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News: Indian has experienced a “K-shaped recovery” from the Pandemic.
Here on one side there are booming stock prices and start-ups and on the other side there are difficulties in most households which are termed as middle level India.
|Must Read: Pointers that India is witnessing a K-shaped recovery|
How has been the economic recovery in India?
The situation has improved.
After 1st wave
With positive consumer sentiment and labour market conditions, there was a rapid recovery after the lockdowns of March and April 2020.
– Market capitalisation of the equity market has been Rs 266 trillion level.
– Large private firms are also registering growth.
After 2nd wave
A similar recovery has not come about after the second wave.
The Omicron variant is likely to make things worse for a month or three of 2022.
Although the number of persons of working age has grown steadily, many households have a lower income when compared with pre-pandemic conditions.
What is Middle India, and How has the pandemic affected the middle India?
Middle India refers to small businesses and people without formal sector jobs.
– It has experienced a succession of shocks, from demonetisation to goods and services tax to the pandemic.
– Apart from this, the recovery after the second wave was poor and now there is renewed fear due to the Omicron.
These sustained economic stresses have led to drawing down of assets and increase in borrowing.
A lot of households have borrowed in order to smooth consumption through the shocks of the recent years and could never have anticipated that something like the current pandemic will ever it.
– Due to which they are facing tough loan recovery procedures, and have no recourse to individual insolvency mechanisms.
– This may make these households reduce their consumption the most, and they may also default on their debt.
– This can also lead to the loss of morale, and vulnerability to political radicalisation.
The firms that sell to middle India worry about the prospects for demand growth in 2022 and 2023. This prospect of reduced margins and weak demand growth can induce weaker investment by these firms, thus influencing the overall demand conditions in the economy.
How the setback in middle India affects the overall economy?
There is reduced financial depth as consumption which is visible has been a result of selling assets and by borrowing.
Fortunes of many large listed companies depend on the optimism and spending patterns of hundreds of millions of households in middle India.
For instance: In the quarter ended Sept 2019, sales were 5.59 million and two years later this was at 5.22 million, which is 6.6% lower.
The difficulties of middle India have impacted large firms making two-wheelers and their component makers.
The difficulties faced by Middle India and the recurrent CoVID variants may cause problem of demand shortfall from middle India in 2022.
Source: This post is based on the article “Worry about middle India” published in Business standard on 9th Jan 2022.