Indian economy recovery

  • August 2, 2021
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Indian economy recovery

Subject: Economy

In news: The Indian economy is in a vicious cycle of low growth and higher inflation.

1. Economic Recovery

  • It is the business cycle stage following a recession that is characterized by a sustained period of improving business activity.
  • Normally, during an economic recovery, GDP grows, incomes rise, and unemployment falls and as the economy rebounds.
  • India is going through a K-shaped recovery, wherein corporates and households with stronger balance sheets have recovered more robustly, while smaller firms and poorer households probably remain trapped in a vicious cycle of poverty and indebtedness instigated by the pandemic.

2. Types of Economic Recovery:

Economic recovery can take many forms, which is depicted using alphabetic notations. For example, a Z-shaped recovery, V-shaped recovery, U-shaped recovery, elongated U-shaped recovery, W-shaped recovery, L-shaped recovery and K-shaped recovery.

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.

Z-shaped recovery: 

  • It is the most-optimistic scenario in which the economy quickly rises after an economic crash.
  • In this economic disruption lasts for a small period wherein more than people’s incomes, it is their ability to spend is restricted.

V-shaped recovery:

  • It is the next-best scenario after Z-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
  • In this, incomes and jobs are not permanently lost, and the economic growth recovers sharply and returns to the path it was following before the disruption.

U-shaped recovery: It is a scenario in which the economy, after falling, struggles around a low growth rate for some time, before rising gradually to usual levels.

  • In this case several jobs are lost and people fall upon their savings.
  • If this process is more-long drawn than it throws up the “elongated U” shape.

W-shaped recovery: A W-shaped recovery is a dangerous creature. In this, growth falls and rises, but falls again before recovering, thus forming a W-like chart.

  • The double-dip depicted by a W-shaped recovery can be due to the second wave of the pandemic.

L-shaped recovery: In this, the economy fails to regain the level of GDP even after years go by.

  • The shape shows that there is a permanent loss to the economy’s ability to produce.

Economic Growth & Base Effect:

  • India is suffering from stagnant growth to low growth in the last two quarters.
  • At best, any growth in the current quarter will be illusionary because it comes on top of substantial negative growth in the first quarter of last year, perpetuating a statistical phenomenon known as the “low base effect”.
  • The base effect is the effect that choosing a different reference point for a comparison between two data points can have on the result of the comparison.
  • Base Effect refers to the impact of an increase in the price level (i.e. previous year’s inflation) over the corresponding rise in price levels in the current year (i.e., current inflation).
  • The base effect states that when measuring YoY, or year- over-year growth, we take the previous year’s numbers as the base and measure the growth as a percentage. As in the low initial base set by last year, almost any growth this year is seen as a significant growth percentage. In comparison, the absolute growth figure is negligible.
  • The base effect can lead to distortion in comparisons and deceptive results.

 Inflation & its causes in current scenario:

  • Inflation:
    • Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
    • Inflation measures the average price change in a basket of commodities and services over time.
    • Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
    • However, a moderate level of inflation is required in the economy to ensure that production is promoted.
  • Current causes: 
    • Inflation in India is being imported through a combination of high commodity prices and high asset price inflation caused by ultra loose monetary policy followed across the globe.
    • Foreign portfolio investors have directed a portion of the liquidity towards our markets. Compared to a developed capital market such as that of the U.S., India has a relatively low market capitalisation. It, therefore, cannot absorb the enormous capital inflow without asset prices inflating.
    • Additionally, supply chain bottlenecks have contributed to inflation. Essential goods have increased in cost due to scarce supply because of these bottlenecks caused by COVID-19 and its reactionary measures enforced.
    • India’s taxation policy on fuel has made things worse. Rising fuel prices percolate into the economy by increasing costs for transport. Furthermore, the increase in fuel prices will also lead to a rise in wages demanded as the monthly expense of the general public increases. This leads to the dangerous cycle of inflation and depleting growth.
    • Other Causes:
      • Due to fiscal stimulus.
      • Depreciation of rupee.
      • Low unemployment rate.
      • Increase in price of inputs.
      • Hoarding and Speculation of commodities.

Minsky moment:

  • Our small and medium scale sector is facing a Minsky moment.
  • The Minsky moment, coined by the economist Hyman Minsky, states that every credit cycle has three distinct stages.
    • The first stage is that of cautious lending and risk aversion by the bankers.
    • The second stage is lending to trustworthy debtors who can pay the principal and its interest.
    • The third stage is a state of euphoria caused by rising asset prices where bankers lend to debtors regardless of their ability to pay back interest, let alone the principal.
  • The Minsky moment marks the decline of asset prices, causing mass panic and the inability of debtors to pay their interest and principal.
economy Indian economy recovery