Context

Increasing pace of vaccination and normalising of monetary policy hold key to economic rebound.

K-shaped recovery and its impact

• Growth indicators so far suggest resilience in the short term — a shallow dent in May’s economic activity followed by a recovery in June, back to April’s levels.
• K-shaped recovery: The external, investment and industrial sectors have been relatively resilient, with consumption and services bearing the brunt.
• Notwithstanding signs of some fatigue in ultra-high frequency indicators in July, damage from the second wave seems largely limited to April-June 2021.
• However, K-shaped recovery means light cracks on the top conceal much larger structural faultlines below.
• Rising poverty: The Pew Research Centre estimates that the pandemic has led to India’s poor rising by 75 million while the middle and upper-middle class has shrunk by 39 million.
• MSMEs and informal workforce worst hit: A recent survey by the ILO finds that the worst-hit — MSMEs and their informal workforce — have struggled to access the government’s pandemic support programmes.
• These more structural scars may become blurred in the GDP data in coming quarters but will almost certainly affect the medium-term growth story.

Way forward in the near term

1) Policy

• Achieving two objectives: When inflation is under control, then flush liquidity and ultra-accommodative monetary policy will help achieve two objectives—
• 1) Ensuring easy financial conditions.
• 2) Help control borrowing costs of the government’s expansive borrowing programme.
• Inflation risk: The above strategy is not costless, it effectively uses the central bank’s credibility in controlling inflation as “collateral”.
• So when inflation flares up and remains sticky, this arithmetic becomes increasingly complicated.
• The RBI’s consistent message recently has been to view the current inflation surge as a “temporary hump”.
• Much as the current monetary policy stance maintains that the economy is ill-equipped to handle policy normalisation, it is a matter of when rather than if.
• As growth strengthens and the RBI’s inflation-targeting credibility comes under greater scrutiny, a policy pivot would become increasingly likely.

2) Vaccination

• The “ultimate unlocking” of the economy remains contingent on a critical mass getting vaccinated, which on materialising should trigger a revival in consumer and business sentiment.
• The uptick in the pace of vaccination over the last few days and higher seroprevalence reported in some states are welcome news.

Conclusion

Even with widespread vaccinations, future pandemic waves may well be unavoidable. Fiscal, monetary and administrative policies cannot remain in a suspended emergency.

Back2Basics: K-shaped recovery

• A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
• This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
• A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
• This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

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