The Falling arm of K
An attempt to analytically examine a casual Saturday evening conversation and to extrapolate one's near-term fate to that of the nation
“The hard times are here, yet again. And we are not even through one-quarter of this decade. After Covid, come the layoffs. I can’t even find friends to empathize with when I tell them that I am fearful of losing my job and not having enough savings. Looks like everyone is in the same boat and they are desensitized to this persistent anxiety”
- Dinnertime rant by a friend, a garden variety Bitsian, living in the concrete suburbs sprawled along the edges of the Garden City of India
It is hard not to turn millenarian if you live in the eastern suburbs of Bangalore - the home to companies whose contribution to India’s reputation as a tech start-up hub dwarfs their actual contribution to the GDP. As the tidal wave of easy money recedes, it carries in its wake the sandcastles of lofty valuations built around narratives of a billion strong market. A collateral damage- employees recruited for functions/ roles/ projects that were neither very well deliberated nor questioned for their marginal productivity. As of January 27 this year- those amounted to 21532 employees since September 2022 in the start-up sector. Since these are self-reported numbers, actuals are likely to be higher than this estimate.
As someone working in a start-up myself, it is hard not to extrapolate the fallen fortunes of my immediate circle of friends onto the national economy. And as a part of a tribe that was told that we were the best of the best in our generation, thanks to us having wasted our teenage years ace-ing what were among the toughest entrance examinations globally, it is harder not to imagine how tough things could get for the less gifted among us. After all, didn’t our leaders - in business, in politics and on social media- tell us that we would be at the vanguard, harnessing India’s youth demographic dividend, leading it through Amrit Kaal (immortal times). Living in India, we demanded global salaries because we were worth it. If we eschewed the brain drain and stayed here in this nation, our wealth would trickle down and benefit the masses.
But even as we suffer, in real or nominal terms, it is imperative to ask these questions - how much of our hard times are representative of the nation as a whole? While we were arguably having a good time cashing in bonuses and working from home, how much of our fortune was trickling down to the masses? On an aggregate level, are we headed for a recession? And if we are not collectively, is that too a reason to rejoice?
To answer some of these questions, it is good to borrow a fashionable post-Covid mental model of the economy - a K-shaped recovery (a brief description for the uninitiated here). In this essay, we will look at how the two arms of this K fared just before the recent spate of layoffs/ funding winter and what the current trends indicate, in my opinion, about the near-term.
The upper arm of K: The Roaring 20s.
Of the 476.6 million workforce in India, approximately 18.8 million (3.95%) are employed in what we could consider the tech sector in India (which includes business, IT and financial services). For nearly 1/4th of this tech workforce, the 18-24 months beginning from H2 2020 were a period of economic prosperity unseen since before the mid-2000s in the run up to the global financial crisis. The closest historical analog for this age would be that of the roaring 20s in the US - an era that inspired classics like The Great Gatsby by F Scott Fitzgerald.
When it comes to income growth, as per Captable, between Jan 2020 to August 2021, average salaries for engineers and product managers were up 45-50%. The competition for talent from well-funded start-ups, which flush with cash were hiring for moonshot projects of tomorrow - such as building ecommerce stack for Bharat or data analytics for lending applications - meant that salary growth in the broad tech sector handily outpaced its counterparts in major emerging and developed economies, growing by 9-11% over the past two years.
Nowhere was this prosperity reflected more acutely than in the housing sector, where housing sales in 2022 rose by a massive 54% y-o-y. The share of luxury homes (INR 4 cr+ in the top 7 metros) within the total home sales rose anywhere between 2x (Mumbai, Bangalore and Kolkata) to 5x (NCR, Chennai and Pune), an indirect indicator of how the wealth made in tech sector, especially in start-up hubs, made its way into high-end accommodation.
India doesn’t publish any standardized, periodic consumption statistics - so it is tough to accurately estimate the impact of a once-in-a -decade growth in income on purchase patterns for white goods. But the numbers on luxury car sales provide a good proxy for the overall purchasing mood of the nouveau riche. In a statistic that reminds me of the go-go days of consumption from Shanghai, luxury car sales were up 50% y-o-y in 2022. Another interesting data tidbit is a report last year from Mercedes that the average age of an S-class owner fell to under 40 for the first time (crypto millionaires anyone?).
Therefore, while the downdraft of job losses and a squeeze in income seems steep and suffocating, the bounty that came before that, for a chosen few, had been equally dizzying in its ascent.
The falling arm of the K: If they can’t afford bread, they can’t have the cake either Mary
All this while, the average Indian lived in a different country. As per the data on daily rural wages compiled by the RBI, the months which saw a double digit growth in the tech sector between H2 2020 to H1 2022, were also the months where wages for the base and the middle of the income pyramid rose by just 5.44% y-o-y on an average.
Source: Reserve Bank of India
Statistical data are not frequently released on this account, but it seems that - pushed away by the degree of informalisation and the poor quality of urban sector jobs, an increasing share of people had already taken to going back to rural agricultural jobs as early as 2019-20- a discordant note in our narrative of aiming to become a services and manufacturing led economy.
Moving slightly up the income chain, while luxury home sales peaked in India, signs of distress were visible when it came to housing affordability in metros. JLL’s Home Purchase Affordability Index, which measures the ability of an average household to secure a loan for a 1000 sq ft apartment, indicated that affordability sharply declined across metros both in 2021 and 2022, with the average buyer now effectively priced out of the market in Mumbai. That said, home purchase affordability, thanks to a better digital identity for customers and stronger regulation of the real estate sector, had seen a sharp increase through the last decade, before stalling since 2020.
