Sharpening income inequalities will hit growth prospects

New Delhi: Former RBI Governor D Subbarao has expressed concerns over 'extreme unevenness' in economic recovery and 'sharpening inequalities' between upper income segments and lower income households in the country, cautioning that the trend will hit growth prospects going forward. Terming the uneven recovery 'morally wrong and politically corrosive," he said liquidity in the domestic market and foreign fund inflows are leading to soaring of prices of stocks and other assets despite disruptions due to Covid pandemic. The ex-central bank governor further said that earlier expectations of a sharp economic recovery this year have been dashed by the new pandemic wave.

"The economy contracted last year, for the first time in four decades, by as much as 7.3 per cent. That was less deep than we had first feared but still deep enough to have caused distress to millions of families in the informal sector. There was expectation of a sharp recovery this year, but those expectations are now tempered by the impact of the second wave," Subbarao told PTI. The RBI too reduced its growth forecast for the current fiscal by one percentage point, from 10.5 per cent to 9.5 per cent, he said adding that even 9.5 per cent growth might seem impressive but note that this is coming on a very low base of last year. "Even if we clock this growth rate, the output during this fiscal 2021/22 will still be less than the output two years ago before the pandemic hit us. Compare that with China which never fell below its pre-pandemic level and the US which is expected to recover to its pre-pandemic level this year," the former RBI chief said. Expressing concerns, Subbarao said that while the majority of people have lost jobs and saw reduction in their income, the wealth of some rich individuals have increased during the pandemic period.

"The positive wealth effect of the upper income segments juxtaposed with the negative income effects of the lower income households tells a story of a very uneven recovery and sharpening inequalities. This is morally wrong and politically corrosive," he said adding that it will also have a big impact on growth prospects going forward. Explaining further, he said the booming stock market is in fact "symptomatic of the extreme unevenness of this recovery". The domestic liquidity coupled with foreign inflows is fuelling stock prices as also prices of other assets, he said. "Who benefits from this? People who have investable surpluses." "Contrast that with the findings of a study by the Azim Premji University that the one year of Covid-19 pandemic has pushed 230 million people into poverty with a 15 per cent increase in poverty rate in rural India and a 20 per cent surge in urban India," he said citing the findings of a study. "Add to that CMIE data showing that the unemployment rate has gone up as high as 12 per cent in May, 10 million jobs have been lost just on account of the second wave and 97 per cent of the households in the country have experienced declines in incomes," Subbarao added.