Pointers that India is witnessing a K-shaped recovery

News: There have been talks about a V-shaped recovery for quite a while, ever since the first lockdown following the novel coronavirus pandemic.

Though, India is on a recovery path, but it can’t be classified as a V-shaped recovery because the pandemic has had an uneven impact on different socio-economic groups.

The recovery we see today is more K-shaped than V-shaped with some groups and industries recovering much more rapidly than others.

What are some indications of a K-Shaped recovery in India?

Decline in two-wheeler sales: The sales of two-wheelers are the second-lowest it has been in seven years. Two-wheelers represent the economic situation of the lower and middle-class groups and India’s small businesses.

What are the reasons behind India’s K-Shaped recovery?

Sustained loss in disposable income due to the taxation policy of government: Government taxation policies continue to be regressive, with increased indirect taxes and lower direct taxes placing greater tax burden on the poor. While inflation increased, the incomes of the middle and lower-middle-class have remained constant.

Lower Budget allocation accounts for MGNREGA tends to increase the pressure on unemployment figures: MGNREGA acts as an alternative employment source for the informal sector at the time of distressed economy.

However, the Government of India had cut its budget allocation towards MGNREGA by 34% for 2021-2022 when there is a greater demand now for MGNREGA jobs.

Further, the lower Budget allocation accounts for the inability to compensate workers in time and fairly.

The recovery in the stock market and other such financial assets over the past year benefitted only a few sections of the population: Less than 5% of India invest in equities, which means that less than 5% of India directly benefited from said recovery. The lower middle class, which does not invest in such assets, has no protection against inflation.

Disproportional benefit of the asset price inflation favored the upper-middle-class and this further explains the inherent K-shape of the recovery.

What is the way forward?

The Government should address this phenomenon and works towards aiding the middle and lower-middle class.

First, Social welfare schemes must be given greater importance to assist households to get through this period. International examples from The U.S. and European economies can be a case point.

Second, Government should try to increase progressive (direct) taxes and reduce regressive (indirect) taxes to ease the financial pressure on lower-income households.

Source: This post is based on the article “Pointers that India is witnessing a K-shaped recovery” published in The Hindu on 25^th November 2021.