India is witnessing a K-shaped recovery instead of a V-shaped recovery that we had hoped for earlier. Most optimistic thinkers in India were hoping for a V-shaped recovery. V-shaped recovery simply means that there is a decline in economic activity, but after some time, it goes back to the original pace, which is an ideal V-shaped recovery. However, India instead of witnessing a V-shaped recovery is seeing a K shaped recovery.
What exactly do we mean by a K-shaped recovery?
In simple terms, K-shaped recovery means that the economy is getting back on track. However, different sectors of the economy are expanding at different rates. Some sectors are getting back on track at their original pace, while some other sectors are not doing that well. We have a lot of examples to highlight this point and also tell where exactly is the government lacking.
The government’s taxation policy.
The government’s taxation policy is still regressive in nature.
Now, what do we mean by regressive taxation policy?
See, there are two types of taxation. First, direct taxes and second, indirect taxes. Direct taxes are the ones that you directly pay to the government like your income tax, your corporate tax. Indirect taxes are the ones that you pay to an intermediary. For example, when you go and buy a biscuit of $5, may be out of those $5, $4 are going to the company’s account and $1, the company has to transfer to the government that is called an indirect tax that you pay to the company, and the company will then pay to the government of India.
Now, ideally, a taxation policy of the government should be as such that indirect taxes should be low and direct taxes should be higher. Why?
Because direct taxes are usually proportional to your income. The more you earn, the more direct taxes you pay. So the richer you are, the more direct tax you will pay. Indirect taxes, on the other hand, are problematic because they impact poor people more. Why?
Because if you buy a biscuit, a poor person buys a biscuit, or if the richest person in India buys a biscuit, all of us are paying the same tax. Indirect taxes are not related to your income level. That is why a taxation system where indirect taxes are more is called a regressive system that should be changed. So the Indian government must change its taxation policy and focus more on collecting direct taxes rather than indirect taxes.
The economy has shown very clear signs, highlighting that the poor people have been impacted the most by this pandemic. For example, the two-wheeler sales in India are a very good indication of the purchasing power of the middle class in India. The two-wheeler sales in India have declined by 3–6% this year as compared to the last year. Although last year, when we were in the pandemic, the pace was much lower. But this year, the number of sales of two-wheelers are even lower as compared to the last year. Interestingly, the sales of high-end premium cars and expensive motorcycles have not declined, which indicates that the rich people are still affording things that only they can, while the poor people and the middle class are not being able to afford things which they usually buy.
The government has also increased taxes on products that are used by a lot of people around the country. For example, the government recently increased the GST on textile products from 5% to 12%, which again is an indication that indirect taxes are increasing, which will hurt the poor people and the lower middle class even more. There are official government data that suggests that over 50 lakh people lost their jobs in October. Apart from the loss of income, these people also have to tackle the high food prices, high fuel prices and increasing medical expenditure due to the flu and dengue season.
A lot of these people who have lost their jobs are migratory workers who would have come to cities in search of jobs from the villages. When they lose their jobs, most of them go back to the village knowing that they at least have an option to work under the MGNREGA scheme. However, the budget allocation under the MGNREGA scheme has also been cut down by the government. In the year 2021–2022, the government of India’s budget allocation towards MGNREGA was cut by one third. That means the government will not be able to pay the wages for MGNREGA workers on time, thus impacting them even more during the COVID 19 pandemic.
Thus India can learn from examples of developed nations such as the US and Europe, where unemployment checks were given to people by the government. In the US, everyone got a check of $1400 during the COVID 19 pandemic so that they can sustain themselves for their basic requirements. In India, that did not happen. The policy that the government adopted was to lower the corporate taxes, give more money to the hands of the industry, hoping that they would use that money to expand their business and then give more jobs to the people. But what happened was that the companies, when they had more money in their hand due to the reduction in taxes they kept the money in their account.
Rather than expanding their businesses, they kept the money with themselves and the benefit did not transfer to the middle class and the poor people. So it makes much greater sense to give money in the hands of those people who are likely to spend that money, rather than those people who are likely to save it. Because spending the money means the money is going back into the market, it’s changing hands and bringing more economic activity to the country. Many people also argue that despite the COVID pandemic, the stock market of India is reaching higher levels every single day. But they forget the fact that only 5% population of India is investing in the stock market.
So this avenue of making money is still largely restricted to a very small population in the country. Thus, the best way forward has to be for the government to focus more on direct taxes rather than indirect taxes, which hurt the poor people more.
Now, let’s try and understand how exactly does a K-shaped recovery look like?
So this is a graph that highlights a K-shaped recovery. When the COVID pandemic lockdowns were initiated, our economy took a downward jump, as with many other countries across the world. After that, when the markets started to open up, there was a resurgence in the market, however, after reaching a certain point that was far below the original level, there were some sectors that started growing at a much faster pace as compared to the other sector. This is what gives it a K-shaped that is there are some sectors that are back at the original level or even doing better than that like technology companies, white-collar jobs, but blue-collar jobs, small businesses, etc. are still to see that face, and for them, their recovery has seen even a worse downward trend.
Now, if you read the economists throughout the world, you will see that these are not the only two recoveries that they talk about like V-shaped, K-shaped. Apart from them, there are many other graphs that the Economist talk about. Let’s see what are those different types of graphs?
We have the L-shaped recovery, this is very dangerous. It means that the economy came down to a very low level and is going back up, but at a very, very, very slow pace. This happened in Japan in the 1990s. It takes almost a decade for the economy to come back to its original level.
Then we have the W shaped recovery. Essentially, W shaped recovery means there will be two dips in the market and not one. So the COVID 19 pandemic took the market here, it recovered, and then one more shock will be seen to take the market back to the lower level.
Then we have a U-shaped recovery. A U-shaped recovery simply means that we are not sure when exactly do we have the worst point in our economy. It is difficult to understand when the good time will start. You are here, you are assuming that good time will start, but keeps falling downwards. So U-shaped recovery means without any clear, lowest point. This usually is seen in cases of recession.
Then we had the Nike swoosh recovery. So Nike symbol, this is called swoosh. It indicates an economic sequence where there was a downfall, but the economy recovered very quickly.
Then we had the Z shaped recovery where the economy grew very fast but was not able to sustain, went back at the lower level and then again is going at a very fast pace. This is an example of an unstable economy where investors would like to avoid coming into the market.
Then we have a square root shaped recovery where the market fell down, it tried to come up, but it has reached a middle level and then it has stagnated over here, so it will not reach the original level again. It is just at the middle level and it is happy being at that level.