerals and nutrients released every year during the budget season and six months later, during the monsoon season.?

So, as the mineral bounty on the surface of the ocean (easy money in the private capital markets) recedes and the green patches shrink, the life at the bottom is likely to go on unperturbed. That said, the chasm between the top and the bottom, the gutsy but nevertheless sub-par growth of Bharat though, will continue to remain a missed opportunity during a golden period for the economy.