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Economic Recovery and its shapes | K-shaped recovery post CoVID-19 | Ayushi Chand - YouTube
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Hello everyone.
Welcome to today's video.
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On this video, I am going to be
talking about the English alphabets.
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No, I'm not kidding.
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I am actually going to discuss different
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English alphabets only
from an economic lens.
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I am going to be talking about
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the different recoveries
that different economies face after going
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through a period
of recession or depression.
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I have already talked about economic
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cycles, how different economies go through
these cycles, how there is a period of GDP
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growth and then fall
and then increase again.
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In my previous video,
I have linked it on the top,
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do go and watch the video.
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It will give you a better understanding
of how economies function in a free market
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state and how they go
through these cycles.
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On this video, I'm going to talk about
the different shapes these recoveries can
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take and also the implications for us
and how it affects our daily lives.
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Just a quick introduction about myself.
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I'm Ayushi. I'm
an Indian Economic Service Officer
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currently working with
the Government of India.
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I have done my BA (Hons) economics
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from Shri Ram College of Commerce
and then my Master's in Economics.
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I have worked at the intersection
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of economics, finance, and public
policy for the last seven years.
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So let's talk about recession.
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What is recession?
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Technically, recession is defined as
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a period where the GDP of the country
falls for two consecutive quarters.
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So if the GDP is falling for two
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consecutive quarters or more,
it is defined as recession.
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If the GDP fall continues over a prolonged
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period over years, then this
will be termed as a depression.
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However, after a recession,
the GDP starts rising again.
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The GDP increases because
of a number of factors.
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It could be because of a positive,
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favorable political climate,
or it could be because of government
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spending or the stimulus that the
government provides to the economy.
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It could also be because of the stimulus
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that the central bank of that particular
country provides,
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and hence because of a number of factors,
the GDP starts rising again.
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I have discussed all these terms about
the central bank interest rate,
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the repo rate in India, for example,
and how government increases its GDP.
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In my previous videos,
I have linked it on the top.
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These economic concepts will give you
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a better understanding about
how economies function.
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Do go and watch those videos after
you've completed this video.
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So once the economy starts recovering
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from the recessionary period, it usually
takes a particular shape recovery.
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Now these are usually in the form
of the English Alphabet.
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It could be a U shaped recovery,
a V shape recovery, W, L, K.
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So different economists have given
different alphabets to these different
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shaped recoveries and hence these are
how they have come to be defined.
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These are not a standardized definition.
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It is only based on the graph that the
economists have observed historically.
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For example, recently,
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former RBI Governor and former CEO
of India, Shri Raghuram Rajan,
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he talked about India going
through a K-shaped recovery.
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Now, K-shaped recovery could be a dire
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state for India, and he wanted Indian
government to be cautious about it.
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I'll be discussing the K
shape recovery in this video.
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Please stay tuned to the very end because
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these things will become clear once
you have seen the entire video.
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So let us first talk about the first
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recovery shape, which is
the V shaped recovery.
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This is how it looks like
in a V shape recovery.
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The economy falls suddenly.
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And when I'm saying the economy,
I mean the GDP of that country falls
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suddenly and it also bounces back
quickly to its pre recession level.
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It is usually the quickest form
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of recovery that can be seen,
and it is considered by the economist
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to be the most favorable form of recovery
because the economy doesn't go through
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a major setback period and bounces back to
its original level at a very rapid rate.
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Now, this kind of recovery can
happen due to a number of reasons.
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For example,
it could be that the government stimulus
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came into effect and it prevented
further downfall of the economy.
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Or it could be because the central bank
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took some preventive steps in order
to prevent the falling of the GDP further
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or to prevent inflation, and hence
the recovery bounce back quickly.
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For instance, the US saw such a V shaped
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recovery in 1953 when it
saw a recessionary period.
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However, it bounced back to its pre
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recession level within
the first few months of 1954.
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That is within one year of the recession.
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And this could happen because the Central
Bank of USA, that is the Federal Reserve,
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could take preventive measures in order
to keep the GDP from falling further.
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As I mentioned, this is the most favorable
form of recovery as it prevents loss
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in employment, loss in GDP,
and even prevents inflation from happening
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over a long period and affecting
the people over a long term.
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The second shaped recovery
is called the U- shaped recovery.
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Now, this, as you can imagine,
is a sudden fall in GDP.
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However, it takes certain time.
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It takes a few years to come
back to its pre-recession level.
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Hence it forms a U, and this
is called a U-shaped recovery.
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Now, it may not mean that the GDP has
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fallen drastically and then
the economy is not able to recover.
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It may only mean that the GDP has fallen.
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However, it is taking a lot more time than
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a V-shaped recovery to recover
to its pre-recession level.
