Context: Predicting a V-shaped economic recovery, the central bank of India has said that if growth momentum continues and inflation stays mild, then there will be a room for policy action to support growth. This observation came in the State of the Economy report released by the Reserve Bank of India (RBI). This comes at a time when the top bank started draining out the surplus liquidity in the money markets, to stave off an economic crisis as a result of COVID-19 pandemic. The consumer confidence is expected to increase from January 2021, peak in July 2021 and continue till September, said the report. Meanwhile, investors took some profit off the table on Friday after markets scaled historic levels a day before, when the BSE Sensex surpassed the 50,000-mark for the first time. Sensex ended near the day's low at 48,878.54, down 746 points dragged by Reliance, ICICI and the HDFC twins. Bajaj Auto remained the best performer through the day. 

Key Highlights of the Report

• According to a recent report published by the central bank, the country's gross domestic product (GDP) is not far from attaining positive growth. It observed that the economy will experience a V-shaped recovery in 2021, where V will stand for vaccine.
• The Covid-19 pandemic has been a human and economic catastrophe for India. Almost one-fourth of the country's economic activity was wiped out due to fall in domestic demand in wake of the strict nationwide lockdowns to curb Covid infections.
• India's GDP dipped a historic 23.9 per cent in the first quarter (Q1) of 2020. The contraction narrowed down to 7.5 per cent in the second quarter (Q2).
• However, so far India seems to have managed the Covid crisis pretty well.
• The first advance estimates of national income for 2020-21 released by the National Statistical Office (NSO) estimated real GDP growth in 2020-21 to be at (-) 7.7 per cent as against (-) 10.3 per cent projected by the International Monetary Fund (IMF) in October 2020. In December 2020, RBI’s monetary policy committee (MPC) had projected GDP to be (-) 7.5 per cent.

Rise in government expenditure

• Total expenditure of the government surged 48.3 per cent on year-on-year (y-o-y) basis in the month of November. While, capital expenditure shrugged off a three-month contraction and expanded 248.5 per cent.
• This was mainly due to the introduction of the Atmanirbhar Bharat package.

Revival of imports, exports

• After contracting for 9 consecutive months, merchandise imports finally experienced a growth of 7.6 per cent (y-o-y) in December 2020.
• The revival was led by gold, electronic goods and vegetable oils. Rising imports of pearls and precious stones, machinery, electronic goods and textiles reflect the revival of domestic activity as they are of the nature of intermediate goods in supply chains. This also augurs well for exports going forward.

Being the global capital for vaccine manufacturing, Indian pharma exports are also expected to receive a big impetus as vaccination drives start globally. The RBI says India must look for ways in which cash sitting idly in balance sheets of corporations and banks and reverse repo balances with the RBI finds its way into credit to productive sectors before it imposes a persistent deflationary weight on real activity.

SHAPES OF ECONOMIC RECOVERY
Economic recovery can take many forms, which is depicted using alphabetic notations. For example, a Z-shaped recovery, V-shaped recovery, U-shaped recovery, elongated U-shaped recovery, W-shaped recovery and L-shaped recovery.

• The alphabets generally denote the graph of growth rate, which resembles the shape of the letter.
• The fundamental difference between the different kinds of recovery is the time taken for economic activity to normalize.
• The time taken is often a factor of multiple things such as the depth of the economic crisis. e.g deeper the recession, longer is the time to get back to normal.
• The other aspect of economic recovery includes the effect of pandemic on jobs and household incomes, and the kind of policy response taken by the government that determines how quickly economic growth will recover.

Z-shaped recovery: It is the most-optimistic scenario in which the economy quickly rises after an economic crash.

• It makes up more than for lost ground before settling back to the normal trend-line, thus forming a Z-shaped chart.
• In this economic disruption lasts for a small period wherein more than people’s incomes, it is their ability to spend is restricted.

V-shaped recovery: It is the next-best scenario after Z-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.

• In this, incomes and jobs are not permanently lost, and the economic growth recovers sharply and returns to the path it was following before the disruption.

U-shaped recovery: It is a scenario in which the economy, after falling, struggles around a low growth rate for some time, before rising gradually to usual levels.

• In this case several jobs are lost and people fall upon their savings.
• If this process is more-long drawn than it throws up the “elongated U” shape.

W-shaped recovery: A W-shaped recovery is a dangerous creature. In this, growth falls and rises, but falls again before recovering, thus forming a W-like chart.

• The double-dip depicted by a W-shaped recovery can be due to the second wave of the pandemic.

L-shaped recovery: In this, the economy fails to regain the level of GDP even after years go by.

• The shape shows that there is a permanent loss to the economy’s ability to produce.

J-shaped recovery: The growth rises sharply from the lows much higher than the trend-line and stays there.

• Swoosh shaped recovery: This is similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
• Inverted square root shaped recovery: In this scenario, while there could a rebound from the bottom, the growth slows and settles a step down. 

Road Ahead

• The Bull-run around the street is likely to continue and investors clearly see and expect a V- shaped recovery. Talking about the sectors that we need to watch out for, we need to increase the spending as far as education and healthcare are concerned. The informal sectors like MSME and NBFCs as liquidation moderation take place is something that we need to watch out for and where hand holding is required real estate hospitality and tourism to need to be given special attention. We need to think innovatively going forward and that's how we will see the V-shaped recovery really taking proper shape.

Source:https://timesofindia.indiatimes.com/business/india-business/rbi-sees-v-shaped-recovery-state-of-indian-economy-explained-in-10-charts/articleshow/80409686.cms