Different Shapes Of Economic Recovery

Different Shapes Of Economic Recovery

Economic recovery has become the buzzword as hopes of vaccine sprout across the globe. If plotted on a graph, economic recovery (GDP numbers generally) form certain shapes which denote the pattern of recovery of an economy. Let’s take a look at the different shapes and understand what they mean.

Crux of the Matter

Understanding Economic Recovery And Its Different Shapes
Economic recovery is the ultimate goal of all the world economies in today’s troubled times. Simply put, it is the business cycle stage following a recession that is characterized by a sustained period of improving business activity. Normally, during an economic recovery, GDP grows, incomes rise, and unemployment falls as the economy rebounds.

Shapes of recovery are the patterns formed on the graphs which denote a shape of recovery of an economy which can usually be U, V, W, Z, L, K.

V Shaped Recovery
Generally happening within a span of 1 year, V-shaped recovery marks the shortest recovery of the economy among all other shapes.

A look at the Indian economy during the Covid-19 period suggest that the sharp fall in GDP in July could be the bottom after which the economy is rebounding. This shape is seen in India’s GDP recovery.

Read more about it here: What Do Latest GDP Numbers For India Say?

Shots For V Shaped Recovery
Several measures have been taken and are ongoing to support India’s V-shaped recovery:
– Indian government announced stimulus packages, and incentive-based production schemes to bolster production and become an exporting nation.
– RBI has maintained interest rate level and also carried out Open Market Operations to maintain liquidity in the economy.
– RBI has also maintained the value of the Rupee reportedly to tame inflation and balance import-exports.

L Shaped Recovery
This is characterized by persistent unemployment, and lower growth – sometimes it depicts that the economy never fully recovers. They generally occur post economic recession.

The Great Depression of 1929 in the USA is a classic example of the L shaped recovery, as the unemployment reached 25% and the stock prices fell 22% causing investors to lose $30 billion (equivalent to $396 billion today).

Causes Of 1929 Depression

  • Federal Reserve increased interest rates.
  • Speculators began trading in their dollars for gold.
  • Fed raised interest rates again to preserve dollar.
  • To combat deflation, the Fed did not increase the money supply.

How Did The Depression End?
Franklin Roosevelt, then new US President, promised jobs, allowed unionization, and provided unemployment insurance. In his lifetime, he created 42 new agencies, and the Fed also increased its debt.

W Shaped Recovery
An economy goes into recession, rises from it to a certain level, sometimes above the pre-recession levels and then again falls into recession, post which it finally recovers. If one looks from the stock markets’ perspective, the falls of 2000-01 and 2007-08 are the best examples of this shape.

K Shaped Recovery
This phenomenon occurs when different sectors of the economy recover at different times post the recession. Sectors like IT, FMCG, Pharma, & Cement are growing well post the lockdown. E-Commerce too registered a growth of 17% post lockdown. Whereas, sectors like Tourism, Hospitality, Cinema, Airlines (barring cargo to some extent) are posting a slow recovery.

Taking this into consideration, economic recovery in India could look more like a K-shaped recovery when sectors
are plotted.

Z Shaped Recovery
This recovery is of a bullish style, in which the economy is highly optimistic and quickly rises after an economic crash is termed to be a Z shaped recovery. It gifts the economy more than what had been taken away due to an economic crash. Although it lasts for a shorter time period, it restricts the purchasing power of the consumer rather than affecting their income.

U Shaped Recovery
U shaped recovery is when the economy wanders for a little while in the economic crash state such as depression. After the downfall, it recovers slowly and the map forms a U shaped structure.

