Context:

  • 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.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy)

Dimensions of the Article:

  1. Economic Recovery
  2. What is a K-shaped recovery?
  3. What are the macro implications of a K-shaped recovery?
  4. About V-Shaped Recovery
  5. The V-Shaped vs K-shaped debate
  6. Impacts of Regressive Taxation
  7. Job loss and MGNREGA
  8. Government stimulus and economic growth

Economic Recovery

  • 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

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