K-Shaped Recovery

Syllabus: GS-III

Subject: Indian Economy

Topic: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

 Why in the news?

SBI’s Economic Research Department published a report debunking notions of a K-shaped post-pandemic recovery.

 What is economic recovery?

Economic recovery refers to the phase of the business cycle following a recession where the overall economic activity begins to improve and move towards expansion.

Key characteristics of an economic recovery:

• Increased Gross Domestic Product (GDP)
• Rising incomes and consumption
• Decreasing unemployment
• Stabilized financial markets

There are different ways to categorize economic recoveries, but one common way is by their shape on a graph.

Types of economic recovery

K-shaped recovery

A K-shaped recovery refers to a scenario where different segments of an economy recover at different speeds, following a slowdown or recession.

The term prominence in 2020 and 2021 in the wake economic slowdown accompanied with the COVID-19 pandemic all over the world.

The letter “K”, with one arm going up and the other going down is the visual representation of this phenomenon.

Economists have pointed to the aftermath of the economic fallout due to the pandemic as resulting in a K-shaped recovery.

The technology sector, including software services remained fairly robust amid work-at-home measures, teleconferencing, and lockdowns that kept people online and streaming.

Likewise, parts of the health-care sector that worked on vaccines and treatments saw a boost.

Meanwhile, service-based industries such as restaurants, travel, and hospitality took a hit.

 Factors that contribute to a K-shaped recovery

1. Structural inequalities:
   1. Pre-existing disparities: Existing inequalities in wealth, income, education, and access to technology can be exacerbated by a recession.
   2. Sectoral differences: Different sectors of the economy are typically hit harder or recover faster than others during a recession. Industries like technology, healthcare, and e-commerce often see stronger growth during economic downturns, while sectors like hospitality, tourism, and retail might suffer due to reduced demand and restrictions.
2. Policy responses:
   1. Uneven stimulus measures: Government policies like fiscal and monetary packages might not equally benefit all sectors and groups.
   2. Digital divide: Unequal access to technology and digital infrastructure can create a divide during economic downturns.
3. Technological advancements:
   1. Automation and AI: Rapid technological advancements, especially in automation and artificial intelligence, can displace low-skilled workers in certain sectors.
   2. Platform economy: The rise of the gig economy and platform-based work can offer flexibility but also bring instability and lower wages compared to traditional employment.

K-shaped Recovery in India post pandemic

Some economists, including former Reserve Bank of India governor Raghuram Rajan, have described India’s post-pandemic economic expansion as K-shaped.

Evidence for a K-shaped recovery:

1. Disparate sectoral performance:
   1. Thriving sectors: IT, pharmaceuticals, e-commerce witnessed significant growth driven by increased demand and digital adoption.
   2. Struggling sectors: Hospitality, tourism, and retail suffered due to lockdowns and travel restrictions.
2. Uneven income distribution:
   21. Rising high-income earners: The richest 20% saw their annual household income grow by 39% in 2020-21.
   22. Falling low-income earners: Annual income of the poorest 20% of Indian households plunged 53% in the pandemic year 2020-21 from their levels in 2015-16, as per survey conducted by People’s Research on India’s Consumer Economy (PRICE), a Mumbai- based think-tank.
3. Slowdown in private investment: Private capital expenditure remained sluggish, indicating businesses remain cautious due to factors like economic uncertainty and high interest rates.

However, the report published by the Economic Research Department of SBI asserts that the repeated use of the phrase K-shaped recovery is “flawed, prejudiced and ill-concocted“.

SBI Report Highlights:

1. Income inequality captured through the Gini Coefficient of taxable income has declined significantly from 0.472 to 0.402 during FY14-FY22.
2. 3 percent of taxpayers moved from the lower income tax bucket to the higher income tax bucket, resulting in 21.3 per cent more income.
3. The report also said that through MSME value chain integration, 19.5 per cent of small enterprises have transformed into larger firms, and consumption of the lowest 90 per cent of the population has increased by Rs 8.2 lakh crore since the epidemic.
4. GDP is projected to grow around5-8% in FY24, highlighting robust overall economic activity despite sectoral inequalities.
5. Schemes like PM Garib Kalyan Yojana and Ayushman Bharat aim to support vulnerable sections, potentially mitigating the pandemic’s worst effects.
6. According to the report, post-pandemic, households are reconfiguring their savings towards physical assets, including real estate.

However, economists criticize the report for using income tax indicator which only a minuscule percentage of people pay for drawing inequality conclusions.

Conclusion: While there is evidence of unevenness in the Indian recovery, with some sectors and groups significantly outperforming others, it’s difficult to definitively label it a full-blown K-shaped recovery. Strong overall GDP growth and government intervention suggest a broader economic rebound underway. However, addressing income inequality and supporting lagging sectors remain crucial to ensure a more inclusive and sustainable recovery.