Pointers that India is witnessing a K-shaped recovery; The economic ravages of the pandemic have had an uneven impact and taxation policies continue to be regressive

Context: Instead of the Quick V shaped recovery, India might be on a path of K-shaped recovery with a few sectors recovering while other few suffering.

Different types of recoveries:

  • A V-shaped recovery is characterised by quick and effective recovery in measures of economic performance after an acute decline in the economy.
  • A U-shaped recovery is characterized by slow and grinding recession followed by recovery after a long time.
  • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.  
    • It leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
    • It is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

The Indian recovery:

  • Not V-Shaped: There is undeniably some type of recovery, but one can hardly label it V-shaped. The economic ravages of the pandemic have had an uneven impact on different socio-economic groups.
  • Justification for K-shape: The recovery we see today is more K-shaped than V-shaped, with various groups and industries recovering much more rapidly than their counterparts.
    • Growth and consumption in specific industries:
      • For example, Premium cars and premium motorcycles have been resistant to the pandemic slowdown.
      • The recovery in the stock market and other such financial assets over the past year has been phenomenal. However, it is essential to understand that this does not necessarily reflect the economy’s condition as observed previously. Less than 5% of India invest in equities, which means that less than 5% of India directly benefited from said recovery.
    • Lower growth in certain sectors: Two-wheelers represent the economic situation of the lower and middle-class groups and India’s small businesses. A report by analytical company CRISIL indicates that in the year 2021, two-wheeler sales are set to decline by 3%-6% year-over-year over  a lower base of 2020. This is second-lowest in seven years. In fact entry-level models are the ones most affected under the category of two-wheelers.

Challenges – Signs from industry

  • Government taxation policies continue to be regressive, with increased indirect taxes and lower direct taxes placing greater tax incidence on the destitute.
    • Government insists on keeping Indirect taxes on fuel and consumer products high while lowering corporate taxes, paints a picture explaining these figures. The Government had recently raised taxes on textile products from 5% to 12%.
  • Inflation soars: the incomes of the middle and lower-middle-class have at best remained constant. There is tremendous pressure on the financial stability of these households, which seemingly face a sustained loss in disposable income.  For most income is the only hedge against the inflation.
  • Lower end-Jobs Data: Over five million or 50 lakh people lost their jobs in October, according to a Centre for Monitoring Indian Economy (CMIE) report. Many of those who lost their jobs during this period are likely economically insecure and abstain from non-essential purchases.
  • Recession(for poor households) = High inflation + Lower jobs/stable salary: Poor growth in Lower end jobs + high food and fuel prices, delivers a deadly blow pushing families to poverty.
  • MGNREGA Figures: This acts as a proxy for the informal sector, which employs a large portion of Indians. In the year 2021-2022, the Government of India had cut its budget allocation towards MGNREGA by 34%. There is a greater demand now for MGNREGA jobs than in the pre-COVID-19 era. Further there is delay in payments and those looking for MGNREGA work cannot afford to be unpaid for such long durations.
  • This explains the automobile data: Therefore, there seems to be no surprise that the consumption of two-wheelers and other such products has taken a significant hit.

The Case for Bottom up approach – supporting poorer sections

  • Most follow this approach: The U.S. and European economies have stimulated the economy bottom-up through unemployment cheques and social welfare schemes.
  • Money Multiplier concept: The economist, John Maynard Keynes, popularised the concept of the money multiplier and the relationship between government stimulus and economic growth. It fundamentally makes great sense to prioritise those who are more likely to spend (the middle and lower-middle-class) rather than those who have a greater propensity to save. The velocity of money which sustained a significant shock from pandemic lockdowns needs to be kickstarted.
  • Furthermore, the inflation of asset prices over the recovery period helps determine the nature of this recovery.

Conclusion: It is crucial that the Government addresses this phenomenon and works towards aiding the middle and lower-middle class. Social welfare schemes must be given greater importance to assist households to get through this period. A seemingly viable solution is for the Government to increase progressive (direct) taxes and reduce regressive (indirect) taxes to ease the financial pressure on lower-income households.

A unified regulatory framework: As there is competition between telcos and Internet companies, regulatory parity between them is required

Context: The takeover of the internet based companies might hamper net neutrality.

Evidences of Problems:

  • The ownership of approximately 18% of Jio by Facebook and Google provides a hint that new dynamics are on the horizon — with the evolution of 5G technologies, we are seeing the growth of an integrated sphere of cooperation as well as competition between telcos and Internet companies on account of substitute services, and competition in complementary value networks.
  • Competition from OTT platforms: The growth in over-the-top (OTT) messaging services provided by Internet firms has been accompanied by significant reductions in the revenues of text messaging services provided by telcos. For instance:
    • the quarterly SMS volume in the U.K. has declined by half to 10 billion by 2021 in the past five years.
    • Similarly, the growth of Voice over Internet Protocol (VoIP) services offered by OTT service providers is also a threat to telcos.
  • Complementary value networks or ‘Walled Gardens’: They comprise a bouquet of services provided by network operators, handset manufacturers, platform vendors, and content providers.
    • For example – Apple with exclusive wholesale agreements with AT&T Wireless in the early 2000s for its iPhones. By subsidising the iPhone with long tenure contractual agreements, and creating a proprietary app store, Apple created a walled garden.
    • Recently in India, RJio has forged arrangements with Google for JioPhoneNext to create an ecosystem of handsets, connectivity and applications.
    • These walled gardens often have a “platform captain” (i.e. Apple, RJio) which provides coordinating mechanisms, rules, key products, intellectual property and financial capital. This generally derive business benefit from their pole position. Hence, members of a walled garden may aspire for the position of captain.
  • Asymmetric regulatory stance: with respect to telcos and Internet companies. Some of this stems from fundamental differences in the nature of business such as the jurisdictional nature of operation and technology used. 
    • Net neutrality regulation: It prohibits discriminatory treatment of Internet companies — either with respect to pricing or traffic management — in a sense eliminates any incentive for vertical integration(such as with content and application providers). It was initially conceptualized in 2020 to stem the significant market power of telcos, which provide an essential service. 
    • It is now used by Internet companies against telcos: This is Preventing telcos from extracting all their revenues from Internet companies. This possibility arises because such firms have no choice but to make themselves available via all telecom service providers.
    • Case of ownership of telcos by Internet giants:
      • On the other hand, subscribers restrict themselves to one service provider.
      • Today, many Internet companies also provide an essential service and enjoy significant market power.
  • Examples of monopoly by Internet based companies themselves: For instance, web search, a market dominated by Google, is often the starting point for navigating the World Wide Web.

Way Forward:

  • Case for Net Neutrality for the Internet based companies:
    • Without search neutrality, search results may be manipulated to favour certain firms.
    • Vertical integration between the search engine company and downstream companies. Hence, net neutrality principles need to be applied to Internet companies as well.
  • Just as it is mandatory for telcos to provide “equal access” for interconnecting with other telcos’ networks, social media networks, instant messengers, and indeed any Internet service that exhibits critical mass dynamics needs to be governed by interconnection regulation.

Conclusion: In sum, there is an element of competition between telcos and Internet companies in the context of overlapping services and walled gardens. Hence, there is a need for a measure of regulatory parity between the two. In the U.S. and in India, while the sector regulator makes rules for telcos, the competition regulator oversees the behaviour of the Internet firms. It is time for a unified regulatory framework. A semblance of this convergence is visible in the European Union. India too needs an integrated perspective.




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