Almost four-fifth of all income losses were incurred by households and the corporate sector
Nikhil Gupta is Economist, Motilal Oswal Financial Services Ltd.
Every economy in the world suffered economic/income losses in CY20. The ‘sudden stop’ forced authorities to react with a quick, massive, and unconditional fiscal/monetary support last year. As in other crisis, however, these measures did not prevent losses, though they definitely helped mitigate them. Assuming that income growth in CY20 would have been the same as in CY19, my calculations suggest that total income losses incurred by Indian economy amounted to 10.6% of GDP (totaling $315b) in CY20. This was lower than losses worth 12.7% of GDP in Spain (ES) but almost double of that in Australia (5.8% of GDP) and the US (6% of GDP).
What, however, is more important to learn is the distribution of these losses among three domestic participants, namely, households, corporate and the government? This is vital because it helps us understand: a) if, and how, the situation is different in India vis-à-vis other major economies, b) how different fiscal responses led to varied implications for the private sector, and c) implications on the strength of recovery, as and when it happens. Lastly, this analysis also provides a key lesson to be avoided during the second wave.
The estimation of distribution of income losses by different sectors in India (IN) is not an easy task. There are two ways of estimating such losses–either the national statistical agencies publish gross disposable income (GDI) data with details on a regular basis, and/or the government releases sectoral data on gross savings, which can then be added to consumption spending to arrive at GDI. For many advanced economies, data on both parameters are easily available. However, for India, neither income nor savings data by sectors is available on a regular basis. The Central Statistics Office (CSO), the data publishing arm of the Government of India, publishes sectoral income and savings data only on an annual basis, with a lag of 10 months. Thus, FY21 data will be available at the end of Jan’22.
In order to bridge this gap, I estimate sectoral savings on a quarterly basis for India, which is then added with final consumption expenditure to arrive at the disposable income for the three domestic economic participants. Please note, the methodology to estimate household income in India, as the sum of consumption and savings, is in contrast to the official methodology. Therefore, my estimates are only approximates and subject to change when more official data are available. However, the broad trends and conclusions are likely to stay intact.
My calculations suggest that almost four-fifth of all income losses in CY20 were incurred by the private sector (household + corporate sector) in India, and the government bore only about a fifth of the losses (Exhibit 1). This is in stark contrast to Australia (AU), Canada (CA), and the US, where the government sector incurred all the losses and eventually ended up transferring net resources to the private sector last year. The private sector faced losses between 20% and 60% in large European nations – France (FR), Germany (DE), Italy (IT), Spain (ES), and the UK – covered in this study. The government sector incurred almost all losses in South Africa (SAf), the only other emerging & developing economy included in this analysis.
Within the private sector, while the fiscal support made up for more than lost household (disposable) income in AU, CA, and the US, households in IN/SAf incurred 61%/68% of economic losses in CY20 (Exhibit 1). Household losses were restricted between 16% and 28% in five European nations covered in our study.
The corporate sector in India also incurred about a fifth of all income losses last year. Since listed companies in India have performed very well in 2HCY20, with their profit-to-GDP ratio at 6-year high of 3.3% of GDP, it implies that almost the entire losses in the corporate sector were incurred by the very large unlisted sector.
Going forward, as the government in almost all countries, including IN, will be taking a step back towards fiscal consolidation (hopefully only gradually) as COVID-19 subsides, the burden of stronger growth in subsequent year will fall entirely on the private sector. With IN’s private sector bearing such a large share of income losses (as much as four-fifth) in CY20, it is rather obvious to be skeptical of a strong rebound in growth, as and when it happens.
At the same time, this study includes a major lesson. With India witnessing a much ferocious second COVID wave, although the income losses may be modest (say, 2-3% of GDP) compared to the first wave, the major lesson is for the government to loosen its purse strings, to support household income in the country. Without a strong household sector, the Indian economy may find it difficult to achieve a strong revival on a durable basis in a post-COVID era.
(Nikhil Gupta is Economist, Motilal Oswal Financial Services Ltd. Views expressed are personal.)