How will the recovery path look like after Covid-19 crisis in India?

While the Indian economy has been hit really hard by the corona crisis, economists are tossing on the shape that recovery path would follow. With lockdown getting stretched in phases, economists are predicting beyond traditional V, U, W, and L-shaped recession towards more of a “Nike swoosh” recovery trail.

As time is passing, the coronavirus crisis is proving to be an unwanted sequel to 1930’s Great depression, with its consequential economic devastation exceeding that of 2008 Great recession. With Government getting more optimistic towards lifting up of lockdown, economists are busy speculating the shape of the recession and the plausible recovery out of it. In the initial phases of lockdown, it was V shaped recession that was getting popular among economists; however, with this covid-19 crisis getting stretched, majority of economist now are hinting more towards a Nike swoosh shaped recovery. Let’s analyse some of the famous recovery patterns on which economists are tossing upon.

V-shaped recession: Sharp decline, Quick recovery

The best case scenario for the COVID-19 crisis is a V-shaped recession. It is marked by a sharp downturn (the first half of the “V“), followed by a quick rebound in growth (the second half of the “V“), just emulating the former drop in speed and intensity. Under V shaped recovery, the economy will rebound as quickly as it had declined, with minimal long-lasting financial damage. This type of recession was observed in US in 1990’s from July 1990 to March 1991, after which economy started growing again fairly quickly.

In India too, in the initial phases of lockdown in month of April, some executives were hopeful about the prospects for a V-shaped recession. In fact, RBI Governor Shaktikant Das forecasted a V shaped recovery for India with sharp turnaround in Covid-19-hit India’s growth rate to 7.4 per cent in 2021- 22.

However, with lockdown getting extended further and consequently economic activity being hit severely, it looks less likely that Indian economy would follow a V-shaped recovery path. The views of the people pitching for V-shaped recovery are based on unrealistic assumptions that economy would reopen all at once with economic activity resuming without hassles and disruptions in supply chains.  Further, it assumes that consumption pattern and spending behaviours of the consumers are not going to change post lockdown which is again less likely.

Further, for COVID-19 recession to be V-shaped, coronavirus testing needs to be scaled up so that working class can get back to work without creating surge in the cases; which again looks quite difficult given the large dense population of India.

U-Shaped Recession: Long gap between fall and recovery

This type of recession is longer than a V-shaped recession, and has a long flat stretch of growth comprising of bottom of U shape. Under U-shaped recession, GDP may shrink for several quarters and even for many years and then only slowly return to normal growth.

The 1973-75 oil shock of US is a famous example of U-shaped recession. In early 1973 the economy began to slow down and continued to shrink for nearly “two” years. After hitting bottom, it again recovered in 1975.

The Great Recession is also an example of a U-shaped recession. It lasted for almost two years, from December 2007 to June 2009, and even after growth resumed it took years before employment level recovered to pre-crisis levels.

A survey done by EY found that 54% of companies believe that global recession caused by coronavirus is going to long live and is more likely to be U shaped. With coronavirus disease a highly contagion one and with its vaccine going to take at least one year to reach to general masses, it’s more likely that economic activity in India is not going to get back to its normal behaviour until the end of 2020 or even early 2021. Further, complete lifting up of lockdown is almost impossible. Given this scenario, its seems that recovery out of this COVID-19 is going to take a long time; thus Indian economy taking a U-shaped recovery path can be a possibility in the coming times.

W-Shaped Recession: Quick Recovery, Second Decline

Also known as a “double-dip” recession, a W-shaped recession is a V-shaped recession and recovery, followed by another V-shaped recession and recovery. In India, a W-shaped recession is possible if government relaxes social distancing and lockdown norms prematurely, which initially would lead to recovery. However, this recovery would be short lived as economy would again plunge into a deep increasing corona infections which would force government to again impose stringent lockdown; thus pushing economy again into another V-shaped recession. Further, fears of another corona outbreak with reports of some COVID-19 survivors again retesting positive for the virus and relapse of virus in upcoming cold weather season can strongly indicate towards a possibility of W shaped recession.

L-Shaped Recession: An Extended Downturn

The worst-case economic scenario for the COVID-19 crisis is that it follows an L-shaped recession. In this outcome, growth falls and recovery to a pre-recession level of economic output may take many years; thus creating the horizontal tail of “L”.

Japan went through an L-shaped recession in the 1990s. The whole decade is known as Japan's” Lost Decade” as it saw steep market crash, credit crunch , liquidity trap and real estate crisis and consequent economic slowdown in these 10 years from 1991 to 2001.

It is quite unlikely that Indian economy would hit L-shaped recession, as medical research professionals are quite confident of developing a vaccine by the year end. In the meantime, government has started opening the economy in phases with a changed mantra from “jaan hai toh jahaan hai” to “jaan bhi jahaan bhi”.  Further, with continuous liquidity enhancement measures by RBI and a 20 lakh crore fiscal stimulus for the economy, it seems that Indian economy will come out of recession in a year or so; thus avoiding the worst case scenario of a long term sluggish growth.

NIKE-SWOOSH-The Air Jordan recovery: Indian economic recovery may be shaped like the Nike Swoosh

Right now, given the increasing rate of infections and consequent impact on economic activity, it’s too optimistic to expect that Indian economy would follow a V-shaped or a U shaped recession, as under both shapes, the recovery is quite sharp. Similarly, it would be quite pessimist to assume that W shaped or L shaped recovery for India as government has started lifting up the lockdown following which economic activity will start reviving.

Instead economists suggest that Indian economy recovery could look more like a “Nike swoosh” as economic activity is going to be depressed for almost an year or so(depicting falling part of curve), until the vaccine comes, however, once the recovery starts, it going to remain steady and gradual(rising part of curve).

However, this type of rebound depends largely on effectiveness of various fiscal and monetary stimulus measures announced by government for economy in general and businesses in particular.