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[Analytics] Why India needs more than a V-shaped recovery to beat Covid-19 slowdown

A man wearing a protective face mask rides a bicycle along a street in smoggy conditions in New Delhi on November 4, 2019. Millions of people in India's capital started the week on November 4 choking through (Agence France Presse/Jewel Samad). Sketched by the Pan Pacific Agency.

Smarting under scathing criticism from the Opposition over historic contraction of the Indian economy in April-June 2020-21 quarter, the government has appeared to be championing a V-shaped growth projection. A V-shaped growth simply means a sharp surge in economic activity in India in the second and third quarters of the ongoing fiscal. Koustav Das specially for the India Today.

The government is at the receiving end over its handling of the Covid-19 pandemic and consequent policy response to minimise its impact on the Indian economy.

After declaring the pandemic-economy situation as an “Act of God”, the government now asserts that the country is witnessing a sharp rebound in economic growth. This assertion by the government appears to be in contrast with the observations by independent agencies and economists.

A majority of global ratings agencies and economists are concerned about the Indian economy’s long-term health. Former Reserve Bank of India (RBI) Governor and economist Raghuram Rajan recently advised the government to take a “hard look” at the current economic situation in India.

Raghuram Rajan’s advice followed the government’s Chief Economic Advisor K Subramanian’s comment that the worst is over for the Indian economy is witnessing a V-shaped economic growth after the most stringent lockdown in the world.

A V-shaped recovery happens when a recession-hit economy recovers sharply. When visually represented in a graph, the line representing recovery will resemble the alphabet ‘V’. Simply put, a V-shaped economic recovery is a sharp rebound in growth for sucessive quarters after an equally sharp decline
A finance ministry report on the economic outlook, published on August 31, echoed what Subramanian had said. However, in absolute GDP growth terms, India is far from any kind of recovery.

V-SHAPED RECOVERY CHALLENGES

The finance ministry’s economic outlook report highlighted that several high-frequency indicators have seen growth (or lower contraction). It, however, failed to shed light on pressing issues such as private consumption demand, state of unemployment and the informal economy.

Some of the high-frequency indicators it mentioned included manufacturing purchasing managers’ index (PMI), eight core industries, E-way bills, Kharif sowing, power consumption, railway freight, cargo traffic and passenger vehicle sales.

For instance, India’s manufacturing PMI showed growth in August after contracting for four consecutive months, but the Index of Industrial Production (IIP) that tracks manufacturing activity showed a contraction of 10.4 per cent in July.

Although the IIP contraction in July was slower than previous months, economists said there is a high possibility that pent-up demand following lockdown relaxations helped improve projections.

Similarly, the contraction in eight core industries was slower at 9.6 per cent in July due to lesser restrictions as compared to April and May.

While lifting restrictions have brought back the Indian economy in motion, sustaining the pace of recovery will be the real challenge over coming months, according to experts. This goes for all the other high-frequency indicators mentioned in the finance ministry’s economic outlook report.

In case businesses fail to sustain this output — be it due to lower demand and private consumption — it could lead to a much slower and painful W-shaped recovery.

RECESSIONS & RECOVERIES

Almost all recessions that the world has seen including the Great Depression — a decade-long economic storm — ended with higher employment generation, lowering of taxes and better investment in infrastructure projects.

Even in the case of the Great Depression, there was a period of sharp growth recovery initially, following which things got worse for almost a decade.

Most modern-day economists blame the US Federal Reserve for contractionary policy measures during the time. There was hardly any policy response; no steps were taken to increase spending, and unemployment soared.

So a V-shaped recovery, which is considered a fairly good outcome for recession-hit economies, needs to be supported with additional stimulus and fresh policy measures directed at creating jobs and demand — the two key ingredients for economic recovery.

Although the challenges during the present Covid-19 crisis are in stark contrast to the ones during the Great Depression, the fundamentals remain the same. A recession-hit economy can only recover with rapid job creation, higher demand growth and allocation of stimulus in key industries.

Even if India witnesses a V-shaped recovery, sustaining it will be the real challenge as the government seems to have hit the brakes on spending to revive the economy.

In such a scenario, a period of high growth can be followed by a prolonged slowdown, especially when the pandemic shows no signs of slowing down in the country. India has so far registered over 55 lakh cases despite months of the strictest lockdown in the world.

INDIA’S HARSH REALITY

After the months of devastation caused by the coronavirus pandemic, the International Monetary Fund (IMF) in August wrote in its blog that the ‘Great Lockdown’ is the worst recession ever since the Great Depression in the 1930s and far worse than the much recent ‘Global Financial Crisis’.

India, with its 1.3 billion population and a majorly informal economy, went ahead with the strictest lockdown in the world. As a result, the poorest half of the economy — a major chunk of India’s population — saw their incomes almost halve or vanish.

Many of the country’s poorest workers have rejoined the workforce after the lockdown, but their income levels have radically fallen due to the pandemic situation.

As for the salaried and white-collar professionals, priorities have changed due to higher uncertainty and lower job security. The salaried-class the principal driver of the economic growth — isn’t buying as much. Studies show they may not spend as freely for several months as they did in pre-Covid-19 world.

A study by Mumbai-based CMIE, which estimates 2.1 crore salaried job losses since the pandemic began, is a solid reason why an average Indian can’t be blamed for turning miser. Not to mention that income levels and private consumption — the two biggest components of a country’s economic health — have shambled.

While reopening the economy further may have led to strong V-shaped growth on charts, the situation on the ground tells a different story. The Covid-19 pandemic hit India when the economic growth was already weakening.

The coronavirus lockdown crippled businesses, forced thousands of small companies to shut down forever and led to a large number of layoffs.

Ratings agency Crisil said the pandemic is likely to leave a “permanent scar” on India’s economy, especially the vast informal sector. Many other global rating agencies have also expressed concern over India’s recovery potential as it is still facing the worst of the Covid-19 wave.

Industry players and economists have sounded alarm bells since the Q1 GDP numbers revealed the true intensity of Covid-19’s impact on India’s economic growth. Having said that, a V-shaped recovery means little for India right now as it needs to find a solution to get out of contraction territory.

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