Understanding Inequality: Why Increased High Value Consumption May Not Be A Positive Sign

One of the interesting developments last year was the behaviour of the stock market.

Conventional wisdom dictated that with complete global shutdowns affecting production as well as consumption, leading to a collapse in national GDP, the effect on businesses and consequently on share prices would be disastrous.

However, after an initial blip, stock markets across the globe have shown an astounding recovery with indices reaching historical highs.

Similarly, newspapers are filled with advertisements for high-end vehicles and mobile phones costing more than the annual income of an average citizen, and articles about who the next billionaire is.

E-commerce sites like Amazon and Flipkart have reported extraordinary GMVs (Gross Merchandise Values) during their sales, with thousands of high value products being snapped up in minutes.

There is an optimism in the air that despite the pandemic and the resultant shutdowns, our economy is rebounding and growing fast.

To explain this apparent disconnect, economists came up with the K-shaped growth theory which said that while a section of the population will be badly impacted by the pandemic, there is another segment that will actually be able to grow faster, post the initial setbacks.

The recently-released Hurun India Wealth Report identifies a new group that it calls the New Middle Class, members of which are able to save at least Rs 20 lakh every year, and there are around 6,33,000 such households in this category.

The report also identifies 5,64,00,000 middle-class households that earn more than Rs 2.5 lakh and have a net worth less than Rs 7 crore, while at the upper end there are 7,45,200 households whose wealth ranged from USD 1 million to USD 1 billion.

Collating data from the details of income tax payers and assuming that around 15% of those earning above Rs 2.5 lakh per year earn more than Rs 10 lakh a year, we have 84,60,000 households.

In other words, we have more than 92 lakh households that earn upwards of Rs 10 lakh per year. And assuming an average household size to be of 4 persons, this gives us 3,68,00,000 consumers — more than the population of several European nations.

And this is the market that is targeted by the makers of high-end luxury goods.

These are the people who have identified the stock market as where their wealth can grow and are investing there, causing the Sensex and Nifty to reach historic heights.

Which is why, though we have around 29 crore households that earn less than Rs 2.5 lakh a year, the other 5.5 crore households are driving economic growth, especially the top 1 crore that are earning upwards of Rs 10 lakh per year.

This is the hidden significance of the K-shaped growth. It means that while 5.5 crore households are experiencing growth, it may be highly possible that the effects and after-effects of the pandemic are causing degrowth for 29 crore households. In other words, more than 75% of our population is slipping deeper and deeper into poverty.

The pandemic has already led to some deep-rooted changes in industry, causing job insecurity and even job losses, especially in the lower end of the strata, compounding their problems.

If we add the effects that increased use of Artificial Intelligence and Machine Learning will bring to the economy, the ability of the households in the lower strata to imbibe the skills required to participate in the job market will be further compromised.

These are factors that need to be kept in mind while devising policies that will drive our country for the next couple of decades. Failure to address these issues can lead to a situation where income inequality erupts into violence and anarchy.