India’s K-Shaped Political Economy

The spectre revealed by contrasting data is yet unravelling. The wide variance in performance across the economy comes embedded with economic & political consequences.

Shankkar Aiyar | 08:10 AM IST, 10 Nov 2021|

It is a half-stated question hanging in the air — at corner suite conversations, board meetings, after-hour networking, and of course political colloquies. What do you think about the… The answer to questions on the state of the economy rests on Euclid’s postulation on the angle of reflection — effectively, it depends on who is telling the story.

As India races to open up, buoyed by the delivery of over a billion jabs, booming indices and asset prices have catalysed optimism about the promise of the potential. That though is not the complete picture. The flip side of the much-celebrated V-shaped recovery is the contrasting spectre of a K-shaped political economy.

As Joan Robinson, Cambridge economist, once famously said ‘whatever you can rightly say about India, the opposite is also true’. A review of the data is riveting.

Rich Richer And Poor…

In 1958, Bertolt Brecht along with Hanns Eisler penned the song ‘belebenden Wirkung des Geldes’. Undoubtedly as the English rendition says, ‘There’s Nothing Quite Like Money…’ to multiply wealth. The ‘invigorating effects of money’ as Brecht put it has been at play through much of 2020 and 2021.

The decoupling of cost and valuation fuelled by public monies — thanks to central banks and governments opening up the vaults — triggered a transfer of gains to private wealth. The Bloomberg Billionaires Index shows, just in the last 12 months, billionaires across the world have added over a trillion dollars to their wealth.

The A-rated club of India’s corporate world, Ambani and Adani, are 10th and 13th on the list pushed past $100 billion and $80 billion between October 2020 and October 2021. Of the $130 billion added by 19 Indian billionaires, Mukesh Ambani and Gautam Adani added $65 billion, nearly the wealth of Jim Walton, in just one year.

Wealth, particularly the rise of wealth, merits illustration. Theoretically, it takes over 31 years to count a billion dollars one at a time — using a 1,400 notes per minute currency counter may cut down the time. To appreciate the magnitude of the gain, consider this: $65 billion is roughly Rs 4.8 lakh crore — more than the defence budget for 2021–22 or the total subsidy bill for the year.

Less than a million out of the 900 million adult-Indians own assets worth over a million dollars, and the richest 10% in the country own over half of its physical and financial assets.

The Tale of Two Savers

The rise in billionaire wealth was catalysed by stock valuations. Between the arrival of the virus and vaccination, between March 2020 and October 2021, India’s benchmark stock index Sensex doubled from sub-30,000 to over 61,000 and the Nifty 50 from 8,000 to over 18,000. Just this year, stock market capitalisation, the total value of listed shares, rose over 37% to nudge past the $ 3.5 trillion mark.

You could say it had a trickle-down effect of sorts. Those who rode the bull harvested returns of over 50% — even passive investors who chose mutual funds clocked historic returns. The percolation of gains though was limited to those who embraced risk and chased stocks.

Returns on savings depend on where the monies are parked. The majority of Indians still park their savings in banks — as per RBI, India’s banks host over 250 crore accounts and hold over Rs 150 lakh crore in deposits. Over 98% of the accounts and over 50% of the deposits are protected by the Deposit Insurance and Credit Guarantee Corporation.

Typically bank deposits are perceived as a safe harbour. Interest rates for one-year deposits fell from 5.7% in March 2020 to 4.9% in September 2021. As inflation stayed elevated over 5%, depositors were hit by a double whammy — they paid more for less and earned negative real returns for their hard-earned savings.

Unsurprisingly the quest for returns triggered a rush of new investors — total demat accounts with NSDL and CSDL have touched 7.02 crore and AMFI informs that the total number of retail folios stands at 9.1 crore. Indeed, the circumstance has nudged many to try their luck with unregulated asset classes — for instance, it is estimated that over 10 million enrolled on crypto platforms in the past year.

Had And Have Nots

Meanwhile, how has the rest of India fared through the pandemic year? Data from the International Monetary Fund reveals that the per capita income of Indians dipped from $2,098 to $1,929 and is at $2,116 in 2021. The lament about dipping below Bangladesh continues as the IMF estimates for India’s neighbour is $ 2,138 for 2021.

Averages, as the 2015 Nobel Laureate Angus Deaton put it, are no consolation to those who have been left behind — per capita income of those in Bihar is roughly a third of the all India figure and a tenth of those in Delhi. Then there is the rural-urban divide. The per capita Net Value Added (NVA based on 2011–12) for rural areas is Rs 40,925 and for urban areas it is Rs. 98,435.

