THE ALPHABETIC SOUP OF RECOVERY
- October 21, 2020
- Posted by: Administrator
- Category: Blog
The official announcement of the economy downturn with the contraction of 23.9% in the Q1 2021 poses a loaded gun of questions towards the government coupled with the analysis of the shape of recovery next gate. Several experts have said India is likely to recover V-SHAPED, W-SHAPED, L-SHAPED, U SHAPED, J-SHAPED and K-SHAPED recovery down the line. Of course, some are just to mock the situation and actions current government by the critics. For example, M.V. Rajeev Gowda has lashed out the government for calling the contraction an ‘exogenous shock’ and the situation of crisis as an ‘Act of God’ by adding another alphabet in the soup of recovery i.e. J-SHAPED which is Jumla (false promises). The situation, according to him, is a result of sheer economic mismanagement. India may still be able to avert the L-shaped curve which mainly shows that when the growth collapses, it stays low and stagnant making it an L-shape. The major argument is around the V-shape recovery that essentially shows the contraction and expansion of an economy in a quick manner. The stimulus that the government is providing to cushion the financial management is just a Life Support that they are giving to the economy. The fact that we cannot call the critics wrong altogether is because at least on some grounds we need to be normal, right? The rising infection curve and the sinking economic curve (GDP growth) are both the ends of an extreme situation that India is facing. The economy not only needs stimulus but also a panel of experts to allocate that fund in a proper direction to revive the economy.
Montek Singh Alhuwalia explains that it is really difficult to further increase the expenditure because the tax income is already likely to fall short and on the top of it, the risk of further adding to the fiscal deficit is also present. But that does not mean the government should not increase the expenditure because what that can really help us to revive the economy is a series of reforms to fiscal consolidation and expenditure in this hour to get back the market in its usual style. People also say that the economy was anyway not doing very well and the virus is just a blow to the existing situation. This is actually true because in the year 2019-20, the economy grew by 4.2% against expansion of 6.1% in 2018-19. The so called exogenous shock was not there in the previous
year then what made the numbers go down? The consumption demand, investments and exports were the key behind the numbers of 4.2%. Thankfully, the exports have crashed less than imports in the last quarter because we were exporting in the countries that were experiencing a flattened COVID graph such as Singapore, Malaysia and Vietnam. The larger crash of imports was due to the fact that incomes were substantially hit which paved way for the consumption to be hit too.
Another shape of recovery in the basket is K-Shaped recovery. This essentially means a growing gap between Winners and Losers. The best way to justify this shape is the situation of businesses that are hit during this period and the stock market on the other hand that is being healthy in every sense i.e. flourishing during this situation too. TN Ninan has explained this very well by pointing out the giants in the industry that are eating the small players like Jio swallowing most of the Future Group. The essence of highlighting these things is just that the rising inequality was there even before COVID, it is just accentuated now. The government is not just escaping the situation where the big players have the key to the door but fencing it with glass in the name of nationalism for the public to enter the rink and question the institutional frameworks such as Competition Commission. This is not just cutting the hands of public to raise voice against the giants swallowing their share of the pie but also setting a plate, cutting the pie and serving them.
Aparna Iyer clearly mentions that the government should monetize its assets and holdings in the public enterprises which is more likely an asset swap where government sells some old holdings and invests in new projects. Crying over the spilt milk is not the solution anymore. Instead we should clean the place (revise the reforms in the correct direction), work harder for the milk (expenditure in the right allocation) and drink it judiciously (pump the economy and then work for fiscal consolidation).
The economy is not only suffering because of the infection curve and shift in the consumption demand but also because just providing the stimulus is not enough. I am again asserting pressure on this point that there is a dire need of appointing a committee of experts so that they can plan policies, reforms and action plan to revive our economy. The Keynesian theory of increased government expansion with lower taxes (not necessarily because government needs certain income to spend). The stimulus provided by the Modi Government is very much in line with this approach. The government has to step in, increase the role of private sector, reducing the role of public in PSUs, encouraging open trade environment and increasing public expenditure in infrastructure. The growth seems to be V-shape rather than any other from the bowl because the K-Shape is not just the shape of recovery but a hard pill to swallow where government is not speaking about the rights of small players. The V-shape that indicates a quick down and up approach is also not very easy to come and pick a speed towards the upwards direction. It needs right resource (stimulus) injected in the right part (where the economy need the most to revive) from the right people (experts) at the right time. The economy will revive at a pace of mostly 5-7% in the next fiscal year but what we need to fed the non-agricultural youth is a steady and substantial growth of 8% (suggested by experts) from the year 2022-23 and so on.
• Indian economy is heading for a K-shaped recovery and it won’t be a pretty sight. (2020, September 5). ThePrint. https://theprint.in/opinion/indian-economy-is-heading-for-a-k shaped-recovery-and-it-wont-be-a-pretty-sight/496170/
• India’s economy could yet avert an L-shaped curve from here on. (2020, September 8). mint. https://www.livemint.com/opinion/online-views/india-s-economy-could-yet-avert an-l-shaped-curve-from-here-on-11599573656562.html
• Iyer, A. (2020, September 14). Contracting GDP calls for reforms, large asset sales. mint. https://www.livemint.com/market/mark-to-market/contracting-gdp-calls-for reforms-large-asset-sales-11600043081384.html