Even those in the bottom quintiles of the tech sector weren’t privy to the soaring fortunes of their friends and peers working in start-ups. As is commonly perceived, but less widely documented, entry level salaries for the IT sector - whose professionals comprise almost 30% of the IT services workforce - have remained flat on a nominal level since 2010. Ergo, it is not so surprising to note a persistent slowdown in the growth rate of mid-market consumption goods - two-wheelers and entry level cars - from even before the onset of Covid.
Barring the real top of the pyramid, from the household in the 80th percentile all the way down to the very bottom, the experience of the past few years has been of growth at the margins, a low and sideways movement in consumer confidence and a persistent anxiety about financial future. The only respite, in these tough times has been the direct state support and the lagged effects of the infrastructure spending by the government which have kept wage growth levels from declining.
Phytoplanktons and Chemosynthetic bacteria
If you think this is a post to trivialize the pains of tech sector workers - many of whom are enviable examples of social mobility and a tough but meritocratic system, particularly in South Asia where birth determines destiny - this isn’t so. A number of those who are being laid off spent their entire lives jumping hoops of one entrance exam after another, picking up that last credential to inch ahead of the others in the race. Their story, including that of my exasperated friend, is real; so is their pain. But how much of their pain is likely to be reflected in India’s aggregated GDP, how far will their misfortunes slow down the elephantine march of the Indian economy? Much as their prosperity in the last 18 months did little to trickle down to the bottom, these pains too are likely to remain localized.
Source: The Center for Monitoring Indian Economy
A good mental model to think about the impact of the recent tech layoffs on the Indian economy is to think of our economy as a large, unfathomably deep ocean. Occasionally, parts of this ocean get covered in patches of bright green, which expand and contract depending upon the mineral content of the water. These patches of green are made of small single-celled organisms like phytoplankton - they comprise less than one percent of the ocean’s biomass but account for almost half the photosynthesis and more than half of the oxygen production in the world. In a sense, the top tier tech and start-up workers are like the phytoplankton swimming on the surface of India’s economic ocean - contributing to its luxury goods consumption and income tax collections in the same pattern as those single celled ancestors of ours.
But the ocean called Indian economy is deep, and there aren’t enough green patches on its surface to drive a food chain and nourish all the organisms way down to the bottom. One of the key models to encourage countries to enact policies that encourage individual enterprise and personal wealth creation relies on the idea of “Trickle down economics”. Lower taxes, deregulation of labor markets and easing of product side restrictions on trade and capital flows are all ways in which wealth creation at the individual level is expected to make a few people richer and then allow them to spend more in absolute terms, engage in more ambitious investment projects and hire the best minds and import the best raw materials from across the world - which is likely to improve the overall levels of productivity in the country, unleash individual enterprise and finally lead to better outcomes for all. Indeed, this is what even Chinese Communist Party leader Deng Xiaoping meant in the 1980s, when he was liberalizing the economy - Let some people get rich first.
However, what the trickle-down effect ignores is - while it is good to unleash entrepreneurial energies through deregulation and allow people to jump and soar as high as they can, taking away the safety net in case you fall, or not even teaching the weakest in the economy what jumping high actually means - ends up being even more harmful than deregulation. Renowned economist Anthony Atkinson, prescribed fifteen proposals that all free-market, liberal democracies must undertake in order to allow prosperity gained through capitalism to seep through to the most deprived.
It isn’t difficult then to see why India faces all the harmful side effects of trickle down economics, with the bulk of its gains since liberalization of the economy being limited to the surface. The percentage of income tax paid as a share of GDP remains low. We are yet to have a formal way of counting unemployment and then creating specific fiscal and monetary policy to target it. Social security and social insurance schemes in India have just been introduced in the past 10 years and while the early gains have been promising, given the degree of informalization in the economy - they have far to go. Furthermore, given that quality of public infrastructure - healthcare, education and public transport - remains abysmal by international standards - one of the biggest aspirations for us Indians, as we move up the social ladder is to be freed of anything sarkari - and to further move away our consumption spending from government owned and operated institution. Factor in the long-standing reflexes that we have developed after millennia of caste system - a public dialogue about the dignity of labor and minimum wages only goes that far.
Coming back to the analogy of the Indian economy as an ocean - the specific features of its geography make it very difficult for any nutrients photosynthesized by the phytoplankton to ever float down. It is as if the ocean continues to exist as a fractured biome - fashionably called in conference circles as India and Bharat.
That said, deep down in the ocean - life continues to thrive, albeit at a lower level of complexity. After having fallen steeply through 2020 and 2021, data shows that both unemployment rate and wage growth in rural and suburban India are showing signs of recovery. We aren’t in the double digit growth territory yet - but the acute distress of hunger, unemployment and lack of basic necessities seems to have been avoided. It is apt to compare life here to the ecosystems at the bottom of the oceans - where the primary producers are not photosynthetic bacteria, but rather a different group of microorganisms that break down chemicals in the minerals produced from below the earth’s surface - gushing out through cracks in its crust.
Multiple econometric analyses indicate that one of the strongest indicators of growth in suburban and rural consumption and income growth have less to do with the robustness of spending in the urban areas and more to do with direct government spending and monsoonal harvests. The mass of India’s economy feeds on this stream of minerals and nutrients released every year during the budget season and six months later, during the monsoon season.
So, as the mineral bounty on the surface of the ocean (easy money in the private capital markets) recedes and the green patches shrink, the life at the bottom is likely to go on unperturbed. That said, the chasm between the top and the bottom, the gutsy but nevertheless sub-par growth of Bharat though, will continue to remain a missed opportunity during a golden period for the economy.