This Diwali, India’s consumer story is divided. Who is consuming? Economic growth may be driven by the top 100 million consumers. As they work from home, their savings have increased; the stock market rebound has also helped

This is the best time and the worst time.

                                                 ——Charles Dickens, the story of two cities.

Politicians are eager to announce that the Indian economy has recovered from the aftershocks of the covid-19 pandemic and is gradually getting back on track. "I am very happy to see the recovery; at this stage, we hope that there will be very positive signs in all areas," EU Finance Minister Nirmala Sitharaman told the Hindustan Times in an interview in September Express. This confidence prediction stems from the political need to declare victory quickly, and also reflects the overall feeling that you can successfully build your own good stuff every year, as the festival season of Diwali reaches its peak. What provides this narrative is that a lot of economic data does indicate an economic recovery. But is a sustained recovery coming? Or is it just part of the economy-very rich-who does it well?

First, let's look at all the data that suggests a recovery.

According to a press release issued by the Ministry of Finance on September 24, the total tax collected by the central government this fiscal year was 6.46 trillion rupees, an increase of approximately 16.8% over the same period in 2019. Or take the export of goods as an example. From April to September, compared with the same period in 2019, it increased by 24.3% to US$197.9 billion. In addition, domestic tractor sales from April to September increased by 23% year-on-year to 440,832 units in 2019.

In the past 19 months, the stock market has also risen sharply. Few experts believe that this makes investors feel richer, which in turn has a wealth effect. Keki Mistry, vice chairman and chief executive officer of HDFC, a housing lender, told The Economic Times that people feel richer and more confident because their investment in the stock market has increased, "so [they] are looking to improve by buying larger or Better houses to improve their quality of life".

An example of the wealth effect of real estate is the sale of 340 houses worth 57.5 billion rupees by Godrej Properties in a project in Noida, Uttar Pradesh in late September. In addition, as more and more people are vaccinated, the economy has opened up. Therefore, people have more opportunities to go out and spend money. This means that the retail business may do well.

A recent research report by ICICI Securities stated: “Our channel inspections indicate that with the relaxation of various blockades, apparel brands/retail companies may be able to watch during the second quarter of fiscal year 22 (July to September 2021). By (exceeding) 80% of the income recovery before the epidemic-related restrictions."

A research report by Emkay Global Financial Services stated that compared with 2020, sales of air conditioners in July-September may increase by 20%. Sales of washing machines and refrigerators are expected to increase 2-5%. Another research report by the same brokerage firm pointed out that compared with last year, credit card spending from July to September 2021 may increase by 59%.

In addition to data-driven indicators, there is a lot of anecdotal evidence. As people began to travel again for business and leisure, the airport was overcrowded. Hotels in tourist destinations outside the big cities are full of people.

All these indicate that the economy will usher in Diwali. But let us listen to a famous saying by the British economist Joan Robinson: “The frustrating thing about India is that whatever you say to India is right, but the opposite is true”.

Although certain parts of the economy are performing well, there are also data showing that the majority of the population is performing poorly.

For most Indian families who want to upgrade their economy and become part of the broad middle class, two-wheelers are one of the most expensive things they can buy. Take a look at the attached chart, which plots two-wheeler sales between April and September over the past 10 years.

The sales of two-wheelers from April to September this year were approximately 6.52 million units. This is lower than the two-wheeler sales in the same period in 2011, which was 6.55 million ten years ago. In fact, this year's two-wheeler sales are the lowest in the past 10 years, except for 2020.

If there is a chart that tells us that India still has major consumption problems, it is it. Sales of two-wheelers are lower than they were 10 years ago. This is a good sign that many families are not really confident in their economic future.

When it comes to housing loans, the overall situation is better. In the 12 months ending in August 2021, the bank’s total outstanding housing loans increased by 1.24 trillion rupees, exceeding the 12-month period ending in August 2020, when the bank’s outstanding housing loans increased by 11,200 Crore rupees. However, this figure is lower than the increase in outstanding housing loans during the 12-month period ending August 2019-an increase of 1.98 trillion rupees. As of August 2018, the increase was 1.37 trillion rupees. Obviously, things in real estate are not that clumsy.

In fact, when we divide housing loans into priority housing loans and non-priority housing loans, things become interesting. The Reserve Bank of India regularly revises the definition of priority sector housing loans. Currently, they provide housing loans of up to 3.5 million rupees in the city centres of metropolises with a population of over 1 million. In non-metropolitan areas, they are home loans of up to 2.8 million rupees. This depends on the conditions that the price of the house purchased in the metropolitan area and non-metropolitan area is up to Rs 4.5 million and Rs 3 million, respectively.

