The recent assessments from the Nomura India Normalization Index (NINI) have demonstrated the impact of Covid-19 on the Indian Economy. It’s also highlighted a unique K-Shaped Recovery process through which the economy is reviving. Nomura Services India Private Limited, a consumer services company, reported these readings.
Effects of Covid-19 on Different Socio-economic Classes
Covid-19 has had variable impacts on different household income levels in India. Higher-income households managed to maintain their earnings and even increase their savings due to the lockdown. In comparison, low-income households experienced permanent job and income losses.
Impacts of the Current Monetary Policy
An ongoing period of ultra-accommodative monetary policy led to a decrease in real lending rates for both corporates and households. These reduced rates and spreads will eventually offer belated relief to the sectors sensitive to interest rates.
The Role of Vaccination in Sectoral Recovery
Sectors that were particularly affected by the pandemic such as travel, tourism, and hospitality are expected to witness recovery as Covid-19 vaccinations progress.
Economic Recovery after Covid-19
The fiscal deficit in Financial Year 2020-21 has approximately doubled to 7% of GDP compared to the pre-pandemic target of 3.5% of GDP. The government might turn to higher fuel taxes, disinvestment, and sin taxes to bolster its income.
India is currently experiencing a K-shaped recovery. Larger firms and wealthier households with stronger balance sheets have recovered more robustly. Meanwhile, smaller businesses and poorer households remain caught in a cycle of poverty and debt triggered by the pandemic.
Understanding Economic Recovery
Economic recovery is the stage after a recession, marked by a sustained period of improving business activity. During this phase, there is typically GDP growth, increased incomes, and reduced unemployment.
Recovery can manifest in several forms, depicted through various alphabets such as Z, V, U, W, L, and K-shaped recovery. A K-shaped recovery denotes different parts of the economy recovering at different speeds, times, or magnitudes.
Implications of a K-Shaped Recovery
In a K-shaped recovery, bottom-tier households experience permanent income setbacks due to job and wage cuts, leading to a persistent drag on demand until the labour market recovers. The pandemic has also shifted income from the poor to the rich, reducing demand as the poor, with higher marginal propensity to consume, have less to spend. Increased competition or income inequalities could constrain growth in developing economies by dampening productivity and tightening political economy constraints.
The Way Forward
Given the K-shaped recovery and the emergence of the “pandemic poor”, budgets for subsidies, employment generation, rural development, and other social sector programs will likely remain substantial. The cost of vaccination will add to these expenses. The government must concentrate on capital spending to minimize potential growth damage.
