Heading for U- shaped recession

By Dr. Santosh Kumar Mohapatra*

The pandemic shuddered and quivered the world, dominated public discourse, and dissent. As the Covid second wave engulfs India, it is well understood that there can be no lasting end to the economic crisis without an end to the health crisis sparked by the corona pandemic. The future is already here, it is just not very evenly distributed. These memorable words, by William Ford Gibson, an American-Canadian speculative fiction writer and essayist, come to mind as I think about the course of the pandemic and consider what lies ahead.

As the IMF has warned, economic recoveries are diverging dangerously. The future can be scary.
Unknown viruses with wobbly governments, over-population, wars among some countries,
starvation, penury, squalor, water shortages, environmental collapse are likely to exacerbate the situation. The disparities will enlarge further between wealthy countries that have extensive access to vaccines, diagnostics, and therapeutics, and poorer countries still struggling to inoculate frontline healthcare workers.

The economic costs of the pandemic have fallen most heavily on those least able to bear them. A
variety of scenarios has unfolded around the world, the differences attributable to a combination of activity, constraints, and sometimes luck. However, the patterns have been foreseeable for a while.

The resurgence of COVID-19 has dented but not debilitated economic activity as there was no
stringent lockdown like the first wave of the pandemic. When India will report gross domestic
product for January-March, the last quarter of the previous fiscal year, the data is unlikely to reflect the full impact of the record rise in virus cases and deaths, which has overburdened the nation’s ramshackle health infrastructure and led to provincial lockdowns.

According to QuantEco Research economist Yuvika Singhal, who downgraded her full-year growth forecast for this year by 150 basis points to 10%, the expectation of consumption snag looks more palpable now than last year. In India and in contrast to a V-shaped recovery, consumption redux could look more U-shaped this year. The RBI also said the impact of the second wave is appearing to be U-shaped with agriculture and technology forming the shoulders of the letter U and most
vulnerable being blue-collar groups and these will warrant a priority in policy interventions.
When the first wave got ebbed, there was debate over whether India is facing a V-shaped
recovery/recession or a K-shaped recovery. While the government machinery was speaking about V-shaped recovery, many economists were speaking about K-shaped recovery. Actually, whatever recovery is experienced was not V-shaped but K-shaped. Now, it is a U-shaped recession.

An economy will have its ups and downs in each phase and one stage can last considerably longer
than the other. Economic recoveries can follow different patterns. The type and speed of any
economic recovery are often categorized by the letters. The letter used to describe the ebbs and
flows of an economy follows the shape of the letter like Z V, U, W, K, and L.

The Z-shaped recovery is the most optimistic scenario in which the economy quickly rises like a
phoenix after a crash. A V-shaped recession and economic recovery are all about speed and
sharpness. The economy nose-dives or there can be a sharp contraction in the economy before it
experiences an equally sharp recovery to pre-recession levels.

This is treated as the second best-case scenario for any economy that enters a recession as it quickly recovers without any complications. A U-shaped recovery that resembles a bath tube sees an economy experiences a sharp fall into a recession like the V-shaped scenario, but a more gradual and slower recovery to pre-recession levels. This means the economy remains depressed for a longer period, possibly for several years, before growth starts to pick up again.

In the case of a W-shaped recovery where the economy is brought back up from its lows, the
economy crashes again before it finally sees a much healthier recovery. A double-dip recession is also known as a W-shaped recovery. A double-dip recession refers to a recession followed by a
short-lived recovery, followed by another recession. Markets are likely to be more volatile under a W-shaped recovery than other types of recoveries.

An L-shaped recession and recovery are seen as the worst-case scenario. Although the economy
returns to growth, it is at a much lower base than pre-recession levels, which means it takes much
longer to fully recover. This can happen if there are poor investment levels, low levels of economic growth, and a sluggish revival in employment. A J-shaped recession implies a steep drop in growth followed by a slow rebound over a long period of time; if the drop-off in growth occurs over two
quarters, the rebound in growth usually takes place over several years thereafter.

According to Singhal India’s second wave of virus, cases will hit the economy by prompting
consumers to save rather than spend, unlike last year’s contraction that was driven mainly by supply
disruptions. The economic drag from the pandemic in the current quarter will be dominated by demand destruction or deferment of expenditures.

Apart from a switch to precautionary savings as consumers become more risk-averse, Singhal also sees pent-up demand from last year’s lockdown fading and spending in rural areas slowing as the new wave spreads from urban. Pent-up demand describes a rapid increase in demand for a service or product, usually following a period of subdued spending. Consumers tend to hold off making
purchases during a recession, building up a backlog of demand that is unleashed when signs of a recovery emerge.

According to the Reserve Bank of India, the second wave of the COVID-19 pandemic in India has had a bigger impact on aggregate demand than on aggregate supply, and it believes the economic slowdown was not as severe as a year ago. It also says the second wave’s biggest hit has been to demand, with a loss of mobility, discretionary spending, and employment, besides inventory accumulation, while the aggregate supply is less impacted.

