Economic recovery is the business cycle stage following a recession that is characterized by a sustained period of improving business activity. Normally, during an economic recovery, gross domestic product (GDP) grows, incomes rise, and unemployment falls as the economy rebounds. Economic recovery can take many forms, example, a Z-shaped recovery, V-shaped recovery, U-shaped recovery, elongated U-shaped recovery, W-shaped recovery and L-shaped recovery.
K-shaped and V-shaped recoveries
- A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries, or groups of people. A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession. This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”
- A V-shaped recovery is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline. Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best-case scenario given the recession.
India’s post pandemic recovery- K shaped
Signs from the industry
- According to a CRISIL analysis, two-wheeler sales are expected to fall by 3 percent to 6% year over year in 2021.
- Two-wheelers are crucial because they symbolise the economic status of India’s lower and middle classes, as well as small companies.
- Two-wheeler sales have dropped to their lowest level in seven years.
- While corporate taxes are being reduced, the government is keeping indirect taxes on fuel and consumer goods.
- Furthermore, the government recently increased textile product tariffs from 5% to 12%.
- Increases in taxes have resulted in a continuous loss of disposable income, even though incomes have mostly stayed consistent.
In terms of employment, NREGA
- According to a survey from the Centre for Monitoring Indian Economy (CMIE), over 50 lakh workers lost their jobs in October 2021.
- Many of individuals who lost their employment at this time are likely to be financially uneasy and avoid non-essential purchases.
- This, combined with rising food and fuel prices, is a lethal combination that pushes families into poverty. Furthermore, the Government of India reduced its budget allocation for MGNREGA by 34% in the fiscal year 2021-2022.
- MGNREGA employment are in higher demand now than they were prior to COVID-19.
- The smaller budget allocation accounts for the inability to reward workers in a timely and equitable manner.
- This year’s budget includes funds to pay off liabilities from the previous fiscal year.
- Those looking for MGNREGA work cannot afford to be unpaid for long periods of time.
- Over the last year, the stock market and other financial assets have recovered spectacularly.
- However, less than 5% of Indians participate in shares, implying that less than 5% of Indians actually benefited from the rebound.
- As a result, the stock market’s recovery does not always represent the state of the economy, as previously reported.
While worries about ballooning public debt would restrict fiscal support, concerns about inflation would keep the central bank from cutting interest rates.
These limitations could contribute to making the economy’s recovery a long drawn one, with ‘K’ representing an uneven rebound compared to a V-shaped one, which as the letter suggests a quick return to growth.
Rising inequalities were “particularly painful” to a low-income country like India, where the upper segments of the population have seen their incomes protected and their wealth rise while the lower sections have lost jobs, incomes, savings and purchasing power
The Implications of a K-Shaped Recovery Following Covid:
- Households at the bottom have seen a permanent loss of income in the form of job losses and wage cutbacks; if the labour market does not heal faster, this will be a continuing drag on demand.
- To the extent that Covid has resulted in an effective income transfer from the poor to the rich, this will be demand-impeding because the poor have a considerably greater marginal propensity to consume (i.e. they tend to spend rather than save) a much larger proportion of their income.
- If Covid-19 decreases competition or raises income and opportunity inequality, it may have an impact on trend growth in developing economies by lowering productivity and tightening political economy limitations.
- Given the desperate position of lower-income households, it is critical that the government try to assist the middle and lower-middle classes.
- Social welfare programmes must be prioritised in order to help households get through this difficult time.
- Budgets for spending items like as subsidies, job creation, rural development, and other social sector programmes are anticipated to remain large in light of the K-shaped recovery and the emerging “pandemic poor.” The cost of vaccinations is added to the bill.
- To limit the damage to potential growth, the government will also need to tighten its focus on capital spending.
- To relieve financial strain on lower-income households, the government could consider boosting progressive (direct) taxes and decreasing regressive (indirect) taxes.
How to structure:
- Give a brief introduction about economic recovery
- Briefly mention about K-shaped and V-shaped recoveries
- Now explain which recovery is India is showing, with examples and arguments that support your argument
- Suggest way forward for a stable economic growth and conclude