K-SHAPED
RECOVERY - ECONOMY
News:
Income inequality
declines, says SBI research unit countering K-shaped eco recovery claims
What's
in the news?
●
As per the State Bank of India’s report,
the claims of K-shaped economic recovery in India as “prejudiced” and
“ill-concocted” because income inequality has declined in India with a higher
tax base and a shift in taxpayers from lower income to higher income tax
bracket.
K-shaped
Recovery:
●
It is a recovery in which the performance
of different parts of the economy diverges like the arms of the letter “K.”
●
In a K-shaped recovery, some parts of the economy may experience
strong growth while others continue to decline.
Evidences
of K-shaped Recovery:
●
COVID
has triggered an effective income transfer from the poor to the rich, leading
to increased inequality.
○
Households at the top of the pyramid are
likely to have seen their incomes largely protected, and savings rates forced
up during the lockdown, increasing ‘fuel in the tank’ to drive future
consumption.
○
Meanwhile, households at the bottom have experienced
a permanent loss of income in the forms of jobs and wage cuts
●
Consequence:
This will be demand-impeding because the poor have a higher marginal propensity
to consume (ie they tend to spend (instead of saving) a much higher proportion
of their income.
●
Visible
Manifestation: Passenger vehicle registrations (proxying
upper-end consumption) have grown about 4% since October while two-wheelers
have contracted 15%.
Other
Recovery Curves:
Z-shaped
recovery:
●
It is the most-optimistic scenario in
which the economy quickly rises after an
economic crash.
●
In this economic disruption lasts for a
small period wherein more than people’s incomes, it is their ability to spend
is restricted.
V-shaped
recovery:
●
It is the next-best scenario after
Z-shaped recovery in which the economy quickly recoups lost ground and gets
back to the normal growth trend-line.
●
In this, incomes and jobs are not
permanently lost, and the economic
growth recovers sharply and returns to the path it was following before the
disruption.
U-shaped
recovery:
●
It is a scenario in which the economy,
after falling, struggles around a low
growth rate for some time, before rising gradually to usual levels.
●
In this case several jobs are lost and
people fall upon their savings.
●
If this process is more-long drawn than it
throws up the “elongated U” shape.
W-shaped
recovery:
●
A W-shaped recovery is a dangerous
creature. In this, growth falls and rises, but falls again before recovering,
thus forming a W-like chart.
●
The double-dip
depicted by a W-shaped recovery can be due to the second wave of the pandemic.
L-shaped
recovery:
●
In this, the economy fails to regain the
level of GDP even after years go by.
●
The shape shows that there is a permanent loss to the economy’s ability to
produce.