From UPSC perspective, the following things are important :
Prelims level : Various graphs of economic recovery
Mains level : Economic recovery amid coronavirus pandemic
The prospects of a K-shaped economic recovery from COVID are increasing both in India and across the world.
What is K-Shaped Recovery?
- 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.”
Try these PYQs:
Q.Economic growth in country X will necessarily have to occur if
(a) There is technical progress in the world economy
(b) There is population growth in X
(c) There is capital formation in X
(d) The volume of trade grows in the world economy
Q. Economic growth is usually coupled with
3 characteristics of India’s economic recovery
- First, India has broken the link between virus proliferation and mobility earlier and more successfully than many countries.
- Second, the employment rate gradually improved till September but has weakened since then, even as the economy has progressively opened up.
- CMIE’s labour market survey still reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
- A third phenomenon is large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
- To the extent there is a migration of activity from the informal/SME firms to larger firms, tax collections and Sensex/Nifty earnings should get a boost, even holding the economic pie constant.
- Greater scale and formalisation undoubtedly augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.
Increased prospects of K-shaped recovery
- Above 3 factors increases prospects of a K-shaped recovery from COVID, a phenomenon playing out globally.
- Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates increased.
- Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.
3 Implications of K-shaped recovery
- 1) What we are currently witnessing is pent-up demand from the upper-income households.
- However, households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
- 2) To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding in the steady state.
- This is explained by the fact that marginal propensity to consume at the bottom is higher than that at the top, just as the marginal propensity to import at the top is higher than at the bottom.
- 3) 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.
Factors that need to be considered to decide the policy response
- Policy need to look beyond the next few quarters and anticipate the state of the macro economy post this expression of pent-up demand.
- The key factor is whether private sector starts re-investing and re-hiring.
- With manufacturing utilisation rates below 70 per cent pre-COVID, an investment revival, in turn, will depend crucially on the demand dynamics
- Exports should benefit from strengthening global growth as the world gets progressively vaccinated and more US fiscal stimulus.
Upcoming budget: India’s New Deal moment
- It’s against this backdrop that the upcoming budget presents India with its New Deal moment.
- Given the prevailing demand uncertainties, the budget represents an opportune moment for the Centre, in conjunction with the states, to embark on a large physical and social infrastructure push.
- This will simultaneously boost near-term aggregate demand, crowd in private investment, create jobs to soak up the unemployed, and improve the economy’s external competitiveness.
- Job creation, health and education, in turn, will be a start to help mitigate COVID-induced inequalities.
How to finance the investment?
- Gradual near-term consolidation coupled with a credible medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
- How then can public investment increase meaningfully if the headline deficit (projected above 11 per cent of GDP) must come down?
- Public investment could be increased only if the public investment push is financed by aggressive asset sales-strategic sales, disinvestment, land and infrastructure monetisation.
- In this manner, expenditure to GDP can actually rise next year — generating an expansionary fiscal impulse to the economy — while automatic stabilisers are used to reduce the headline fiscal deficit.
India’s faster-than-expected rebound is very encouraging. But given labour market pressures and prospects of a K-shaped recovery around the world, the economy will need to be carefully nurtured and stoked. The budget presents a crucial opportunity to make a big down payment towards this end.