Context: 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.
Different Types of Economic Recovery
K-shaped
- 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.
V-shaped
- It is characterised by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
- Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best-case scenario given the recession.
U-shaped
- U-shaped recoveries happen when a recession occurs and the economy does not immediately bounce back, instead tumbling along the bottom for a few quarters.
- It is similar to a V-shaped recovery but more prolonged.
W-shaped
- A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession.
- Hence, it is also known as a double-dip recession.
- W-shaped recessions can be particularly painful because the brief recovery that occurs can fool investors into getting back in too early.
L-shaped
- It occurs when, after a steep recession, the economy experiences a slow rate of recovery.
- L-shaped recoveries are characterised by persistently high unemployment, a slow return of businesses' investment activity, and a sluggish rate of growth in economic output.
- They have been associated with some of the worst economic episodes throughout history.
Why K-shaped recovery?
- The COVID has triggered an effective income transfer from the poor to the rich
- This has 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%.
Evidence on the Contrary
- Reduced Income Inequality: Income inequality captured through the Gini coefficient of taxable income has declined significantly from 0.472 to 0.402 during FY14-FY22.
- Increased Consumption of the bottom 90% of the population has increased by Rs 8.2 lakh crore post pandemic.
- Widened Tax Base: The number of ITRs filed by people earning between Rs 10 lakh and Rs 25 lakh increased by 291 per cent while the total number of persons filing income tax increased to 7.4 crore in AY23 from 7 crore in AY22. For AY24, 8.2 crore ITRs have been filed by December 31, 2023.
- Higher Income Tax Returns: The income-tax returns (ITRs) filed by individual taxpayers earning between Rs 5 lakh and Rs 10 lakh, climbed by 295% between the assessment years (AY) 2013-14 and AY 2021-22, showing a positive trend of migration to a higher range of gross total income.
- Shift in taxpayers from Lower Income to Higher Income Tax Bracket:
- About 36.3% of individual ITR filers belonging to an income group of less than Rs 3.5 lakhs in AY15 (FY14) have left the lowest income group and shifted upwards resulting in 21.3% additional income.
- 15.3% have shifted each in the income group of Rs 3.5 lakhs to 5 lakhs, and Rs 5 lakhs to 10 lakhs.
- 4.2% people shifted in the income group of Rs 10 lakhs to Rs 20 lakhs.
- Declining Contribution by the Highest Taxpayers: The top 2.5% of taxpayers’ contribution in income declined from 2.81% in FY14 to 2.28% in FY21.
- Transition into Larger Firms:
- 19.5% of small firms have transitioned into larger firms through MSME value chain integration.
- The transition of small firms into larger firms and consumption trends such as the rising trend of ordering from food ordering platforms such as Zomato are indicative of “vanishing inequality”.
- Rising Sale of 4-Wheelers:
- Two-wheeler sales are on a downward trend and passenger vehicle (4-wheeler) sales are on an upward trend even before the pandemic, but FY19 onwards, there has been a clear preference for 4-wheelers over 2-wheelers.
- Further, the strong credit deployment of auto loans touching nearly 1.8 times the pandemic level, supported by Gross NPAs of vehicle loans at just 1.4% signifies that auto loans are not down or non-performing, it is indeed substituted from two wheelers towards 4 wheelers even for the bottom of pyramid.
Way Forward for a Broad Based Recovery
- Economic Growth: In India, Private consumption expenditure is the biggest driver of economic growth. However, due to reduced social sector spending by the government over a few years and the recent COVID induced lockdowns reduced the consumer demand. So, increased social sector spending by the government will increase consumer demand thereby economic recovery.
- Demographic Dividend: Spending on human capital will help India reap the benefits of demographic dividend.
- Reducing Poverty and Hunger: Reduced social sector spending by the governments force the poor to spend more on non-food essential items squeezing their food budget and ultimately results in Hunger and malnutrition. This will further reinforce poverty.