Early in the crisis, many analysts talked of a V-shaped recovery. Now, it is becoming increasingly clear that we’ll be in a prolonged slowdown.
The economic recovery trajectory after a recession, when plotted in a graph assumes different shapes. These shapes (GDP plotted in a graph) are denoted using different alphabets or shapes that they resemble- U, V, W, L, Z, or swoosh?
Before we discuss the shape of India’s economic recovery curve, let us look at the different possibilities-
- Z-shaped recovery: It is the most optimistic scenario. The economy bounces back quickly after an economic slowdown due to pent-up demand. This happens when the slowdown doesn’t affect the income levels of the people and the demand for goods and services is simply delayed until the pandemic subsides. The absolute GDP over-shoots the trend line for a while and settles for the trend eventually. This shape indicates that the effects of the pandemic will not last long.
- V-shaped recovery: It is the second-best scenario. The economic returns quickly to the pre-pandemic trend line after a sharp downfall, but there is no temporary boom (like in the Z-curve). This is because the demand for goods and services is not delayed, but foregone. This happens when the effect on income is temporary. Example- China’s recovery. China was the first country to be affected by the Wuhan virus. It was successful in containing the spread of the virus and provided adequate fiscal support to the economy by putting money directly in the hands of the consumers. As a result, China’s GDP contracted by 6.8 % in Jan-Mar 2020 but grew by 3.2 % in April-June 2020. It points towards a sharp fall followed by a sharp recovery.
- U-shaped recovery: Unlike V-shaped, in this, though the GDP curve bounces bank to the pre-pandemic trend line, the recovery is slow. This is because of incomes being affected due to job losses. The Financial Crisis of 2008 in the US, which lasted 18 months followed by a slow recovery, was U-shaped. [You may also read: The Financial Crisis of 2008 explained]
- Swoosh-shaped recovery: It is shaped like the logo of Nike. It indicates a sharp drop followed by a long slow recovery.
- W-shaped recovery: This is when the economy bounces back quickly to fall into recession again. This could be when the countries that were successful in containing the virus gets affected by the second wave of infections.
- L-shaped recovery: This is the worst-case scenario. The economy fails to recover for years. There is a long period of low GDP. The Great Depression of the 1930s, which lasted 43 months with four straight years of negative GDP growth, was L-shaped. [You may also read: The Great Depression of the 1930s explained]
It is important to note that the economic recovery will depend on various factors- the length of the pandemic, the shape of the COVID infections curve, arrival of the vaccine, the fiscal stimulus provided by the Government, effect on incomes, etc
Coming back to the question of the economic recovery trajectory in India, we know that India was already experiencing a slowdown before the pandemic since the second quarter of 2018-19. [You may also read: What is the Reason for the Economic Slowdown in India?]. The pandemic hit India just when it was showing signs of revival and aggravated the situation. The GDP in the 4th quarter of 2019-20 was only 3.1 % (lockdown was imposed only in the third week of March). And, the SBI research report estimates a contraction of over 40% in the GDP in the 1st quarter of 2020-21.
As per Pronab Sen, former Chief Statistician of India, India’s absolute GDP is likely to struggle to even come back to the 2019-20 level (pre-pandemic level) by 2023-24.
This points towards an elongated ‘U’. India’s coronavirus infections haven’t peaked yet. Moreover, much of the Modi’s 20 crores economic package is in the form of loan guarantees (liquidity-driven). Unlike China, we have focussed less on putting money in the hands of consumers. So, fiscal support has been inadequate.
[You may also read: Modi’s 20 lakh crore Economic Package– Is it worth all the hype?]
India’s spending capacity is also limited due to rising debt levels as a percentage of GDP. Therefore, our recovery is likely to be extended.
[You may also read: Is lockdown the only way out of this pandemic?]
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