Nilanjan (Neel) Roy:”Szklanka do połowy pusta…”

Nilanjan (Neel) Roy:”Szklanka do połowy pusta…”

As the COVID 19 virus ravages human life as well as confidence in the future the big question in everyone’s mind is the impact on the global economy as well as our own and what measures are required for its recovery. Will there be any lasting structural Impact from the crisis.

Penning down my thoughts in a 3 part series

Series 1 The macro and Micro economic Impact of the Lockdown, what kind of shape will the recession take

Series 2: Looking Beyond the Crisis and planning for the future: Leadership skills and important of cash

Series 3: Opportunities for India, how this crisis can be a paradigm-changing opportunity for India

Series 1 The macro and Micro economic Impact of the Lockdown, what kind of shape will the recession take.

“The old order changeth, yielding place to new,

And God fulfils himself in many ways,

Lest one good custom should corrupt the world”.

Alfred Lord Tennyson wrote these lines in the Poem “The Passing of King Arthur”

COVID 19 is going to change the world in more fundamental ways than we can even begin to imagine to think.

How is going to be the impact on the economy due to the events that COVID 19 has unleashed? Projections won’t answer this question. Indices are hardly reliable in the calmest of times, GDP forecasts are dubious especially when the virus trajectory is unknown, the effectiveness of containment efforts are also unknown and mostly aimed at flattening the curve rather than finding a cure. The reality is that there is no single number that captures or forecasts what the impact of COVID19 could be on the economy.

There has been a brutal meltdown in the global financial markets including of course our own BSE and NSE. This might seem to indicate that the world economy is on the path to recession. Yes, there is a risk of recession but it is not a foregone conclusion. Second, while financial markets are a relevant recession indicator, history is often shown that bear markets do not necessarily lead to recession. So what is going to be the impact in India, of course, a lot will depend on to what extent India can contain the spread of the virus. The good news is that we have a large domestic economy and the dependence on exports is still not very high. Fortunately, favourable oil prices and the low off-take of oil by India will have a positive effect of cushioning some amount of fall of the economy. The risk, of course, is the economy was weakening even before the crisis combined with the massive impact of the COVID-19 crisis and we could have comorbidity.

As the dawn of the 21st of April breaks India has to move the focus now from lives to lives and livelihood which are of course intertwined, with a special focus on the poor. The government should be applauded that unlike many other leaders our leaders have been decisive in closing the borders and locking down the country early. This is one of the rare times the state and central government after a few false starts have developed a good working relationship.

A similar kind of resolve should be shown to stop the economy from sliding. A big risk is a breakdown in credit lines which could lead to a severe liquidity crisis, high number of bankruptcies and severe job losses. So again what is going to be the likely recovery path? Whether we can avoid the recession or not will depend on lots of drivers. We will have to look at factors, like the degree by which the demand has been delayed or the degree to which the demand has been lost.  Whether the shock is truly a spike or is it lasts or whether there is structural damage.

What Kind of Recession are we looking at?

Economists generally sketch an economy going into recession and coming out of it into 4 broad scenarios. An L, a U, a V or a W.

  1. An L-shaped recovery is a type of economic recession and recovery characterized by a steep decline in economic growth followed by a slow recovery. An L-shaped recovery is the most dramatic type of recession and recovery. Because there is a drastic drop in economic growth and the economy does not recover for a significant period of time, an L-shaped recession is often called a depression.
  2. A U-Shaped Recovery is a type of economic recession and recovery that resembles a U shape when charted. A U-Shaped Recovery represents the shape of the chart of certain economic measures, such as employment, GDP and industrial output. It is also charted when the economy experiences a gradual decline in these metrics followed by a gradual rise back to its previous peak.
  3. V-shaped recovery is a type of economic recession and recovery that resembles a “V” shape in charting. Specifically, a V-shaped recovery represents the shape of a chart of economic measures economists create when examining recessions and recoveries. A V-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to its previous peak.
  1. A V-shaped recovery is characterized by a sharp economic decline followed by a quick and sustained recovery.
  2. The recession of 1953 is an example of a V-shaped recovery.
  3. A V-shaped recovery is different from an L-shaped recovery, in which the economy stays in a slump for a prolonged period of time.
  1. A W-shaped recovery refers to an economic cycle of recession and recovery that resembles the letter W in charting. A W-shaped recovery represents the shape of the chart of certain economic measures such as employment, gross domestic product (GDP), industrial output, and others. A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back upward, followed again by a sharp decline and ending with another sharp rise. The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis.
  1. A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession.
  2. When charted, major economic performance indicators form the shape of a letter “W” during a W-shaped recession.
  3. W-shaped recessions can be particularly painful because the brief recovery that occurs can trick investors into getting back in too early.

