Context- India’s low level of fiscal spending could leave behind other problem and leads to inequality.
India has stood out in three distinct ways.
- Firstly, India seems to have broken the link between rising levels of mobility and COVID-19 cases. As of now the fear of increased mobility around the festive season stoking cases has not come to bear and the fatality rate continues to fall as the recovery rate rises.
- Secondly, India has seen amongst the smallest fiscal support packages globally, government expenditure has not grown in the year so far.
- Third, inflation is now a big problem, CPI inflation has been outside the 2-6% tolerance band for seven months in a row.
How small fiscal support link with inequality?
- The government’s fiscal packages were far too modest and indirect to achieve much, some part was not covered (like the urban poor), and overall outlays were small.
- Rise in inequality between large and small firms –Large listed firms saw a larger rise in profits and the smaller listed firms did not do as well.
- A combination of cost-cutting, lower interest rate environment, access to buoyant capital markets, and formalization of demand could also be a driver of the rise in individual-level inequality.
- Impacted larger number of people– small firms are more labour-intensive than large firms. Data shows that small firms have cut staff costs by much more than large firms.
- Widening wealth gap– The coronavirus pandemic has dealt a huge blow to India’s middle and low-income groups. This is likely to further widen the wealth gap between India’s rich and poor.
- For instance– Expensive passenger vehicle sales doing better than two-wheeler sales.
What are the negatives of rising inequality?
- Inequality could elevate inflation- People with higher incomes can offset rising inflation with rising incomes. Sadly, though, income inequality and rising inflation can entrap lower-income households in poverty.
- For example– India has had a troubled past with services inflation. once it takes a stronghold (for instance, in 2011), it remains elevated for a prolonged period (it averaged 7.7% in the 2011-13 period).
There are three possible reasons that services inflation rises quickly in 2021-
- Inequality could stroke prices– The large firms and their employees do relatively well through this period, they are likely to demand more services, stoking services inflation.
- Pent up service demand– As a vaccine comes into play, there could be a wave of pent-up (high-touch) services demand.
- The service providers did not do the regular annual price reset in 2020, and may do it jointly for two years, once demand picks up.
What need to be done?
- Inflation control could be the main task cut out for policymakers in 2021.
- RBI have to take steps to gradually drain the excess liquidity in the banking sector, provide a floor for short end rates and finally narrow the policy rate corridor by raising the reverse repo rate.