Mass deaths reduced the size of the labour force, and labour scarcity post-pandemic led to higher wages. As wages rose disproportionately more than profits, inequality declined.
The Covid story will run differently because thanks to modern medicine, the death toll, although tragic, has not been so devastating as to decimate populations. And thanks to modern technologies, the rich have been able to not just cope with the crisis but even prosper because of it even as the poor have lost their incomes, savings, jobs and purchasing power.
While a rise in inequality triggered by Covid is a worldwide problem, it hurts much more in a poor country like ours. Evidence of sharpening inequality is all over. Mercedes recorded the highest monthly sales of its super luxury SUV in June in the midst of the ferocious second wave when millions of poor were gasping for oxygen outside hospitals.
Last year when the economy went through its biggest contraction since independence, the number of billionaires in the country increased from 102 to 140. This, even as 75 million people retreated into poverty, accounting for 60% of the global increase in poverty, as per Pew Research.
The stock market is booming with indices at record highs even as the daily earnings of 230 million people, as per a study by Azim Premji University, slipped below the national minimum wage threshold of Rs 320.
Despite the stringent lockdown of last year, profits of listed companies as a proportion of GDP hit a ten year high of 2.6% even as CMIE data showed that the unemployment rate had shot up to 23.5% at the peak of the lockdown.
Sharpening of inequalities came from many sources and many directions. Start with the burden of disease. People living in urban slums and other crowded areas were obviously more vulnerable to the virus and were forced to run down their savings for treatment and subsistence.
Worse, the morbidity on account of the disease will continue to eat into their earning power long after they are cured of the virus. The better-off could protect themselves, or if they contracted the virus, had the means to afford treatment, isolation, rest and recuperation.
Much of the inequality came from the trade-offs in public policy choices. Importantly, how governments decided on the lives vs livelihoods balance affected different income classes differently.
Poorer people, typically employed in contact-based sectors such as restaurants, hospitality, travel and tourism, had seen hits to their jobs and incomes because of the lockdowns. But those with white-collar jobs could comfortably settle into remote working, have their incomes protected, and in fact use the lockdown as an opportunity to build up savings.
Thanks to GST and other measures, India’s fragmented economy was already consolidating, and the pandemic has accelerated the process. Large firms were able to take advantage of low interest rates and raw material costs and they also cut jobs ruthlessly while small firms and micro enterprises in the informal sector were forced to shut down. Business migrated from small to large firms and this may largely be irreversible.
The Reserve Bank of India, like other central banks, slashed interest rates and injected an extraordinary amount of liquidity to preserve financial stability and keep the economy’s wheels rolling.
But all that money, instead of flowing into productive activity via credit, has gone into the stock market and fuelled an asset price boom. Meanwhile, inflation at over 6%, above the upper limit of the target band, has hit the poor hard.
Managing the tension between maintaining financial stability, keeping inflation low and supporting recovery has been a difficult policy choice for RBI. Nevertheless, the net result of the easy money regime has been that the rich have seen their wealth grow via higher asset prices even as the poor have seen a decline in their real incomes because of inflation.
The biggest worry though is that the scars of this sharpened inequality will persist long after Covid has left us.
Online schooling, for example, has deepened an already deep digital divide. The Annual Status of Education Report (ASER) revealed that only under a third of the children were able to access online classes.
The quality of learning of even that lucky third is doubtful given that virtual teaching is a new experience for both teachers and children, raising concerns that achievement levels in school education, already disturbingly low, could be further eroded by school closures.
World Bank Research shows that in poor societies education has been the route for upward mobility across generations. If additional efforts are not made to neutralise the learning disadvantages contracted during the lockdown, an entire cohort of children may forfeit the opportunity to move up the income ladder.
Inequalities are morally wrong and politically corrosive. They are also bad economics. The huge consumption base of the bottom half of our population is our biggest growth driver. If they earn more, they will spend more, which will in turn spur more production, more jobs and higher growth.
It is this virtuous cycle that we must target.
The writer is a former governor of the Reserve Bank of India