[Editorial Analysis] Pointers that India is witnessing a K-shaped recovery

Mains Paper 3: Economy
Prelims level: K-shaped recovery
Mains level: Different types of economic recoveries

Context:

• Instead of the Quick V-shaped recovery, India might be on a path of K-shaped recovery with a few sectors recovering while other few suffering.
Different types of recoveries:

• A V-shaped recovery is characterised by quick and effective recovery in measures of economic performance after an acute decline in the economy.

• A U-shaped recovery is characterized by slow and grinding recession followed by recovery after a long time.

• A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.

1. It 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.

2. It 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.”

The Indian recovery:

• Not V-Shaped: There is undeniably some type of recovery, but one can hardly label it V-shaped. The economic ravages of the pandemic have had an uneven impact on different socio-economic groups.

• Justification for K-shape: The recovery we see today is more K-shaped than V-shaped, with various groups and industries recovering much more rapidly than their counterparts.

• Growth and consumption in specific industries:
1. For example, Premium cars and premium motorcycles have been resistant to the pandemic slowdown.
2. The recovery in the stock market and other such financial assets over the past year has been phenomenal. However, it is essential to understand that this does not necessarily reflect the economy’s condition as observed previously. Less than 5% of India invest in equities, which means that less than 5% of India directly benefited from said recovery.

• Lower growth in certain sectors: Two-wheelers represent the economic situation of the lower and middle-class groups and India’s small businesses. A report by analytical company CRISIL indicates that in the year 2021, two-wheeler sales are set to decline by 3%-6% year-over-year over a lower base of 2020. This is the second-lowest in seven years. In fact entry-level models are the ones most affected under the category of two-wheelers.

Challenges – Signs from industry

• Government taxation policies continue to be regressive, with increased indirect taxes and lower direct taxes placing greater tax incidence on the destitute.

• Government insists on keeping Indirect taxes on fuel and consumer products high while lowering corporate taxes, paints a picture explaining these figures. The Government had recently raised taxes on textile products from 5% to 12%.
• Inflation soars: the incomes of the middle and lower-middle-class have at best remained constant. There is tremendous pressure on the financial stability of these households, which seemingly face a sustained loss in disposable income. For most income is the only hedge against inflation.

• Lower end-Jobs Data: Over five million or 50 lakh people lost their jobs in October, according to a Centre for Monitoring Indian Economy (CMIE) report. Many of those who lost their jobs during this period are likely economically insecure and abstain from non-essential purchases.

• Recession (for poor households) = High inflation + Lower jobs/stable salary: Poor growth in Lower end jobs + high food and fuel prices, delivers a deadly blow pushing families to poverty.

• MGNREGA Figures: This acts as a proxy for the informal sector, which employs a large portion of Indians. In the year 2021-2022, the Government of India had cut its budget allocation towards MGNREGA by 34%. Further there is delay in payments and those looking for MGNREGA work cannot afford to be unpaid for such long durations.

• This explains the automobile data: Therefore, there seems to be no surprise that the consumption of two-wheelers and other such products has taken a significant hit.

The Case for Bottom-up approach – supporting poorer sections

• Most follow this approach: The U.S. and European economies have stimulated the economy bottom-up through unemployment cheques and social welfare schemes.

• Money Multiplier concept: The economist, John Maynard Keynes, popularised the concept of the money multiplier and the relationship between government stimulus and economic growth. It fundamentally makes great sense to prioritise those who are more likely to spend (the middle and lower-middle-class) rather than those who have a greater propensity to save. The velocity of money which sustained a significant shock from pandemic lockdowns needs to be kickstarted.

• Furthermore, the inflation of asset prices over the recovery period helps determine the nature of this recovery.

Conclusion:

• It is crucial that the Government addresses this phenomenon and works towards aiding the middle and lower-middle class. Social welfare schemes must be given greater importance to assist households to get through this period.

• A seemingly viable solution is for the Government to increase progressive (direct) taxes and reduce regressive (indirect) taxes to ease the financial pressure on lower-income households.

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Prelims Questions:

Q.1) With reference to the Competition Commission of India (CC), consider the following statements:

1. The Competition Commission of India (CC) has recommended the creation of a National Digital Drugs Databank and strict enforcement of drug quality standards to boost price competition among generic drugs in India.

2. Pharmaceuticals including generic drugs account for about 95 percent of out-of-pocket healthcare expenditure in India according to the CCI study.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

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