View: How will the economic recovery shape up? Likely scenarios

As the country inches towards a normalcy of sorts, the question uppermost on everyone’s minds is: what does ‘normal’ really mean anymore? For readers of this paper, the question, more specifically, is: what shape will the economic recovery take?

In his 2018 Oscar-winning movie, The Shape of Water, Guillermo del Toro’s draws on Plato’s idea that pure water takes the shape of an icosahedron, a 20-sided polyhedron with many faces, to show how beauty comes in many shapes and faces. Economic recovery, too, is likely to have many shapes and faces, especially after a pandemic like this one.

It is best to talk in terms of possible shapes, rather than numbers — even while accepting that the ultimate outcome may well be something none of the scenarios had contemplated. With that caveat, here are four possible scenarios for the global economy and India.

1. Base case scenario: In this scenario, the lockdown that now covers more than half the world’s population in varying degrees, flattens the curve sufficiently to allow governments relax lockdowns by early-late May so that the world returns to close to ‘normal’ by autumn. Not the ‘normal’ of the pre-Covid-19 world. But to Bill Gates’ ‘semi-normal’, where travel restrictions remain, people travel much less, many more work from home, and while restaurants and cinemas open, they will be less crowded as social distancing remains the norm for the foreseeable future. Recovery shape: U

2. Virus returns: Here, the world wins only a temporary respite, with the virus returning in winter. However, the world will be better prepared, testing facilities will be more widespread and the western world more willing to live with restrictions on individual freedoms, slowing the spread of the disease. Growth will plummet after the initial recovery following easing of restrictions. But greater success in dealing with the return of the virus will see growth recover much faster. Recovery shape: W

3. Best case scenario: Here, the world recovers quickly. Like China, where harsh lockdown measures not only contained the virus from spreading to other areas, but lifting of restrictions has also seen a rapid recovery in economic activity. The virus is defeated for good and does not return. Even if it does, it is no more feared than the ordinary flu. In any case, majority of the population already has immunity against it. Recovery shape: V

4. Worst case scenario: Here, lockdown measures continue, although with varying intensity, till much later in the year. Economic growth plummets and stays low for a long time. It is only by Q2, 2021that the world takes slow hesitant steps towards recovery, with recovery to pre-Covid-19 levels likely only by 2023. Recovery shape: L

So, which of these shapes will recovery take in India? Much depends on how the global economy recovers. For once, our lower integration with the global value chain might even work to our advantage. Even so, the short-term outlook is bleak — barring agriculture, that is likely to fare reasonably well, thanks to a normal monsoon.

For the rest, supply disruptions, the return of labour from urban centres, lack of capital from risk-averse banks, government reluctance to extend the required level of fiscal support, and the fact that states with urban hotspots (accounting for 64% of GDP) will be among the last to resume normal activities means growth in industry and services will suffer. Since these two sectors together account for more than 80% of GDP, growth will suffer in tandem. Over the medium to long-term, however, the outlook is much brighter. As countries, world over, realise the folly of depending on a single source (China) for their components and raw materials, and look to diversify, they are likely to turn to India.

So, what is it going to be for us in India? U, V, W or L? Alas, it’s unlikely to be a V. Recovery will be a slow process, given the scale of disruption and government’s failure to provide adequate fiscal support. It’s unlikely to be W either, for two reasons. One, social distancing for a prolonged period is, at best, a pipe dream for most Indians. So, even if the virus returns later this year, we are likely to have developed herd immunity by then.

Two, a vaccine is likely to be ready by year-end. So a return of the disease will not have a similar devastating effect on the economy. That leaves only two candidates: U and L Hopefully, GoI will wake up from its slumber, spend what is necessary to keep the wheels of the economy moving, and we will be spared an L-shaped ‘recovery’, a return to the ‘Hindu rate of growth’ we struggled to break away from.

That leaves only U. And it can happen. Provided all of us, U and I (and GoI) do our bit.

(Scenarios based on an ING research paper by Carsten Brzeski & James Smith)