Although today a lot of international pundits are crying wolf and pointing towards an L phase which looks ugly and causes significant structural damage impacting the supply side, the labour market, capital formation and the productivity function? At this stage as a knowledgeable Indian, it is difficult to imagine this scenario even when viewed with the most pessimistic lens.

To validate our optimism or our fears let us look at empirical data from prior shocks including the SARS, the HongKong Flu in 1968, the Asian Flu in 1958, the Spanish Flu in 1918 all of them had a V-shaped recovery, this gives us hope. I’m a born optimist and have great faith in the leadership of India and more importantly the resilience, ingenuity of the people of India. We will be able to bounce back like the eternal phoenix which rose from the ashes India will emerge from this catastrophe stronger, smarter and more powerful.

My little crystal ball gazing on the shape the recession will take and how it will recover:

But if I were to balance out my optimism with what my brain is telling me I would probably lean towards a W shaped recovery and let me tell you why I believe so. Let me tell you about the 3 pillars on which this scenario will pivot.

  1. First is the impact on the wealth confidence when you get a shock from the stock markets and your household wealth contracts your consumption confidence takes a beating. The tendency is to start saving money and that impacts the consumption which has a domino effect down the line.
  2. The second is when there is a direct hit to consumer confidence. This happens when financial market performance and consumer confidence correlate strongly then consumer confidence drops sharply and this could potentially have a direct hit on consumer spending making them wary of discretionary spends and perhaps become pessimistic about the longer term.
  3. The third pillar is the supply side shock which is unique to the situation we have today. Unlike many other recessions or financial crisis which was very simple compared to what’s happening today. In a financial crisis, you take care of the global big financial institutions and the country’s big financial institutions you would be able to overcome the crisis. Today we just don’t have a demand-side problem, we also have a supply-side problem which could lead to severe financial problems. The virus lockdown has stopped production and has disabled critical components of the supply chain. These gaps will start becoming apparent as we go along and will start resulting in layoffs. This is when we will get into a vicious cycle.

It is also very important to get reassured that recessions are cyclical in nature and not structural, however, let me qualify this by saying that sometimes the boundaries can be blurred. After the2nd world war, the world hasn’t seen a shock like this and consequently, the world will be a different place once we come out of it.

Hope for the best but definitely prepare for the worst. A V-shaped recovery is a very plausible scenario conceptually and empirically but don’t let that insight make you complicit. Prepare for what I would call a double whammy or a W shaped recovery. The lockdown will create the first dip, the pent up demand and the economic stimulus package announced for the industry will create a mini recovery. But the structural gaps created on the supply-side due to the lockdown, lack of consumer confidence combined with an already existing slowing economy and credit squeeze will create a second dip of the W. The price of oil in the near and medium-term and some global business realignment favouring us will hasten up India’s recovery. On recovery, I believe India will be back to its 7-8 % GDP growth rates. Like I said earlier we will be able to bounce back like the eternal phoenix which rose from the ashes India will emerge from this catastrophe stronger, smarter and more powerful.




Nilanjan (Neel) Roy

Expert in: in product management,

product marketing, technical sales,

engineering, strategy and P& L management


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