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

  • George Soros is a billionaire investor and philanthropist. During the 2009 recession, he said that the recession could follow an “inverted square root sign”-shaped recession. Soros explained that: “You hit bottom and you automatically rebound some (i.e. a spike), but then you don’t come out of it in a V-shape recovery or anything like that. You settle down – step down”.
  • During the coronavirus pandemic, several commentators used the shape of a normal square root to describe a situation where the recovery would not be complete, but after an initial rise, would flatline for a period.
  • A Manhattan plot/graph is a type of scatter plot, usually used to display data with a large number of data-points and with a distribution of higher-magnitude values. It gains its name from the similarity of such a plot to the Manhattan skyline: a profile of skyscrapers towering above the lower level “buildings”.

Chinese Fingers In India’s Business Pie

Chinese Fingers In India's Business Pie

Social media got flooded with anti-China sentiment after 20 soldiers attained martyrdom in Indo-China face-off at Galwan valley. People across India are voicing boycott of Chinese products. Even government entities like BSNL and Railways are reconsidering their tie-ups with Chinese firms. But with the dragon’s investment so deeply penetrated into the Indian economy, is it feasible to cut out China from the Indian Economy?

Crux of the Matter

Even though India has a significant dependence on China, the government has taken immediate action after the clash on the border with China. The Department of Telecommunications asked BSNL to not use Chinese equipment in the up-gradation of its 4G facilities.

Even Indian Railways decided to terminate the contract of the Chinese signaling behemoth China Railway Signal and Communication Corp, which had won the contract in 2016 to install signaling systems in over 400 km in the Eastern Dedicated Railway Freight Corridor. The deal worth ~Rs. 500 crore involved designing, supplying, constructing, testing, and commissioning signaling and telecommunications for the railways.

Let us have a look at some infographics to understand the footprints of Chinese in the Indian market.

  • The Shanghai Stock Exchange is the world’s 4th largest stock market by market capitalization at $4.0 trillion as of November 2018. The exchange started on 26th November 1990.
  • The Art of War is an ancient military treatise from China attributed to the ancient Chinese military strategist Sun Tzu. The Art of War remains the most influential strategy text in East Asian warfare and has influenced military thinking, business tactics, legal strategy, lifestyles, and beyond.
  • Jack Ma, is a business magnate, investor, and politician from China. He is the co-founder and former executive chairman of Alibaba Group. Ma is a global ambassador for Chinese business and is often listed as one of the world’s most powerful people, with Forbes ranking him 21st on its “World’s Most Powerful People” list.

The Changing Meta-Narrative Of The Indian Economy

The Changing Meta-Narrative Of The Indian Economy

The global economy has become more interconnected today as compared to the past few decades with increasing globalisation, mass communication and plethora of real time data. Today it is important to build an entrepreneurial, fast-moving, risk-taking economy and have an architecture within which a country can maximize the benefits of trade.

Note: This article is inspired by the talks of Sanjeev Sanyal, the principal economic advisor to the government of India.

Crux of the Matter

Feel the Stones
A saying by Deng Xiaoping , the father of modern economic superpower China, is very popular: “cross the river by feeling the stones” which perfectly describes reforms that led to China becoming an economic superpower. The idea is to feel your way carefully by making sure of your footing for each step before taking the next. A river is fast-flowing like an economy wherein the flow represents internal and external pressures and the floor of the river represents unfamiliar territory that makes every step uncertain.

Post-independence, even after opposition from some economists, the then Prime Minister Jawaharlal Nehru opted for a socialist type planning-based economy over a market-based economy. But over the next couple of decades, India was hit with a number of scandals and by the 90s it was proven to be a failure. By the 1990s, it became imperative to end license-raj and open up the economy. Liberalization reforms were brought by the PV Narsimha Rao government in the first half of the 90s. Subsequently, India’s share in the global economy started to rise and it became one of the fastest-growing countries. Yet the legacy of 5-year planning persisted.

Changing Tracks
India is known widely for Jugaad and all these years we have been experimenting with our economy by finding temporary solutions. Through regimes like the 5-year plan, we have spent a lot of time to discuss, think, and lay down ambitious reforms. But not implementing them has led to a number of issues like the struggling banking sector, black money, and rise of NPAs which have stalled our economic growth. Some blame the lack of political will and leadership but no one tried to clean the mess by implementing some of the major reforms which have been only discussed for decades. 