There are those who had jobs and therefore incomes and then there are those who struggle. Data reveals the level of distress at the bottom of the income pyramid. The need for incomes sent the utilisation of the national rural employment scheme soaring — work generated rose from 265.34 crore person-days in 2019–20 to over 389.17 crore person-days in 2020–21 and stands at 225.45 crore person-days for the first half of 2021–22.

Allocations shot up from Rs 71,686 crore in 2019–20 to Rs 1,11,500 crore in 2020–21. Abatement seems far off as in 2021–22 the allocated sum of Rs 73,000 crore is nearly exhausted with 21 states facing negative balances in October 2021.

Goliaths Grow, Davids Decline

The divergence triggered by the K-shaped recovery is manifest at the individual and the institutional level. A hypothesis presented by State Bank of India’s economists suggests that the informal sector may have shrunk to no more than 20% of GDP. The seductive hypothesis demands robust coherent empirical studies for validation. That said, there are signs that Goliaths consolidated as Davids struggled.

Performance of top corporates improved despite the circumstance. The combined net profit of listed companies rose by over 50% and the share of corporate profit in India’s GDP touched a 10-year high of 2.64%. But the rise in earnings varied by sector and size. Analysis of Bloomberg data shows 12-month trailing EPS or earnings of Sensex companies were more than twice that of the smaller BSE 500 companies.

Outside the universe of listed companies, how have micro, small and medium enterprises fared? Studies conducted under the aegis of the MSME ministry states that over half the MSMEs faced “issues of liquidity and others faced difficulties for fresh order, labour logistics, and raw material availability”.

Consequently over half of them either paid part of the salaries or not paid salaries to employees. The resultant migration of labour from formal to informal and the struggle is reflected in the MGNREGA data as also studies which estimate over 230 million slipped below the minimum wage poverty line.

Yes, the government and RBI have taken measures ranging from emergency credit to restructuring of loans. Despite the measures, stress persists. The July 2021 Financial Stability Report reveals that the quantum of loans due has risen as has the level of NPAs to 15.9% and that the solvency of “MSME and contact intensive sectors was expected to exacerbate further”. Fact is, there are limits to RBI’s intervention and reach.

The August 2021 report of the Parliamentary Standing Committee on Ministry of Labour cites government employment census data to observe that “81% of MSMEs are self-financed and only 7% of MSMEs borrow from formal financial institutions”.

Presumably, there have been improvements since the census, but even the most optimistic estimates of credit bureaus suggest formal credit reaches barely a third of MSMEs. Clearly, the capillaries of credit are stymied by regulatory cholesterol.

Public Exchequer And Private Consumption

The optics of optimism, particularly for the establishment narrative, is anchored on the rise in the flow of revenues into the account of the public exchequer. Despite the impact of the pandemic on the economy both direct and indirect tax collections have been on an upswing.

Through the year, GST collections have averaged over Rs 1 lakh crore. Indeed the collection in October 2021 at Rs 1.30 lakh crore — 24% higher than the same month a year ago and 36% over the pre-pandemic levels of 2019 — is the second-highest in its history after April collections of Rs 1.4 lakh crore. Similarly, gross direct tax collections were up 47% while net direct tax collections grew 74%, well-above the pre-pandemic levels of 2019–20.

Arguably, the buoyancy in the economy symbolised by rising tax collections should reflect in private consumption. However, that isn’t the case as data released as part of the national accounts for the first quarter of 2021–22 shows.

Private final consumption expenditure (2011–12 prices) has scarcely matched the pace of revenue collections. PFCE for the first quarter of 2021–22 at 17.8 lakh crore is lower than that the Rs 18.8 lakh crore recorded in first quarter of 2018–19. Indeed, PFCE for 2020–21 at Rs 75.60 lakh crore was lower than Rs 78.84 lakh crore recorded in 2018–19.

The spectre revealed by contrasting data is yet unravelling. It is true that existing comorbidities of income and wealth in the political economy were aggravated by the pandemic. Equally the fault lines reveal a need for public policy intervention.

The wide variance in performance across the economy comes embedded with economic and political consequences. At a macro-economic level, the divergences illustrate the risks which could hurt the sustainability of growth. At a political level, they represent a threat to social harmony and stability.

It is a concern that occupies the minds of leaders across the world whether it is Xi Jinping with the idea of Common Prosperity or the Biden Administration seeking to level the asymmetries in income and opportunity. It is a circumstance that demands intervention.

Shankkar Aiyar, political-economy analyst, is the author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at and follow him on Twitter. This column was first published here. Previous columns can be found at Thought Capital.

Journalist-Analyst. Author of ‘Accidental India’ and Áadhar: A Biometric History. Studying how the market for politics rules the economics of people!