How is the Indian economy doing right now? What is the state of its recovery? What is the shape of this recovery? These are questions that are hard to answer with any certainty even in the best of times. And in these uncertain times where the economies world over are recovering from a crippling pandemic, feeling the impact of a debilitating Russia-Ukraine war, reeling under the actions of the US Fed’s rate hikes, and raging inflation, these questions become even harder to answer.
Among the more fancy ways of explaining the economy’s recovery is through an alphabet — V-shaped, W-shaped, U-shaped or K-shaped. The Indian economy’s recovery of late has been likened to that of the alphabet ‘K’.
Now before dissecting what these alphabets signify, it must be said that there is nothing sacrosanct about the use of these alphabets — they are mere approximations that give a brief idea about how the recovery roughly looks like and what that means for future prospects of the economy.
Now what exactly does a K-shaped recovery signify? It tells us that some segments of the economy are doing well and some are lagging. So the larger message here is that the recovery is patchy or uneven and even unequal. Some people are doing well or even prospering while some people are obviously in distress or even slipping down.
Now for policy-makers, this gives a glimpse of which sectors are prospering and which are lagging and more importantly what needs to be done from a policy perspective.
Back in January, when the country was in the grips of the Omicron wave, Raghuram Rajan, Professor at University of Chicago, and former RBI Governor, had warned the government of a K-shaped recovery. He had then said in an interview with PTI that the Indian economy had “some bright spots and a number of very dark stains”. He urged the government to do more to prevent a K-shaped recovery from occurring.
According to him, the bright spots were the good performance of the large firms and the IT and IteS sectors. The number of unicorns was also a sign of some segments doing well. (Though since then the mood has darkened in the start-up space with big layoffs even in some of the storied unicorns.)
The dark stains, Rajan said, were in the struggling small businesses, growing unemployment and tepid credit growth. Though bank credit growth has perked up since.
The festival season in India, which usually includes Onam, Navaratri and Deepawali, sees a spike in consumer spending, which boosts the bottomlines of consumer-serving industries that includes retail, white goods, consumer electronics, textiles, jewellery, two-wheelers and cars.
Some media reports of festival spending spike have enthused analysts and investors about the prospects of the economy. Jewellery demand this time was at 146 tonnes, which is above the pre-pandemic level. Demand for two-wheelers and SUVs too has seen a rise. Bank retail credit has grown by a robust 19.6 per cent in September, the highest print in many months.
But this positive news again being seen as evidence of a K-shaped recovery with the economically better-off consumers leading a spending splurge, while the economically under-privileged having to tighten their belts.
So clearly the recovery has been skewed, with some segments doing well and others struggling. From the policy perspective, the government should continue welfare schemes for the poor and also allocate more funds to job guarantee scheme MGNREGA where the rural folk get jobs on demand.
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So what are the near- and long-term prospects for the Indian economy? The opinion is not surprisingly divided among economists and analysts. Kaushik Basu, Professor at Cornell University and former Chief Economic Advisor, in a recent newspaper column flagged off a couple of serious concerns over the economy — jobs and anemic private investments.
Basu argues that during India’s growth spurt, between 2003-04 and 2010-11, the investment as a proportion of GDP was close to 40 per cent, a rate close to the East Asian economies. But since then the investment rate has been steadily falling, touching 32.2 per cent in 2019-20. His suggestion is to shift the policy focus to small businesses, farmers and workers and for the short term at least focus on direct income transfers.
At the other end, economists such as Surjit Bhalla of IMF and Chetan Ahya of Morgan Stanley take a more sanguine view of India’s medium-term prospects. Ahya in a recent Financial Times column says India is poised to become globally the third largest economy by 2027 with the GDP more than doubling in 10 years.
He is more optimistic about the government’s PLI scheme, the potential of India tapping the opportunities of China+1 (where global manufacturing firms are looking to relocate from China and derisk their supply lines), and the youth bulge or demographic dividend.
Bhalla too, in a recent column, takes an optimistic view, arguing that India’s per capita income growth will be the highest among the G20 economies in the 2022-27 period. He also quite hearteningly debunks the view, fashionable among sections of the Indian intelligentsia, that democracy is holding back India’s growth potential.
So what are the Indian economy’s prospects? The conclusion one can draw from these contrasting views is that though India’s medium- and long-term prospects look promising, short-term pain still persists, which will require immediate policy attention.