With a slew of tough economic reforms brought in by the Modi government in recent years; the Indian economy is witnessing a paradigm shift for the first time and is shifting from a patronage-based economy to a rule-based economy. In the last 4 years, reforms like the Goods and Services Tax, Demonetization, and Insolvency and Bankruptcy Code have proved to be a gamechanger and have shown that we are moving towards adaptive policy-making and a feedback-based economy.

Feedback Loops
For a complex system it is impossible to predict all possible factors and outcomes of the system and as a result any static and rigorous plan is bound to have ever-widening gaps. Contrary to the traditional approach of planning policies to a tee, the new paradigm seems to be ‘adaptive’ policy making:

  • Broadly decide the direction where to go.
  • Basis certain initial data, theoretical studies and assumptions initiate the first version of policy.
  • Actively study the feedback from the market, industries and society and make small, quick course corrections.
  • Rinse and repeat. Don’t get stuck on an assumption if reality disproves its bases.

We can see these kinds of systems everywhere in nature as well as in the modern world – lean startups, machine learning algorithms and medical research all work on a similar philosophy. This process of using feedback loops to fine tune the approach to solving a problem becomes easier with massive increase in data collection abilities. Even 2 decades ago, demographic statistics could only be discerened on a decadal basis during the census. Today it can verily be deduced from multiple data points that are updated live – from social media usage to phone usage, human behaviour is being tracked at an unprecedented level in both scale as well as granularity.

Feedback economics fits perfectly with the emerging discipline of behavioral economics. Even if the measures are tough, they will help reap gains in the long term.

Sanjeev Sanyal, Principal Economic Adviser

Adaptive Policies
GST was a reform that was discussed for over 2 decades but its challenges could only be identified after its implementation. No amount of planning would have prepared the nation and though GST has been politically criticized for its poor implementation, its continuous upgrades, and modifications based on feedback from the states and taxpayers it is now evolving and achieving its set objectives.

After the end of the socialism approach, the post-1991 era India ended the license-raj but established capitalism without exit which slowly and steadily weakened the banking systems and gave rise to a number of scams and primarily the NPA issue. Rather than opting for a faster solution, the Insolvency and Bankruptcy Code was implemented in 2016 that not only boosted NPA recoveries but also has proven to be a long-term step to strengthen the banks and reduce litigations.

Even the historic step of Demonetisation which has been highly criticized has proved to be effective in getting people to switch from the old styles of business and fall in line with the changing times.

Entrepreneurial Thought Process
Genuine failures in businesses have been seen as a social stigma but to build an entrepreneurial economy a nation needs to take tough steps on a continuous basis focussing on the long-term gains. While going further in this direction it is important to know that we do run the risk of an overreach but the only way ahead for the government is to keep proactively responding to the situations by creating feedback loops and implement flexibility-based economics.

Lean Approach to Dealing with COVID
These recent steps seem to show that feedback and adjustments help navigate chaotic uncertainties better. The COVID-19 pandemic has been a black swan event that is still in progress. Even almost 6 months after its first outbreak in China, the entire world is still learning how to deal with it. When one doesn’t know the exact contours of the problem being tackled, how can one plan a comprehensive long term response strategy for it?

During the present conditions of the COVID-19 pandemic and the subsequent lockdowns, such a conceptual framework for adaptive policy-making has proven useful in dealing with the medical, social and economic concerns of the country. The response of the government has been multi-pronged and tailored to granular situations for different localities. As situations have developed, the government machinery, from the national level down to the municipal level, has kept doing course corrections and relaying short term measures to keep up with the evolving situation.

This has helped ramp up testing and PPE production to monumental scales, after starting from scratch in March, has helped contain the death toll, fatality rate and transmission rate and has helped increase the disease doubling time from 3 days in March, to almost 3 weeks as of today. Every locality is dealing with COVID in a tailor-made, evolving way depending on the ground reality of that locality. The government seems to have imbibed a lean startup approach to dealing with a pandemic and has done well.

