- There has been great chatter about a V-shaped recovery for quite a while, ever since the first lockdown following the novel coronavirus pandemic.
- However, some of the view that there is undeniably some type of recovery, but one can hardly label it V-shaped.
- The recovery we see today is more K-shaped than V-shaped, with various groups and industries recovering much more rapidly than their counterparts.
GS-III: Indian Economy (Growth and Development of Indian Economy)
Dimensions of the Article:
- Economic Recovery
- What is a K-shaped recovery?
- What are the macro implications of a K-shaped recovery?
- About V-Shaped Recovery
- The V-Shaped vs K-shaped debate
- Impacts of Regressive Taxation
- Job loss and MGNREGA
- Government stimulus and economic growth
- 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, GDP grows, incomes rise, and unemployment falls and as the economy rebounds.
- Economic recovery can take many forms, which is depicted using alphabetic notations. For example, a Z-shaped recovery, V-shaped recovery, U-shaped recovery, elongated U-shaped recovery, W-shaped recovery, L-shaped recovery and K-shaped recovery.
What is a K-shaped recovery?
- A K-shaped recovery happens when different sections of an economy recover at starkly different rates.
- 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.”
What are the macro implications of a K-shaped recovery?
- With the top 10 per cent of India’s households responsible for 25-30 per cent of total consumption, one could argue consumption would get a boost as this pent-up demand expresses itself.
- Upper-income households have benefitted from higher savings for two quarters.
- To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor have a higher marginal propensity to consume (i.e., they tend to spend, instead of saving) a much higher proportion of their income.
- If COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.
About V-Shaped Recovery
- V-shaped recovery is a type of economic recession and recovery that resembles a “V” shape in charting.
- Specifically, a V-shaped recovery represents the shape of a chart of economic measures economists create when examining recessions and recoveries.
- A V-shaped recovery involves a sharp rise back to a previous peak after a sharp decline in these metrics.
- It is the next-best scenario after Z-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
- In this, incomes and jobs are not permanently lost, and the economic growth recovers sharply and returns to the path it was following before the disruption.
The V-Shaped vs K-shaped debate
- There has been great discussions and speculations about the economic recovery for quite a while, ever since the pandemic.
- However, experts are divided on the type where for some it is more K-shaped than V-shaped, with various groups and industries recovering much quicker than others.
- It is also corroborated by the fact that the pandemic distinctly affected different sectors.
Impacts of Regressive Taxation
- The decision to lower the corporate tax rate to provide for an ecosystem for economic growth has resulted in recovery in some sectors.
- The high excise duties and tax rates on fuels and consumer items has led to inflation and created more problems for the lower and middle class.
- The combined effects of these policies indicate that a K-shaped recovery could be visible, if at all.
Job loss and MGNREGA
- The pandemic resulted in huge unemployment in the informal economy and led to further destitution in the country.
- The 34% cut in the allocation for MGNREGA in the Union Budget this year has aggravated the situation.
- The delay in payments reduces the chances of timely purchase of essentials adding salt to the wounds.
Government stimulus and economic growth
- There is a direct relationship between government stimulus and economic growth and the money multiplier effect shows this phenomenon.
- Providing disposable income to those who have more tendency to spend than save will lead to growth in the economy.
- The Government needs to increase progressive taxes and reduce regressive taxes to ease the financial pressure on lower-income households.
-Source: The Hindu