The curve of Covid-19 infections is starting to flatten in many countries across the globe. While the possibility of a second wave is a real threat, the worst seems to be over at least for now. As federal and sub-national governments across the globe gradually lift lockdowns in their respective geographies, economic activity is limping back to normal.
However, governments could struggle to cope with the aftermath of lockdowns on their economies in the coming months. One of the most pressing economic challenges the world could face post Covid-19 is increasing income inequality. The conventional containment response to pandemics (i.e. social distancing and lockdowns) tend to affect poorer segments of the society disproportionately as they typically have jobs that cannot be performed remotely, e.g. construction workers, taxi drivers, housekeeping and maintenance staff, factory workers etc. and require physical presence at work sites. Moreover, a large percentage of low-skill jobs are in the unorganised segment. Hence, this segment is extremely vulnerable to shutting of workplace. For them, the lockdown essentially means loss of livelihood.
On the contrary, educated white-collar workforce is largely insulated from the impact of lockdown. People who do high value-adding jobs in financial services, consulting, information technology etc. can work from home (or any other location) seamlessly. Additionally, contrary to the more affluent class, poorer segments tend to have very low or no savings and limited access to credit.
Given all these factors, prolonged lockdowns and social distancing measures will expectedly hit poorer households the hardest and result in increasing income inequality. According to a poll conducted by IGM Economics Experts Panel, Chicago Booth School in April, 2020, 84 per cent of the 44 economists polled (which included Nobel Laureate Abhijeet Banerjee) believed Covid-19 will disproportionately affect low-income workers despite government support schemes.
Further, 91% believed due to the lockdown existing gaps in access to quality education between high and low-income households will be exacerbated. This has implications for future employment opportunities for children and youth in low-income households which could further increase income inequality.
Several research studies have corroborated the worries voiced by economists. A recent study based on five major pandemics in last 17 years viz. SARS, H1N1, MERS, Ebola and Zika has shown that pandemics lead to a persistent and significant increase in inequality, lower the share of incomes going to the bottom deciles, and lower the employment rate for those with basic education but not for those with advanced degrees.
Five years after a major pandemic, the net Gini (a measure of inequality adjusting for government welfare support) is above its pre-shock level by about 1.25 per cent, indicating worsening inequality due to the pandemic.
In India, anecdotal evidence (such as reports of large-scale job losses in the unorganised sector, mass exodus of migrant labour) also suggests that income inequality is likely to increase and pose a big challenge in the post Covid-19 world.
We expect the impact of Covid-19 on inequality to be much worse than previous pandemics because (i) Covid-19 has affected significantly larger proportion of world population than previous pandemics (ii) the lockdowns and/or social distancing in many geographies have been far more stringent and prolonged than in case of previous pandemics (iii) death toll of Covid-19 is higher than other pandemics and (iv) lack of vaccines and fears of second wave are likely to keep activity in some segments at suboptimal level.
In FY12, top 20% of India’s population accounted for 47 per cent of consumption share while bottom 20% of population accounted for only 6 per cent. Hence, the gap between consumption shares of top two deciles and bottom two deciles was 41 percentage points. If we apply the research study’s conclusion to India, then five years after Covid-19 i.e. in FY25-FY26, the gap between income shares going to top two deciles and bottom two deciles could increase to 43.5 percentage points.
Increasing income inequality has implications for consumption pattern.
Poor and affluent households’ consumption patterns tend to be very different. While poor households spend large share of their income on food, more affluent households spend more on discretionary items such as durable goods, housing, entertainment, personal care etc. Hence, potentially increasing income inequality in the coming years could have implications on India’s consumption basket.
To understand the same, first let us look at how households in rural and urban India spend their money.
As per our calculation based on NSSO data for FY12, bottom 30 per cent population in rural area accounts for 10 per cent of food, 11 per cent of ‘clothing and footwear’, 9 per cent of ‘entertainment and personal care’ and just 3 per cent of durables consumption. Compared with this, top 5 per cent population accounts for 15 per cent of total food, 14 per cent of total ‘clothing and footwear’, 18 per cent of ‘entertainment and personal care’ and a whopping 47 per cent of durables consumption.
The picture is similar in urban India: bottom 30 per cent population accounts for 12 per cent of food, 10 per cent of ‘clothing and footwear’, 8 per cent of ‘entertainment and personal care’ and just 2 per cent of durables consumption. Compared with this, top 5 per cent accounts for 13 per cent of total food, 16 per cent of total ‘clothing and footwear’, 23 per cent of ‘entertainment and personal care’ and 44 per cent of durables consumption.
Since poorer households are likely to be disproportionately affected by Covid-19, we expect them to tighten purse strings and switch consumption from discretionary items to food. This could result in share of food in consumption basket to increase markedly at the bottom fractiles, and resultantly in overall consumption basket. As Covid-19 disrupts poorer households’ livelihoods, we expect them to aggressively cut back on consumption of durables, entertainment, and personal care products.
Although more affluent households are likely to be less affected, they too could reduce consumption modestly to conserve cash amidst the uncertainty and weak economic outlook. As a result, we expect aggregate spend on durables, entertainment, personal care to decline in the coming years.
In the coming year, we could see Covid-19 induced rise in income inequality to manifest itself in two ways: first, the private consumption pie as a whole could shrink, and secondly, the composition of the consumption pie could shift towards food at the cost of corresponding decline in discretionary spend.
(Anagha Deodhar is Economist at ICICI Securities. Views are her own)
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June 09, 2020 at 06:11PM
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