Contraction seen in Indian economy in the very first quarter of FY 20-21 has been remarked as “once in 150 years” event by Chief economic advisor KV Subramanian. When compared,the stringent lockdown was found to be 15 percent higher in India than in UK. India experienced a huge economic deadlock. Thus, contraction of 22 percent in UK’s GDP makes India’s 23.9 percent slump in economy somewhere on the expected lines as per the government officials.
The fluctuations in the components of GDP and its key indicators can be easily observed from the data given :
COMPONENTS OF GDP
Govt and CEA being too optimistic about the economic recovery have projected a V shaped recovery taking into consideration some of the other indicators which have shown some positive figures. However, there needs an analysis to be done to get more clarity of the rate of GDP growth. So here are some of the recovery shapes of an economy at a glance:
V SHAPED- SHARP DECLINE, QUICK RECOVERY
This is the most optimistic level of economic recovery that India might go through. It happens when there is quick rebound of the economy. The graph of our economic growth resembles V shape. The damage is less severe than others as occurred when US went through V shaped recession in 1953 with 2.2% decline in GDP which was back to normal by the fourth quarter of 1954.
After covid ,this can take place only if everything goes back to normal in near future which seems difficult as the current pandemic is still causing huge economic loss.
U SHAPED: EXTENDED PERIOD BETWEEN DECLINE AND RECOVERY
The recovery would take a shape of U if charted. The economy faces a decline and stays depressed for a longer time than V, then gradually picks up the growth.
If it happens, this would mean that there is a delay in recovering that could take few more months or quarters. It is different from V shaped as there is no immediate rebound, rather it tumbles around the bottom.
Recovery from 1900-91 has been a U shaped recovery which is also considered as jobless recovery as total employment couldn’t be regained by 1993.
Post covid, it might take a while for the business and consumption to come to same level as pre-crisis level. In this case the economic activities are brought to a halt and experience the downfall for an extended time before the rebound.
W SHAPED: QUICK RECOVERY BUT SECOND DIP
In this case, economy begins to recover quickly as in V shaped but falls again and then rising once more after a fake recovery, experiencing a double dip recession. The rebound that occurred twice in an economy justifies the shape W. Take the second oil crisis in 1980 as an example. US faced a W shaped recession. After growing gradually, high interest rates made the situation worse and economy dipped again.
There are possibilities that Indian economy might face the double recession. As the economy reopens, there are chances that it starts to grow initially but the increasing number of covid cases, till the vaccine isn’t available, might create such circumstances that may lead to a sharp decline again.
L SHAPED RECESSION: MASSIVE DOWNTURN
If the situation gets worse and worse, L-shaped recovery would come into the picture. Here is a steep downfall which remains for several years even after official recession has ended. It is often called depression. It takes many years for a country to recover and face continuous stagnation for a longer period. Example can be taken from economic history of Japan which is also called Japan’s lost decade in 1990. It failed to recover from crash even in 10 years. From 1991 -2001 it experienced a period of price deflation and stagnation suffering from both credit crunch and liquidity trap.
Well economists and analysts are hopeful about India’s recovery, so L-shaped recession isn’t the matter of concern.
As we analyzed the ABCs of economic recovery, it can be interpreted that they are based on certain assumptions. For a V shaped recovery, it is assumed that everything which has come to a standstill during the pandemic will be reopened soon. The production, consumption, travel and tourism which had been kept shuttered for a while would start to recover immediately. People would begin to visit bars and restaurants as soon as economic activities are continued. But it is hardly possible that people will regain confidence by carrying out massive production and consumption before the vaccine arrives. It would be a wild assumption amidst the increasing no of cases. Behavioral change can’t be expected suddenly. Hence, it would take some time for the economy to return to the position of pre-covid period.
The shape of economic recovery is determined by the growth rate of GDP which is dependent on many factors like monetary and fiscal policies, private – consumption expenditure, public confidence and sentiments
As the major engine that drives the GDP of India is private consumption from individuals which accounts for 56.4 percent of the GDP. Many economists have argued that V shaped recovery can’t be achieved without stimulating the private consumption. As of now, our consumption is restricted to essential components and with no major provision to boost the demand in the economic stimulus, it is somewhat difficult to expect a V shaped recovery.
Recently, former RBI governor, Raghuram Rajan has quoted the figures of the two most covid affected advanced economies of the world, namely, Italy and US where the drop in GDP has been calculated as 12.4% and 9.5% respectively. The 23.9% contraction in India indicates that spending and employment will remain low till the virus is not contained which doesn’t seem plausible in the near future. Even if the govt is projecting a V shape recovery, it is more likely that India may witness a U or W shaped recovery post covid.