The Budget Ignored Raghuram Rajan’s Warning About A K Shaped Recovery. So, What Lies Ahead For The Indian Economy?

Indian Economy


The noted economist and former governor of the Reserve Bank of India, Raghuram Rajan, recently warned about the dangers to the Indian Economy from a K Shaped Recovery. In his view, the “world-beating growth” that we are all celebrating is essentially the result of an uneven recovery wherein both the gains and the demand is being driven by the Top 10% of the population, measured in terms of the incomes and wealth, whereas the rest continue to languish without much difference to their post-pandemic dip in incomes and savings. Indeed, this is the reason he used the term K shaped recovery to indicate how the Tech, Startup, and Services sector along with select manufacturing firms are roaring whereas the other “leg” of the economy, comprising farmers, informal economy workers, and the average Indian have “diverged” from the former in the present Indian Economy. While statistics do bear this out, it is concerning that the recently presented Indian Budget does little to alleviate these “concerns” from one of the world’s most reputed economists, especially when he laid out a case for “careful” and “targeted” spending by the government on the sectors that need assistance to recover from the pandemic ravaged Indian Economy. So, what lies ahead for the Indian Economy and why it would be better for us all if we take Raghuram Rajan’s “advice” on how to fix the economy.

To start with, tune in to any media outlet and the news about the Indian Economy is all celebratory, self-congratulatory, and chest-thumping bravado, with much noise about how India is on track to become a 5 Trillion Dollar economy in this decade. Moreover, the projected 8 to 9 % of GDP (Gross Domestic Product) is shown as propelling India to the top of the table as far as recovery from the pandemic is concerned on a worldwide basis. Never mind that this “growth” is relative to starting from a negative base for the last two years and hence, must be seen in that light. In addition, there is the paradox here wherein Rajan’s warning about a K shaped recovery comes into play as I have noted earlier by pointing out that If the Indian Economy is doing so well, why does the common person feel so screwed. Moreover, India’s Youth Unemployment is at an all-time high of around 28% which means that nearly one in every three of those under 30 is jobless. This is leading to undesirable societal outcomes such as rising crime, skyrocketing suicide rates, and violent outbursts against others, driven by desperation and a feeling of hopelessness. Indeed, this is the reason why I argue that India’s Youth Need Jobs, and Not Jails.

Having said that, Raghuram Rajan acknowledges the “stupendous” achievements of the Indian tech sector, which has become the engine that is driving the Indian economy forward. Add to this is the fact that India has become the De Facto startup “capital” of the world, where its starry-eyed Gen Zers are dreaming of global dominance, with some of them achieving their ambitions, as can be seen from the many Unicorns that dot the Indian Startup land. Moreover, the fact that a TV Show like Shark Tank India has become one o the most-watched shows means that its youth are indeed rearing to go. So, this is where the Indian Government ought to focus its energies in tapping this humungous Demographic Dividend with half of the population under 30. We must act sooner than later to not waste the potential of its youth, lest the Dividend becomes a Burden. Again, Rajan’s “prescription” ought to be seen in this context, as the Indian MIddle class needs all the help it can get. Indeed, it is disappointing that the Indian Budget had little in the way for the Middle Class which can lead to serious consequences once the present “recovery” peters out. In other words, Rajan says that when the “pent up” demand dissipates, it is more likely that the Middle Classes, who are the force behind consumption, might be scarred, impacting the economy in more ways than one.

So, here we are where the K shaped recovery can exacerbate the “Fault lines” in the Indian Economy, which anyway have been building up for quite some time now. What with Demonetization and the GST (Goods and Services Tax) rollout along with successive budgets unable or unwilling to address some of these “divergences” between the Rich and the Rest leading to much concern over where the Indian Economy is headed. My guess is that we would see more of this unequal and inequitable growth playing out wherein speculation brings in more returns than productive activities as I explain here, Why are Real Wages Staganting, When the Stock Market is Booming. We risk social unrest unless we address some of these paradoxes at the heart of the Indian Economy. Considering that Raghuram Rajan predicted the Great Recession of 2008 much before others, and risked his standing by being a Cassandra, perhaps our grey-haired mandarins who sit in North Block can take their former colleagues advice seriously.