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Krisnamurty Subramanian, the Chief Economic Advisor (CEA), India has recently stated that the downward economic trajectory would reverse shortly and hoped for a ‘V’ type recovery of the Indian economy. The opposition parties, particularly the Congress and the Left, are not taking the CEA’s prediction seriously. Many economists and observers are also not optimistic about the economic situation and about the role of the government so far.  

Meaning of ‘V’ shape recovery

Prabhat Patnaik, Professor Emeritus, Jawaharlal Nehru University, New Delhi, has refuted the possibility of a ‘V’ type economic recovery in the next few quarters. He explained that although a section of observers thinks that there is scope for a ‘V’ shaped recovery, they are not transparent about the projection. According to Patnaik, they have been mixing up two things. One is recovery from the extreme contraction that happened during the lockdown and the other is the recovery to reach the economic level experienced before the lockdown. According to Patnaik, the former may happen but the possibility of the second is bleak. What is the economic logic behind the impossibility of a smart recovery to reach the income level witnessed before the lockdown?

The supporters of the smart recovery formulation assume that during the lockdown, people could not move out and they did not purchase all the usual items of their choice. They limited themselves to buying necessary items. When the unlocking process started, they could gradually spend in a bigger way to meet their pent-up demand. It that situation, a phase of excess demand may arise and investment would rise to meet that excess demand – which would kickstart economic recovery.

However, in practice, most of the pent-up demand cannot be fully recovered as in most cases, demand foregone means demand lost. One cannot tour twice or more a place of interest or cannot eat double at a restaurant or purchase more cars or two wheelers because those were not purchased a few months ago. So, there would be little possibility of creating excess demand. Actually, the opposite is the norm. In the lockdown phase, most of the people lost incomes - partly or fully. After the lockdown, discretionary spending should be less - particularly in the Covid 19 situation where uncertainty has been all-pervasive.

Therefore, demand deficiency would prevail and hence excess capacity in production units would remain in the economy and employment generation would not be at the pre-Covid 19 level. Notably, the unemployment level was quite high even before the lockdown. In this situation, a downward spiralling of the GDP projection may take the Indian economy into a disastrous stage.        

Government initiatives

A government is characterised by its special spending capacity. It can spend beyond its revenue projections in exceptional situations. The government can do this by taking loans from its central bank (RBI for India) at very low rates. The Indian government can also utilise a portion of its huge foreign currency deposits (more than $54 billion) at present or through monetisation - that is printing new currency.

But the Indian government has been slow in economic policy matters. Only about 1.5% of the annual GDP has been announced as a measure of boosting the economy. Various countries have spent double digit portions of their GDP to boost their own economies. Due to the very limited spending of the Indian government, quick economic recovery will remain a far cry. 

The investment multiplier economic theory states that there is a positive multiplier relationship between government spending or any other investment spending and the resulting economic output. That additional output in due course will be a multiple (four or five more times - depending on prevailing conditions) of the original amount spent.