The economic devastation of the pandemic has had a disproportionate impact and taxation policies remain regressive
There has been great talk about a V-shaped recovery for quite some time, since the first lockdown following the novel coronavirus pandemic. A V-shaped recovery is a measure of economic performance characterized by a quick and effective recovery after a sharp decline in the economy. There is undoubtedly some kind of recovery, but one cannot label it V-shaped. The economic devastation of the pandemic has had a disproportionate impact on different socio-economic groups. The improvements we see today are more K-shaped than V-shaped, with different groups and industries recovering much more rapidly than their counterparts.
signal from industry
The government’s taxation policies remain regressive, with increased indirect taxes and fewer direct taxes putting a higher tax burden on the destitute. The effects of this K-shaped recovery can be seen through growth and consumption in specific industries.
Two-wheelers represent the economic condition of the lower and middle class groups and small businesses in India. A report by analytical company CRISIL suggests that two-wheeler sales are set to decline 3%-6% year-on-year in 2021. This is on top of the bottom base in the already pandemic-hit year 2020. The actual decline in two-wheeler sales from pre-pandemic times should be far more significant due to the base effect. Two-wheeler sales are the second lowest in seven years. It is important to note that under the two-wheeler category, the entry-level models are most affected. The incident was said to be rectified during the festive season, but it could not happen. On the other hand, premium cars and premium motorcycles have been resistant to the slowdown of the pandemic.
effect of taxation
Furthermore, the government’s usury taxation policy, which emphasizes retaining indirect taxes on fuel and consumer products while reducing corporate taxes, paints a picture that explains these figures. The government recently increased the tax on textile products from 5% to 12%. While inflation rises, middle- and lower-middle-class incomes remain the best. There is tremendous pressure on the financial stability of these households, which are facing continuous losses in disposable income. Furthermore, figures representing people who are employed only partially explain this phenomenon.
on jobs, NREGA
According to the Center for Monitoring Indian Economy (CMIE) report, 50 lakh or more than 50 lakh people lost their jobs in October. Many of those who lost their jobs during this period are financially insecure and avoid non-essential purchases. This, combined with astronomically high food and fuel prices, dealt a fatal blow pushing families into poverty.
Additionally, it is prudent to look at the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) data as it serves as a proxy for the informal sector, which employs a large section of Indians. In the year 2021-2022, the Government of India had cut its budget allocation for MGNREGA by 34%. There is more demand for MGNREGA jobs now than in the pre-COVID-19 era. The low budget allocation is attributable to the inability to compensate workers on time and fairly. A part of this year’s budget is spent on paying the liabilities of the previous financial year. Those looking for MGNREGA work cannot be paid for such a long period. This is again linked to putting upward pressure on the unemployment figures.
promotion and development
It is, therefore, no surprise that the consumption of two-wheelers and other such products has declined drastically. The US and European economies have propelled the economy from bottom to top through unemployment checks and social welfare schemes. Economist, John Maynard Keynes popularized the concept of money multiplier and the relationship between government incentives and economic growth. It basically makes a lot of sense to give priority to those who are more likely to spend (middle and lower-middle class) rather than those who have a greater tendency to save. The money movement which has taken a major blow from the pandemic lockdown needs to be kickstarted. Furthermore, the inflation of asset prices over the recovery period helps determine the nature of this recovery.
The recovery in the stock market and other such financial assets in the last one year has been phenomenal. However, it is necessary to understand that it does not necessarily reflect the state of the economy as seen earlier. Less than 5% of India’s people invest in equities, which means less than 5% of India has directly benefited from the said recovery. The lower middle class, which does not invest in such properties due to various reasons, has no protection against inflation. Their only defense against inflation is their income which makes up for a poor one.
consider welfare schemes
Hence, as discussed earlier, their financial position has deteriorated due to rising prices of essential commodities. Furthermore, the disproportionate benefit of asset price inflation in favor of the upper-middle class demonstrates the underlying K-shape of recovery. It is important that the government addresses this incident and works towards helping the middle and lower-middle class. Social welfare schemes should be given more importance to help the families during this period. Increasing progressive (direct) taxes and reducing regressive (indirect) taxes is a viable solution for the government to reduce the financial pressure on low-income households.
Anand Srinivasan is a Consultant. Sashwath Swaminathan is a Research Associate at Aionion Investment Services
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