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Who bore the burden of income losses in CY20…

…and what does it mean for a rebound?

* The COVID-19 led economic crisis seen in CY20 was very different from other economic/financial crisis. The ‘sudden stop’ forced authorities to react with a quick, massive, and unconditional fiscal/monetary support last year. As in other crisis, however, these measures did not prevent losses, though they definitely helped mitigate them. In this note, we attempt to distribute the income losses by sectors – household, corporate, and government – in India and compare it with other major nations1, 2.

* This exercise holds importance because it helps us understand: a) if, and how, the situation is different in India vis-à-vis other major nations, b) how different fiscal responses led to varied implications for the private sector, and c) implications on the strength of recovery, as and when it happens. Lastly, we talk about the key lessons that must be remembered during the second wave.

* Our calculations suggest that almost four-fifth of all income losses3 in CY20 were incurred by the private sector in India (IN), and the government sector bore only about a fifth of the losses. This is in stark contrast to Australia (AU), Canada (CA), and the US, where the government sector incurred all the losses and eventually ended up transferring net resources to the private sector last year. The private sector faced losses between 20% and 60% in large European nations – France (FR), Germany (DE), Italy (IT), Spain (ES), and the UK – covered in this study.

* The income losses incurred by the government in IN were, by far, the least (only ~20%), while it was over 200% (100%) in AU (CA/the US). Even in South Africa (SAf), the only other emerging nation included in our study, the government suffered all income losses, while private sector income was broadly unchanged.

* Within the private sector, while the fiscal support made up for more than lost household (disposable) income in AU, CA, and the US, households in IN/SAf incurred 61%/68% of economic losses in CY20. Household losses were restricted between 16% and 28% in five European nations covered in our study.

* Effectively, it implies that the corporate sector suffered higher income losses in FR and ES (30-35%) and gained massively in AU and SAf due to the fiscal support. The corporate sector in other nations, including IN, in our study witnessed moderate losses (12-16%), while it was broadly balanced in DE.

* This study clearly reveals that due to extremely low fiscal support in IN, the income losses for the private sector (especially households) were much higher compared to other major nations in our study. Going forward, as the government sector in all countries, including IN, will be taking a step back (only gradually) as COVID-19 subsides, the burden of stronger growth will fall entirely on the private sector. With IN’s private sector bearing such a large share of income losses in CY20, we are skeptical of a strong rebound in growth, as and when it happens.

* With IN witnessing a much ferocious second COVID wave, the major lesson for the government is to loosen its purse strings and support the household sector directly via income transfer/employment guarantee. Without a strong household sector, the Indian economy may find it difficult to achieve a strong revival on a durable basis in a post-COVID era.

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