Infrastructure spending, coupled with a welfare scheme, would go far to address rising inequality, and prevent the kind of a K-shaped recovery
What shape will the economic recovery take? Back in 2020, during the early days of the pandemic, it was a research paper by Carsten Brzeski & James Smith of ING, the multinational banking and financial services corporation headquartered in Amsterdam, that first spoke of varying shapes that recovery could take in economies across the world.
Building on a range of scenarios – from base case to most optimistic, the duo predicted a range of possibilities from the worst case W, where a sharp recovery proves short-lived and we have another dip before recovering, to the best case V, where the recovery is both sharp and sustained. Between the two extremes, they spoke of other kinds of recovery – U, where the recovery is less sharp but sustained, and L, where the economy is so badly affected that it settles at a lower level of equilibrium – the dreaded L.
Surprisingly, the paper did not mention the possibility of a K-shaped recovery, wherein different sections/sectors of the economy experience a completely disparate pace of recovery, with grave implications for equity.
U, V, W, L, K? There are 26 letters in the English alphabet; so, we have a long way to go before we run out of options! But for the moment, there seems to be broad agreement -- among everyone except government spokespersons -- that economic recovery in India is likely to be K-shaped, with the rich and upper-middle class doing very well, even as the vast majority i.e., the lower-middle class and those at the bottom of the economic pyramid, continue to suffer.
The latest to lend his voice to that view is the Raghuram Rajan, former governor of the Reserve Bank of India (RBI). In an interview with the Press Trust of India, Rajan has cautioned the government against the dangers of a K-shaped recovery and urged it to do more to alleviate the distress of those who have been worst-affected by the pandemic and the economy’s selective rebound.
Rajan is not the only one, nor even the first to point to the unequal pace of the recovery in India. His predecessor at the RBI, Duvvuri Subbarao, makes the same point in his piece in The Times of India on 24 January. Stating that the loss in income during the pandemic years (output at the end of this fiscal is likely to just equal what it was two years ago) has fallen almost entirely on the bottom half of the population, Subbarao calls on the government to focus not just on hastening economic growth, but also on ensuring the benefits of that growth translates in more income and jobs for the poor in its forthcoming budget.
Both former RBI governors point to the folly of relying on a pick-up in consumption to power growth at a time when, as Rajan said, there has been a "scarring of the middle-class, the small and medium sector". In such a scenario, government spending, and of the right kind, is the only engine of growth. So, even as finance minister Nirmala Sitharaman keeps one eye on that all-important fiscal deficit number, she must ensure government spending is properly targeted to achieve maximum bang for the buck.
There is only one kind of spending that ticks all the boxes on that: infrastructure spending. Apart from providing jobs and incomes for the unskilled who are typically at the bottom of the pyramid, it also creates much-needed infrastructure for the country, and spurs demand for mass consumption items as well as items like steel and cement. Infrastructure spending, coupled with a welfare scheme, would go far to address rising inequality, and prevent the kind of a K-shaped recovery as seen in the most recent survey of Mumbai-based People Research on India’s Consumer Economy. Mint has reported that the government may roll out a social security scheme on the lines of PM-Kisan, which directly transfers money to bank accounts of farmers. If announced, a social security scheme for a broader range of beneficiaries will be a welcome intervention for supporting low-income households that have borne the brunt of the economic shocks of the pandemic and the lockdowns.
That calls for a careful balancing act. The FM must stick to her previously announced path of fiscal consolidation (4.5% fiscal deficit by 2025-26) but settle for a gentle glide path that allows for a return to fiscal rectitude but in a calibrated fashion. It could be a potential win-win that could alter the present K-shaped recovery to a V-shaped one. V for victory for all Indians, not just a few.