March 1, 2024
Understanding the V-Shaped and K-Shaped Economic Models: India's K-Shaped Recovery

Understanding the V-Shaped and K-Shaped Economic Models: India’s K-Shaped Recovery

The global economy is constantly fluctuating and is subject to various economic cycles. One of the most crucial cycles is the recession and recovery cycle. The way an economy recovers after a recession can have a significant impact on businesses, industries, and individuals. Two models that are commonly used to describe the recovery of an economy after a recession are the V-shaped economic model and the K-shaped economic model. In this article, we will delve into the details of these models, understand their implications, and explore examples of each model in action.

The V-shaped economic model and the K-shaped economic model are two different ways to describe the recovery of an economy after a recession.

The V-shaped economic model describes a rapid and strong recovery where the economy quickly bounces back to its pre-recession level. This type of recovery is characterized by a rapid decline in the recession followed by a rapid rebound, creating the shape of a “V” on a graph. An example of a V-shaped recovery is the recovery that occurred following the 1990-1991 recession. The recession was mild and short-lived, and the economy quickly rebounded and returned to its pre-recession level.

The K-shaped economic model describes a recovery where different segments of the population or different industries experience different levels of recovery. This type of recovery is characterized by some segments of the economy experiencing a rapid and strong recovery while others experience a slower or weaker recovery, creating the shape of a “K” on a graph. An example of a K-shaped recovery is the recovery that occurred following the 2008-2009 Great Recession. While some sectors such as technology and e-commerce experienced rapid growth, other sectors such as brick-and-mortar retail and the oil industry struggled to recover. Additionally, certain groups of people such as the highly educated and high-income earners saw a strong recovery while others such as low-income workers and people of colour experienced a weaker recovery.

It’s worth noting that these models are not mutually exclusive and real-world recoveries often exhibit elements of both. Additionally, the shape of the recovery can be affected by various factors such as government policies, global economic conditions, and the nature of the recession itself. For example, the COVID-19 pandemic has led to a recession that is different from previous ones, and it is yet to be seen if it will lead to a V-shaped recovery or a K-shaped recovery.

 

India’s K-Shaped Recovery.

  1. A report by CRISIL indicates that in 2021, two-wheeler sales are set to decline by 3%-6% year-over-year. This is significant as two-wheelers represent the economic situation of the lower and middle-class groups and India’s small businesses.
  2. The government’s maintenance of indirect taxes on fuel and consumer products while lowering corporate taxes and the recent increase of taxes on textile products from 5% to 12% has led to a sustained loss in disposable income.
  3. Over 50 lakh people lost their jobs in October 2021, according to a Centre for Monitoring Indian Economy (CMIE) report. Many of those who lost their jobs during this period is likely economically insecure and abstain from non-essential purchases.
  4. High food and fuel prices, coupled with job losses, deliver a deadly blow pushing families to poverty.
  5. The government of India had cut its budget allocation towards MGNREGA by 34% in 2021-2022, which is a greater demand now for MGNREGA jobs than in the pre-COVID-19 era.
  6. Lower Budget allocation accounts for the inability to compensate workers on time and fairly. A portion of the budget this year is spent on paying the liabilities for the previous financial year. Those looking for MGNREGA work cannot afford to be unpaid for such long durations.
  7. The recovery in the stock market and other financial assets has been phenomenal, but less than 5% of India invests in equities, which means that less than 5% of India directly benefited from said recovery.
  8. Given the worrying situation of lower-income households, it is crucial that the Government works towards aiding the middle and lower-middle class by increasing progressive taxes and reducing regressive taxes to ease the financial pressure on lower-income households.
  9. Government should consider implementing social welfare schemes to assist households to get through this period.
  10. There is a direct relation between the money multiplier and the government stimulus and economic growth. It is more important to prioritize those who are more likely to spend (the middle and lower-middle-class) rather than those who have a greater propensity to save.

Based on the analysis provided, some suggestions for addressing the issues outlined in the report include:

  1. Implement stimulus measures targeted towards lower and middle-class households, such as unemployment benefits and social welfare schemes, to help them weather the economic downturn caused by the COVID-19 pandemic.
  2. Reducing indirect taxes on consumer goods and increasing progressive taxes on higher-income households to ease the financial pressure on lower-income households.
  3. Increasing budget allocation towards MGNREGA to ensure that workers are compensated in a timely and fair manner, and to address the greater demand for MGNREGA jobs during this period.
  4. Encouraging investment in equities and other financial assets through education and other means to increase the number of people who directly benefit from the recovery in the stock market.
  5. Implementing policies to increase job creation in the formal sector, such as tax incentives for businesses that hire more workers or invest in sectors that are more labour-intensive.
  6. Encouraging research and development in the field of new technologies to increase the productivity of the economy and create new jobs.
  7. Encouraging small and medium enterprises through various means such as providing easy access to funding, reducing compliance burden and providing subsidies.
  8. Improving the education system to increase the employability of the youth.
  9. It’s important to note that these are just some suggestions and a more detailed analysis would be required to craft a more comprehensive policy response.

 Conclusion:

In conclusion, the V-shaped and K-shaped economic models are two different ways to describe the recovery of an economy after a recession. The V-shaped model describes a rapid and strong recovery where the economy quickly bounces back to its pre-recession level, while the K-shaped model describes a recovery where different segments of the population or different industries experience different levels of recovery. Real-world recoveries often exhibit elements of both models, and the shape of the recovery can be affected by various factors such as government policies, global economic conditions, and the nature of the recession itself. Understanding these models can help businesses and individuals prepare for and navigate the recovery process.

The report by CRISIL indicates that in 2021, two-wheeler sales are set to decline by 3%-6% year-over-year, which is a significant indicator of the economic situation of the lower and middle-class groups and India’s small businesses. The government’s maintenance of indirect taxes on fuel and consumer products while lowering corporate taxes and the recent increase of taxes on textile products from 5% to 12% has led to a sustained loss in disposable income. Additionally, a CMIE report states that over 50 lakh people lost their jobs in October, and the government’s cut in budget allocation towards MGNREGA by 34% in 2021-2022 has led to a greater demand for MGNREGA jobs than in the pre-COVID-19 era. The recovery in the stock market and other financial assets has been phenomenal, but less than 5% of India invests in equities, which means that less than 5% of India directly benefited from said recovery. The government should work towards aiding the middle and lower-middle class by increasing progressive taxes and reducing regressive taxes to ease the financial pressure on lower-income households. Government should also consider implementing social welfare schemes to assist households to get through this period to achieve a more inclusive and equitable recovery.

 

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