Why festive sales may increase inequality

As a child, I saw a lot of South India. I recall running my hands over the exquisite carvings in Belur-Halebid, hard as stone, yet smooth to the touch. I remember craning my neck to look at the awe-inspiring giant statue of Gomateshwara. I remember the elephant ride in the forests of Bandipur. And I remember looking down as our plane was about to land in Hyderabad and marvelling at how red the soil looked.

All this was possible because my parents were teachers in Delhi University. Every four years, the government gave them highly subsidised tickets to travel across India, under the Leave Travel Concession (LTC) scheme. Along with that, they also got Home Travel Concession (HTC). Since my parents called Calcutta their home, we went there every alternate year, to spend our summer or winter holidays.

We were not alone. Millions of government employees of various shades used their LTC to travel. Of course, the government only covered ticket costs. Travelling entailed other expenditure as well. There were hotels and guest houses to be paid for. Food to be eaten. Souvenirs and local goodies to be bought. As travellers spent, local economies flourished.

By the mid-1980s, the government realised that travel and tourism was a great job creator. So, new concessions were given to the tourism industry. Since then, travel and tourism has ballooned into one of India’s biggest sectors. It is also amongst the worst hit by Covid-19. An early estimate by FICCI (Federation of Indian Chambers of Commerce & Industry) suggested that the pandemic would cause a revenue loss of Rs 5 lakh crore to the travel and hospitality industry and result in 3.5-4 crore job losses.

On the flip side, not going on holidays will result in huge savings for India’s middle class. A joint study by Bain & Google estimated that Indians spent $57 billion on leisure travel. The study predicted that this spend will rise at 13 per cent per year. That would work out to about $64 billion in leisure travel expenditure in 2019. Of course, travel spends are a function of disposable income and Covid-19 is likely to reduce that by at least 10 per cent this year. So, the potential spending that Indians could have done on travel and tourism in 2020, would be 10 per cent less than 2019, or about $58 billion. In Indian money, that amounts to about Rs 4.3 lakh crore.

Now, let us assume that 80 per cent of those who would have travelled for a holiday will skip it this year because of the pandemic. That means, India’s middle class, which does the bulk of leisure travelling, would have ended up saving nearly Rs 3.5 lakh crore, which it would have otherwise spent on holidays. This is after we have accounted for the loss in disposable income caused by the Covid-induced recession. If even 60 per cent of this ‘saving’ goes into additional consumption, that would be more than Rs 2 lakh crore, or over one per cent of India’s GDP in current prices.

To understand what this means, let us take two figures. In 2018, the India Brand Equity Foundation (IBEF) estimated that Indians bought consumer durables — TV sets, refrigerators, fans, ACs, microwave ovens, computers, laptops, digital cameras, etc — worth about Rs 1 lakh crore that year. In 2019-20, Maruti sold cars worth Rs 72,000 crore, and it has more than 50 per cent of India’s passenger car market. Compare these numbers to the ‘potential’ extra money in the hands of India’s middle class because most of them will not travel for leisure this year.

To revisit the numbers I have outlined above, the tourism industry is taking a Rs 5 lakh-crore hit, while India’s households are potentially saving Rs 3.5 lakh crore by not travelling for leisure. Out of this, Rs 2 lakh crore could end up being spent on clothes and apparel, smartphones, consumer durables and automobiles, while Rs 1.5 lakh crore could end up being invested in fixed deposits and stocks. This is all additional money, more than half of which would have otherwise been spent on ‘perishable’ goods and services like air and train tickets, hotel stays and food. Even holiday-related shopping often consists of non-essentials like souvenirs and gifts that are not manufactured by the organised sector.

In other words, about 40 per cent of what the tourism industry loses in revenue this year could end up in the pockets of manufacturing companies in the organised sector. This Rs 2 lakh crore is equal to the total revenue of Maruti Suzuki, Hero Motors, Samsung, LG & Dell, combined in 2019-20. This partially explains why we are seeing this unprecedented rise in the sale of consumer durables during this festive season. Other than pent-up demand, need for smartphones and personal vehicles due to social distancing needs, big discounts, the extra money in the hands of middle class households who skipped their summer and Dasehra holiday travel, is helping push up sales.

This will have a profound income-distribution impact across the economy. Travel and tourism is highly labour-intensive and creates a large number of mid- and low-income jobs. It accounts for a large chunk of earnings of restaurants and hotels, which too employ many people, and sustain their own ecosystems of suppliers. Tourism also helps local economies in tourist spots, which might otherwise have no economic connection with other towns and cities.

The organised industry of consumer durables and automobiles, on the other hand, is capital-intensive and highly mechanised. Many of the biggest companies in this space are multinationals that only assemble their products in India. Samsung, which has more than one-third share of India’s refrigerator market and dominates the market in TV sets, microwave ovens and washing machines, does have manufacturing facilities in India, but a bulk of the parts come from outside.

In any case, most of India’s consumer goods makers have excess capacity, and additional demand will not make them invest more. What it might do is induce them to hire more white-collar managers and take a few additional workers on contract. They might also expand their marketing spends, which, in turn, will boost the incomes of India’s media companies.

In other words, we might see a revival of hiring amongst the top 10 per cent of Indians, but a sharp decline in employment for middle- and lower-middle income people who were dependent on the travel and tourism industry. That will make the affluent even richer, and push the lower middle class into poverty. By staying at home during the festival holiday season and buying goods instead, India’s middle class will inadvertently end up making our society even more unequal.

The author is a senior economic analyst