Income volatility: The new gorilla in the room

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Income volatility: The new gorilla in the room

Read more on - Polity | Economy | Schemes | S&T | Environment


  • As recovery begins: In 2021, the govt. of India is now faced with a simple question - decide a medium-term investment and consumption policy. It was focused on reviving output initially, and it may have reached its limits already. (overall from 2011, there's a general decline in GDP growth rates)
  • Focus on consumption revival: Other than reviving investment, consumption has to be revived. It's much tougher. The only approach till date (ever) was "let them have money". Can there be another approach? Yes, it can be "Milton Friedman's Permanent Income Hypothesis".
  • What is it: The hypothesis says that while consuming, people always focus on what their lifetime income will be. They adjust consumption accordingly. So if govt. gives artificial boosts to income (via cheaper credit, tax cuts etc.) it has a temporary effect only. What really matters is income expectations over life. 
  • India's new sociology of consumption: 
    1. Due to urbanisation, there's a new hybrid in India now, between a nuclear family and joint family
    2. Fewer income earners, higher costs of living
    3. The inelastic overheads have grown with time - education, health, communication and entertainment (so both savings and expenses are declining)
    4. Post 2020, income earned from jobs in formal economy will be smaller compared to income earned from non-jobs (in the US, it's called the gig economy)
    5. Since labour market is extremely competitive, there's a downward pressure on incomes
    6. So the right question to ask is - what is people's lifetime income expectation?
  • Indian situation: Of the 60 crore income earners, around 55 crore don't have any steady monthly income. They earn, but intermittently.
    1. Some earn a lot - highly skilled people - doctors, architects, lawyers, sportspersons. But most others (crores of shopkeepers, e.g.) earn very little
    2. And every day, more and more are joining these low earners, from 2020
    3. So, India is stuck in a low-income, high-volatility trap
    4. This is the pre-second world war era in labour market
    5. So high volatility in income is leading to highly uncertain consumption. It is not a problem of total income, or distribution of income. It is about "volatility" of income.
  • 2021-26 period: The new technologies like A.I., and the virus, will deepen this new change in coming years. Governments have to tackle this primary challenge - how to increase consumption on a secular basis when income is so volatile?
  • MGNREGA: The rural demand-on-work programme was one effort by India's politicians to dampen volatility. Crores of low-productivity jobs were created, but fiscal limits don't allow any more.
  • The road ahead: If dampening of income volatility is a reality, India is in for a long period of poor consumption growth. And with that, GDP growth for a long time will be less than 7%. Now, one third of that (approx) will be from agriculture. So for the other two sectors, dire signals ahead.
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                                                                                                                                                                                                                                                                                                                                                                                                                                PT's IAS Academy: Income volatility: The new gorilla in the room
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                                                                                                                                                                                                                                                                                                                                                                                                                                Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
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