Following the COVID-19, the government’s push for self-reliance with the Atma Nirbhar Package, seems to be aimed at leveraging the changing geopolitical contours to help build a net-export economy in the long term. But in the short term, the intent seems to be to kickstart an economy which has been brought to a standstill due to prioritization of human life over capital. The short term economic measures seem to also be evolving with weekly announcements from the RBI and Finance Ministry as the nation tries to balance between mitigating loss of life and mitigating loss of production.

What’s Over the Horizon?
The government has been criticized for changing rules and regulations too often, leading to disruptions and chaos but it is set to become a new normal as India’s economy adopts an evidence-based framework that may very well bring in revolutionary reforms in the Indian economy. The RBI, NITI Aayog, and the government have time and again reiterated the importance of making a shift, and by 2022 the government targets to set in place all the necessary frameworks and bring about a change in the meta-narrative of the Indian economy.

  • “The Indian Renaissance: India’s Rise after a Thousand Years of Decline” is a book by famous Indian economist and author, Sanjeev Sanyal. He is the Principal Economic Adviser in the Ministry of Finance, Government of India.
  • Machine learning (ML) is the study of computer algorithms that improve automatically through experience. It is seen as a subset of artificial intelligence. The term machine learning was coined in 1959 by Arthur Samuel, an American IBMer, and pioneer in the field of computer gaming and artificial intelligence.
  • Lean manufacturing, or lean production, is a production method derived from Toyota’s 1930 operating model “The Toyota Way”. ‘Precisely specify value by specific product, identify the value stream for each product, make value flow without interruptions, let customers pull value from the producer, and pursue perfection.’ These are the 5 key principles of Lean as stated by James Womack and Daniel Jones.

Recession Predictions in Numbers

The World Economic Outlook Report published by the International Monetary Fund (IMF) on April 14, called the Coronavirus pandemic a ‘crisis like no other’. It said that a recession is looming over the world as the global economy is projected to contract sharply by 3% in 2020.
Complete Coverage: Coronavirus

Crux of the Matter

IMF assumes that the pandemic would fade in the second half of 2020 and as economic activities resume it projects a 5.8% growth in the global economy in 2021. The statistics predicted by the IMF are much worse than the 2008-09 financial crisis.

Since equity markets have gone down dramatically; high-yield corporate and emerging market sovereign spreads have widened significantly and portfolio flows to emerging market funds have reversed. The IMF plans to deal with this crisis in 2 phases: firstly a phase of containment and stabilization followed by the recovery phase.

Growth in the advanced economy group is being projected at –6.1% in 2020. Other regions like Latin America (–5.2%); Russia (–5.5%), the Middle East and Central Asia (–2.8%) are also expected to slow down severely and witness negative growth rates.

Elephant and Dragon Lead the Hope
Non-oil GDP would contract by 4%, and most economies like Saudi Arabia and Iran are also expected to contract. India and China are only nations that may see a positive growth rate in 2020 at 1%, which is ~5% below the previous decade’s average.

In China, even with a sharp rebound at the end of 2020 and sizeable fiscal support, the economy is projected to grow at only 1.2 % in 2020. India in the same region which was expected to grow at 5.8% in January 2020 is now predicted to grow positively with 1.9% growth rate. Both India and China are expected to recover sharply with 7.4% and 9.2% growth rate in 2021 respectively.

The GDP numbers being projected by the World Bank and IMF for India are far “too optimistic” and the country would require additional expenditure of  ₹10 lakh crore to bring the coronavirus-hit economy back on track.

Arvind Subramanian, Former Chief Economic Adviser

Even before the pandemic hit India, the economy was slow and was already fighting a major unemployment crisis. According to Centre for Monitoring of Indian Economy, the unemployment level has reached 23% in the recent weeks and now with the extended lockdown and increased economic disruption the economic losses are estimated at $234.4 billion which is 8.1% of the GDP.

