Montek Singh Ahluwalia:”This is a K-shaped recovery not V-shaped and although the worst is behind us the economy is not in a comfortable position”:

Montek Singh Ahluwalia to Karan Thapar

Montek Singh Ahluwalia: “This is a K-shaped recovery not V-shaped and although the worst is behind us the economy is not in a comfortable position”

In an interview just over a week before the Finance Minister presents the first post-Coronavirus and post-lockdown budget, the former Deputy Chairman of the Planning Commission has said: “I would agree with the view that the worst is behind us” but quickly added: “This does not mean the economy is in a comfortable position”. Montek Singh Ahluwalia said, “the economy fell off a cliff but is now climbing back up”. However, “we are still going to end the year with negative growth of 7.7%.” He pointed out that whilst it’s true “the economy is recovering” it’s important to remember two things: First, “it’s not an even recovery” and, second, “it’s also not clear how things will pan out”.

In a 47-minute interview to Karan Thapar for The Wire, which will go on The Wire’s website tonight in which Mr. Ahluwalia spoke at length about steps he thinks the Finance Minister should announce in the budget particularly to do with what he called fixing the tax system, he began by saying what we are experiencing is definitely a K-shaped recovery. He does not accept the government’s claim that it’s V-shaped. “The government has never defined what it means by V-shape”, he said. A 15% decline in the first half and zero growth in the second half is not V-shaped, he added.

Mr. Ahluwalia said that whilst the formal sector could be experiencing a V-shaped recovery that was not true for the whole economy. The small sector and the informal sector cannot be said to be experiencing a V-shaped recovery. This is why he prefers to call it a K-shaped recovery.

In the interview to The Wire, Mr. Ahluwalia spoke about several areas that remain issues of deep concern for the economy. First, he said, “unemployment is a big problem”. He said whilst the unemployment rate had reduced from the extremely high point of April and May, in recent weeks it has begun to increase again.

Speaking about the financial sector, he said public sector bank NPAs are “a major constraint on achieving a V-shaped recovery”. However, Mr. Ahluwalia added, the RBI “needs to be congratulated for bringing out” in its recent Financial Stability Report the extent of increase in NPAs that is likely by September 2021. The RBI has said NPAs could shoot up to 13.5% compared to 7.5% a year earlier. Those of public sector banks could increase to 16.2% compared to 9.7% in September 2020.

Mr. Ahluwalia told The Wire that sectors like the MSME sector, the construction sector, and others where contact is unavoidable, such as tourism, hospitality, hotels, and restaurants, “absolutely need special attention”. He said: “They were the worst hit. They need more time to recover”. He also added, “some may never regain their old levels of profitability”. He said this could include restaurants, shopping malls, and airlines.

Speaking specifically about MSMEs, which constitute 30% of GDP, 45% of manufacturing and employ up to 12 crore people, Mr. Ahluwalia said “small MSMEs may have a tough time competing with large enterprises”. He said there is “bound to be a lot of sorting out and shuffling” that will happen. However, he added that “if a sector has become fundamentally unviable tough decisions will be needed” and, on further questioning, made clear that there is no point throwing good money after bad prospects. Some enterprises have to be allowed to close down.

Speaking specifically about investments, Mr. Ahluwalia said “investment will be a problem area”. He said the decline in investment of the last 4-5 years will not easily reverse itself. He said private sector investment faces two continuing problems i.e. the twin balance sheet problem and the fact the banking system is in no position to seek out good creditors and lend to them.

Speaking to The Wire about what he would like to hear from the Finance Minister when she announces the budget on the 1st, Mr. Ahluwalia identified four things. First, “she must come clean on the fiscal deficit” and reveal its full extent. Second, she must prepare people for the fact that next year the fiscal deficit will also be high but, at the same time, lay out a path for bringing it down. Third, she must “stop increasing import duties”. Later in the interview, Mr. Ahluwalia also explained that the government’s reversal of the earlier agreed strategy of lowering import duty has put off international investors and reduced the chances of attracting investment that wants to relocate from China.

However, Mr. Ahluwalia laid most stress on steps the Finance Minister must take in the budget to fix the tax system. Whilst accepting that there is no need to reduce income tax and that corporate tax has already been reduced, he said there is a great need to remove opacity and reduce the room for different interpretations of taxation laws and clauses. He also said we must stop constant appeals to courts, all the way to the Supreme Court. He said there is a need to bring India’s tax system in line with international best practice.

Speaking specifically about GST, Mr. Ahluwalia said we need to drastically reduce exemptions. He said a general rate of about 14-15% should apply to most items.

Speaking more generally about the budget, Mr. Ahluwalia said the Finance Minister must “set out a strategy she will follow”. He advised her not to be fixated by next year’s growth rate. He said it may well be 8% or even more but added “that’s not necessarily robust growth”. He said the real challenge is the growth rate of 2022-23. He said the Finance Minister needs to structure the budget with that in mind.

Mr. Ahluwalia said in all likelihood the additional expenditure necessary in the forthcoming budget will mean that the fiscal deficit in 2021-22 will still be about 6 or 6.5%. In 2020-21 i.e. this year he expected it to be around 7 – 7.5%.

Mr. Ahluwalia told The Wire that if the government is serious about seeking investment relocating from China it must “stop the reversal in the strategy of lowering import duties”. He also said it must seek an early opportunity to join RCEP. The earlier decision not to do so “sent out negative signals”. As he explained, “if we raise import duties we will put off investment”.

In an outspoken moment, Mr. Ahluwalia said the government’s decision to appeal the arbitration cases it has lost in the Vodafone and Cairn matters, was “an unfortunate decision”. However, he added: “I am not sure how much to blame the government and how much the system”.

Mr. Ahluwalia said he had opposed the Vodafone decision when it was taken by Pranab Mukherjee in 2012. At the time he had advised both Mr. Mukherjee and Prime Minister Manmohan Singh that this was an error (details of that were first made public in the interview Mr. Ahluwalia gave Karan Thapar for The Wire in March 2020).

Finally, asked if the image of rising divisiveness was deterring investor sentiment, Mr. Ahluwalia said: “People look to see how the government reacts when tensions surface. Does the government address the problem in a way that brings all on board? India needs to show its handling its problems well.” He added that polarization and divisiveness were not new to India but what mattered to investors was the way in which these problems are handled.


(A Kshaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries, or groups of people./.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 rise back to a previous peak after a sharp decline in these metrics).

Video link to Karan Thapar’s interview with Montek Singh Ahluwalia for The Wire: “This is a K-shaped recovery not V-shaped and although the worst is behind us the economy is not in a comfortable position”.


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‘Recovery is K-Shaped, Not V-shaped. Worst is Behind Us But Economy is Not in Comfortable Position’


Disclaimer: The opinions expressed in this article are on the basis of an interview by the noted journalist Karan Thapar. The facts and opinions appearing in the article do not reflect the views of does not assume any responsibility or liability for the same.)



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