The central bank said despite seasonally adjusted month-on-month momentum in industrial
production being positive for the fourth consecutive month, anecdotal evidence points to feedback loops from the demand contraction seeping through into curtailments of output in the months ahead unless infections recede. However, the number of lives lost will have a far-reaching impact on the livelihoods of people for long periods which cannot be measured immediately.

According to Garima Kapoor, an economist with Elara Capital, though the gravity of the health crisis is severe than last year, the economic impact of this is likely to be far less subdued than we saw in the first wave. But of course, it does put questions on the ability of India to spring back quickly.

According to a State Bank of India Research, rising fuel prices have crowded out discretionary
household spending on items like health, grocery, and utility services, calling for an urgent cut in oil
prices through tax rationalisation. Consumers will feel the double pain of rising health expenditure and lower incomes in this financial year as the second wave of Covid-19 spreads across India. In aggregate terms, family health expenditure may increase by as much as Rs 66,000 crore, or 11% of their consumption expenditure, this year from 2019-20.

This is likely to also result in a crush in expenditure on other items of discretionary consumption, a recipe for a cutback in consumption spending. According to data from the Central Statistics Office
(CSO), an additional burden, income per capita fell by Rs 8,637 in 2020-21 from a year earlier,
causing further diversion from another discretionary spending to health. What is worrisome is that the share of non-discretionary spending jumped to 59% in April from 52% a month earlier and 84% in April and May last year.

The present problem is not simply problems of supply disruptions as observed by Yuvika Singhal the aggregate demand will hit due to decline in their incomes and erosion of purchasing power due to inflation and decline in jobs and rise nonemployment. The dreary employment conditions impact the recovery prospects of the Indian economy. According to the Centre for Monitoring Indian Economy
(CMIE), the unemployment rate has seen a sudden rise to a 49-week high of 14.45 percent in the week ending May 16 from 6.5 per cent in March.

In the past year, unemployment was the highest in May 2020 at 21.73 percent, when the country
was facing the wrath of the first coronavirus wave. In the second Covid-19 wave, the month of April turned out to be worse than expected when it came to jobs as various states resorted to strict
lockdowns. While the labour force shrank by 1.1 million in April, the count of the employed fell by a much larger 7.35 million.

According to data from the Employees’ Provident Fund Organisation (EPFO), more than 35 million formal sector workers, over half of all provident fund subscribers, have withdrawn money from their retirement savings since April 1, 2020, reflecting the hardships faced by salaried people since the
outbreak of the pandemic. Nearly 7.2 million of these workers together availed of the non-
refundable Covid advance that was allowed last year amounting to Rs 18,500 crore between April 1, 2020, and May 12, 2021. EPFO subscribers’ number is about 60 million.

Data released by the commerce ministry on Monday17 May 2021 showed wholesale price index (WPI) based inflation at 10.49% last month, up from 7.39% in March. Inflation in fuel and manufacturing items rose to 20.94% and 9.01%, respectively, in April compared with 10.25% and 7.34% last month. The weakening rupee has exacerbated the inflation. Retail inflation in April eased to a three-month low of 4.29%, but experts consider it temporary and have detrimental consequences.

While headline inflation eased to 4.29% in April from 5.52% in the previous month due to a dip in
food prices, item-wise inflation of the Health Consumer Price Index showed a persistent monthly increase in non-institutional medicine and X-ray, ECG, and pathological tests. The pandemic-induced increase in health expenditure also had an impact in rural areas as rural core inflation jumped to
6.39% in April from 5.85% in March.

As the pandemic rages through the country, it is worthwhile to look beyond the headline inflation as the rural core has now jumped to 6.4 percent in April and will rise further in May. The increasing health spend due to the pandemic is having a meaningful impact in rural areas, Soumya Kanti Ghosh,
the group chief economic adviser at State Bank, in a note also noted that the steep fall in retail
inflation in April to 4.29 percent from 5.52 per cent in March is deceptive, as the CSO inflation
number is primarily due to easing food prices as the rural core inflation has jumped to 6.4 per cent.

The global rating agencies Morgan Stanley had earlier said that India, Indonesia, and the Philippines
would look better placed in this Goldilocks environment, as they stand to benefit more from early
vaccine availability and the Fed’s AIT (average inflation targeting) framework. Goldilocks economy is often the one where the growth is high but the inflation is under control. That is the economy is in equilibrium or the best state possible: with good employment figures, economic stability, and higher
than world average growth. But India has failed miserably to vaccinate its people.

According to Morgan Stanley, as Covid-19 flare-ups, India’s investment-grade sovereign rating could face pressure due to rising headwinds against growth as the country battles the second Covid wave, which may exacerbate the country’s high debt and fiscal stress and increase financial sector risks. It may be noted that ravaged by the second wave of the pandemic, non-bank lenders have seen a 50% rise in customers missing payments in the first fortnight of May, threatening to push up overall
defaults to perilous levels. The NPAs will rise exponentially.

However, it feels growth-enhancing structural reforms and addressing infrastructure gaps could bolster the rating outlook. But such measure taken in the budget may not be a reality. Hence, in this critical time, it is imperative on the part of the government to enhance expenditure and ensure income transfer, raise the purchasing power of people so as to spur demand.

 

The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]

 

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way
represent the views of Sambad English.