With the fluidity of the situation thwarting precise forecasts, ICRA currently projects Indian GDP to contract by a range of 10-15 percent in Q1 FY21, which would translate to a bleak full-year growth band of +/-1 percent in FY21.

Aditi Nayar, Principal Economist, ICRA.

Is it Recession Yet?
From mid-January to end-March, base metal prices fell about 15%, natural gas prices declined by 38%, and crude oil prices dropped by about 65%. Futures markets indicate that oil prices will remain below $45 a barrel through 2023, approximately 25% lower than the 2019 average price, reflecting persistently weak demand. Following the dramatic decline in oil prices, the growth rate for oil-exporting countries is projected to drop to –4.4% in 2020. They are going to be severely hit whereas due to the recent OPEC+ agreement and reduced oil prices, oil-importing countries will be at a benefit.

Commodity Prices

The rapidly worsening risk sentiment has prompted a series of central bank rate cuts, liquidity support actions, and, in a number of cases, large asset purchase programs from all countries. An overall analysis of the IMF report suggests that financial conditions are serious in advanced as well as emerging market economies and this is the biggest crisis and recession of the century.

  • A recession had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP. However, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore.
  • The Panic of 1785 is one of the earliest recessions to be dated ever. This recession lasted for almost 4 years, during which the business boom post-American Revolution vanished. The recession was immediately followed by the recession of ‘Cooper Panic of 1789’.
  • 2008’s recession was termed as the “Great Recession” while economists and many media houses have started referring to this (2020) recession as the “Great Lockdown”. While the 1930’s recession is called the “Great Depression”.
  • Below is the entrance of the RBI office in Delhi. The entrance is guarded by 2 Statues of a Yaksha and Yakshani each. These are mythological creatures who serve ‘Kubera – God of Wealth’. Although some people raised concerns regarding showcasing the Yakshani half-naked.

5 lakh Companies Shut Shop in China in 2020 Q1

The pandemic Coronavirus has severely damaged China as it lost nearly half a million firms due to the lockdown. Geopolitical tensions also loom over the Dragonland as US and other nations accuse it of cover-up and opaqueness in disseminating information.
Complete Coverage: Coronavirus

Crux of the Matter

China Losing Limbs
China, the first epicentre of Coronavirus, has faced a great deal of damage in the business and industry sector. Due to Coronavirus, 4,60,000 firms shut down operations in the first quarter of 2020. More than half of them have merely operated for 3 years. In addition, only 3.2 million new firms were opened in the first quarter which is 29% less than the previous year. 

Recovery in the manufacturing industry in China won’t be easy even though the threat of Coronavirus is relatively less there. Its industry may not pick up healthy growth because many countries are on the verge of economic crisis, resulting in a huge slump in the external demand of products. China’s overseas shipment fell 17.2% compared to last year. 

Looming Geopolitical Risks
Geopolitics is likely to alter due to the COVID-19 pandemic. The strain on US-China relations due to the US-China Trade War may exacerbate due to the Coronavirus crisis. But will the US put sanctions on China at a time when others have put a ban on the export of medical equipment, as US imports medical equipment from the latter? The US has accused China of poorly handling the critical situation of Coronavirus. Even if the US and its allies pass any resolution against China in the UN Security Council, China can simply nullify it using its veto power.

In the past when the US and its allies filed a suit at the International Court of Justice against China for building artificial islands in south china sea, China simply ignored the verdict of the International Court and continued its expansion in international water.

  • Due to manufacturing units being shut, carbon emission in China has significantly come down. In the 3 week period of February when China shut down its manufacturing units, dip in carbon emission was equal to almost 150 Million Metric Tons.
  • Shanghai Stock Exchange has seen a decrease of almost 400 points in the past 3 months.
  • In 2015 only, China had 28,01,143 factories compared to 2,74,407 factories in the US.