V-shaped Growth Recovery | A reality check

The Global Economic Prospects (2021) published by the World Bank have provided a comprehensive analysis of the economic growth patterns during the post Covid-19 pandemic period. The analysis gave four different scenarios for the evolution of growth, namely, (i) baseline, (ii) downside, (iii) severe downside and (iv) upside. The variation in the growth pattern is based upon the assumptions such as Covid-19 caseloads, roll out of vaccination, social distancing measures by the households, the effectiveness of the pandemic-control policies of the governments, and financial market stress built primarily in the Susceptible-Infected-Recovered (SIR) model.

The report cautioned by saying that “unless there are substantial and effective reforms, the global economy is heading for a decade of disappointing growth outcomes as the pandemic is expected to leave long-lasting adverse effects on global economic activity and per capita incomes”. It highlighted that “the pandemic has had a devastating impact on South Asia (SAR), leading to an estimated 6.7% output contraction in 2020”. However, it noted that overall the SAR has “less total cases on a per capita basis than other emerging market and developing economies (EMDEs) and advanced economies”.

Set in this backdrop, it is necessary to examine the claims of the Union government’s forecast about the V-shaped growth recovery pattern. The Economic Survey 2020-21 states that since March-April, 2020 “several high frequency indicators have demonstrated a V-shaped recovery”. The basic idea behind the V-shaped recession is a sharp decline followed by a quick revival of growth.

The correlation between the growth rates in two consecutive phases of economic activities is depends upon whether it is for “expansion and subsequent recession” or for “recession and subsequent expansion” was developed on the basis of Milton Friedman’s “plucking model”. According to this model, the strength of economic recovery is related to the severity of the recession; after reaching a more mature phase and the economy is uncorrelated with the severity of the preceding recession.

Let us apply this model to the India’s growth trajectory to ascertain the recovery pattern and its trend in the short and long run. The Survey has mentioned that the V-shaped recovery can be traced on the basis of the performance of the high frequency indicators such as power demand, E-way bills, GST collection, steel consumption, etc. It is a fact that the increase in power demand reflects the signs for the kick start of various business activities in this particular sector.

However, this model is insufficient to capture the inter and intra sectoral variations within a given sector. To illustrate, agriculture is projected as a silver lining even during the crisis time; the fact is that most of the agricultural labourers have lost the livelihood thereby affecting the sectoral growth contribution to the GDP. The supply chain disruptions caused in the agriculture has contributed food inflation.

The payment of ebills, GST collection indicators do not reflect the real picture of the variables such as consumption, income and wages of households. It is a well-known fact that, India is an informal led economy with more than 90% of workers are employed in the unorgansied sectors. The high frequency indicators that were used to project the V shaped recovery has failed in totally accounting the impact of the Covid on the informal sector. A robust estimation of the loss accrued to the informal sector would have been provided a somewhat realistic estimation so as to enable the government to come up with related public policies.

Services sector

The services sector, which accounts for 54% of the economy, is yet to attain the Q3 level of pre-Covid situation. According to the Action Aid India data, the unemployment rate within the services sector rose to 76.32% from 72.72% during post and pre lockdown periods, respectively. The hotels and restaurants, transport and storage sectors have faced the biggest losses along with tourism. Most of the workers in these sectors have lost jobs and still searching or not joined the workforce even in the month of December 2020.

The rise in prices of essential commodities during the lockdown and the aftermath of the same have not come down implying the constraints of consumer demand. The levels of consumption have just begun showing an increasing and an optimistic trend. However, it will be too early to forecast the sustainability of the same in the wake of non-return of the large number of informal workers to the cities.

The private investments and the household consumption are not showing real recovery trends. To increase the levels of consumption and demand for non-essential goods, there is a need for appropriate policy measures. An Urban Employment Guarantee Scheme along with the Universal Basic Income (UBI) for targeted groups, especially informal workers on a pilot basis might be starters to increase the purchasing power of the individuals. These steps will infuse the confidence among the workforce to join the labour market and positively promote a conducive ecosystem to revive the economic growth.

The foregoing analysis indicates that the macro economic variables and the sectoral performances have not yet reached a mature phase. The recovery shown by the high frequency indicators reflects the nascent phase and requires some more time to validate the said the recovery growth pattern. It must be noted that only larger firms are showing the signs of quick revival while others are pretty much sluggish in terms of recovery. The formal sectors are coming back on the track though slowly and steadily; this need to be supplemented by the robust economic policies to uplift the informal sector too.

Until and unless this is being done along with effective implementation of the Covid vaccination programme, assuming the V-shaped growth recovery, though desirable, but remains distantly realistic as the Covid recession has left a severe and deep impact on the economy. The rise in the debt to GDP ratio is a cause of concern.There is a need to create the necessary secured environment for the private investments by removing the uncertainties around the same.

(The writer is PhD Fellow & Guest Faculty, Institute for Social and Economic Change, and University Law College, Bangalore University)