As of August 2021, the bank's total outstanding housing loans amounted to 4.71 trillion rupees. A year ago, in August 2020, this figure was 4.73 trillion rupees. This means that in the past year, banks mainly funded housing loans in non-priority sectors. This clearly shows that only the rich can afford a house.

In addition, as of August 2021, compared with August 2020, the bank's outstanding loans for gold jewelry increased by 66% to Rs 62,926 crore. Between August 2019 and August 2021, these loans increased by 137%. What does this tell us? After all options are exhausted, Indians will finally turn to gold lending.

In fact, this pressure can also be seen in the huge announcements made by gold loan companies in newspapers, which announced the sale of loaned and defaulted jewelry.

All the data cited above are from the formal sector. But a large part of the Indian economy is informal. Although there are no regular data on the informal sector-which is why it is called the "informal sector"-it can be inferred by studying some data.

Take, for example, the jobs required by the Mahatma Gandhi National Rural Employment Guarantee Program (MGNREGS) from July to September 2021. It is almost similar to the job requirements between July and September 2020. In fact, this year's job demand has significantly increased beyond the job demand in the same period in 2019.

One inference is that many people who work in the informal sector of the city and migrate back to rural households when the pandemic spread have not yet returned. Therefore, they requested that work be carried out in accordance with the plan. This may mean that the company they work for has either reduced the scale of its operations or closed its doors altogether.

Take the catering industry as an example. A recent survey by the National Hotel Association of India indicated that in the last fiscal year, approximately 25% of hotels in India may have been permanently closed. Approximately 230,000 jobs may be affected. Those who work for these restaurants in the city may have returned to their villages and have no incentive to return.

Several other surveys have concluded that small businesses and businesses in the informal sector are downsizing, closing or looking for buyers. This means fewer employment opportunities in the informal sector.

In fact, we can draw this conclusion from another data set. According to data from the Indian Economic Monitoring Center (CMIE), the labor participation rate (that is, the proportion of the Indian labor force in the population aged 15 or over) in Indian cities in September this year was 37.88%. Before the pandemic started, it was 40.48% in February 2020. For rural India, it was 42.08% in September and 43.67% in February 2020.

What does it mean? The decline in the labor force participation rate tells us that many people have stopped looking for work and simply withdraw from the labor market when they cannot find a job. As a result, there are fewer jobs in cities and rural areas in India, which in turn leads to an increase in job demand under the job security scheme.

The fact that rural incomes are under pressure can also be seen in the comments made by Hindustan Unilever Co., Ltd. in its September quarterly results.

Sanjiv Mehta, the chairman and managing director of the company, mentioned: “The growth of the fast-moving consumer goods [fast-moving consumer goods] market rebounded after the second wave, but slowed down in August and September. So far it has shown good resilience. The rural market...has slowed down in the past few months."

Rich man's market

The question is what explains this dichotomy? Why do the data points diverge? The reason lies in what economist Rathin Roy has been talking about. As he explained in his May 2019 Business Standards column, economic growth is driven by "meeting the needs of billionaires." This is exactly what is happening now. From the improvement of economic indicators, it can be seen that, for example, the sales of air conditioners, the sales of tractors, the high-end housing and the higher taxes imposed by the government.

Neelkanth Mishra, Credit Suisse Asia Pacific (APAC) strategic co-head, Indian strategist and member of the Prime Minister’s Council of Economic Advisers, made a similar point in a recent column in The Times of India.

He said that the rich are consuming. He believes this is important because “the spending of the top 10% of households in India is equal to the spending of the lower half of households”.

Much of this consumption is delayed consumption, stemming from the fact that the rich have gained money since the pandemic began. As they work from home, their savings increase. The stock market rebound has helped. Nevertheless, delayed consumption will eventually disappear gradually.

Moreover, this kind of consumption can only promote economic growth in the short term, because if the economy is to sustain long-term growth, it needs investments that can create employment opportunities. CMIE data points out that compared with the same period in 2020, the value of new investments announced from July to September has fallen by 54.9%. This is not good news. From July to September 2019, it dropped by 55%.

Nonetheless, Crisil Research seems to be optimistic. Compared with 2017-18 and 2019-20, total industrial capital expenditures in 2021-22 and 2023-24 are expected to increase by 30%. Will that happen? Your guess is as good as mine.

Vivek Kaul is the author of "Bad Money".

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