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Hence, it is not about the depth
of the 'U', it is about how much time it is
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taking for the economy to recover
back to the original level.
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For instance, the recession that happened
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in US in 1973 to 75 was
a U-shaped recovery.
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It took a significant amount of time
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for the economy to come back
to its pre recession level.
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Some economists also considered
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the recovery from the 2001 recession as
a U-shaped recovery, while the GDP fall was
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mild and it also bounced
back relatively quickly.
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However, the employment was at a very low
level, unemployment was very high,
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and that took as good as seven years
to come back to its original level
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and hence it was termed as a U shaped
recovery by certain economists.
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The third shaped recovery is
called as the W-shaped recovery.
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Now, W-shaped recovery is essentially
two recessions or two Vs
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coming into the picture.
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This means that once the economy starts
recovering from a recession,
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the consumers are tricked into believing
that it is a V-shaped recovery.
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However, the economy goes into recession
once again and hence it is a double dip
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recession and it can shatter
consumer confidence immensely.
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It is essentially two recessions in one
and this means that the economy can take
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a very large amount of time in order
to come back to its pre-recession level.
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Sometimes it could be the political events
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that are going on in the country,
or it could be external factors,
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for example a global crisis,
or it could also be that the measures
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that are being taken by the government or
by the central bank prove to be
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counterintuitive and the economy
suddenly falls into recession again.
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So there could be a large
number of reasons,
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there is no fixed reason as such.
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However, this recovery takes a lot of time
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and generally it is considered
to be a scary situation.
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In general, the fourth type
of recovery is an L-shaped recovery.
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Now, L-shaped recovery is a very scary
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situation because it means
that the GDP has fallen.
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However, it is taking not only months
but years to come back to its pre
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recession level and sometimes it is also
dubbed as depression because the economy
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is not able to bounce back
to its original level.
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For example, the 2008 crisis is generally
dubbed by the Economist as an L-shaped
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recovery, while in terms of GDP, the GDP
could recover in two to three years.
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However, other parameters such as
employment, such as inflation,
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took a very, very long time to recover
and in fact they could not reach
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the forecasted level of GDP growth
and hence it was an L-shape recovery.
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And this proved to be a major
major setback to the US economy.
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Some of the reasons that were given
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by the former
Federal Reserve Chairman Ben Bernanke
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would be as follows: that the economy could
not bounce back from the subprime mortgage
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crisis then the housing sector
was still at a very low level.
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It could not boom after the amount
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of credits that was available
for the people of the US economy was not
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adequate and people were
not spending enough.
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So this was an L-shaped
recovery for the US economy.
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The fifth and the final shape recovery
that I'm going to talk about is the
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K-shaped recovery, which was also
in the news recently after
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Mr. Raghuram Rajan talked about
this kind of recovery.
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As the name suggests,
the K-shaped recovery means that some
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sectors are actually coming back
and booming back from the recession.
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However, some sectors are sinking further
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down below and are stagnating or just
not recovering from the recession.
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This is a relatively new term which has
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come into being after this pandemic and
hence there is not lot known about it.
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Now the K-shaped recovery
basically has two arms.
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The two arms could be divided in terms
of the sectors which are recovering.
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For example in the pandemic,
the hospitality sector, the travel sector,
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the airline industry,
they were the most affected and hence they
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have still not bounced back
and it started sinking down.
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However, other sectors such as the FMCG
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sector such as the It sector were booming
and did not have to bear the brunt
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of the recession for a very long time
and hence the two arms again diverged.
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It could also be in terms of the section
of the population affected.
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For example, the affluent class did not
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have to bear a lot of the brunt of the GDP
recession and hence they could actually
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bounce back from this
recession very quickly.
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They actually started pouring in their
money in the stock markets and hence they
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could see the returns
for their investments.
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However, the lower section
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of the population, the poor people,
they lost their jobs,
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they lost their livelihood and they face
the brunt of the recession and probably
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still are facing that front and hence they
diverged in the lower segment of the key.
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And this is what Mr.
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Raghuram Rajan was talking about in terms
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of the K-shaped recovery
of the Indian economy.
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We have to take into account
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that different sectors are actually coming
back from their session at different pace.
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Some are not seeing growth and some are
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seeing rapid growth and this can lead
to greater inequality in the economy.
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It could also be in terms
of the different classes of people.
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For example,
different sections of the people have been
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affected differently because of this
pandemic and hence we need to ensure
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that the inequality is reduced
and all the people are catered to.
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This is the goal of the government.
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Now the important and the final part
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of this video is how do
these shapes affect you?
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This is how it works.
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If the economy is seeing an L-shaped
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recovery, then it means that it's time
to diversify your income sources.
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The unemployment might persist and the GDP
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might not come back to its pre
recession level for a very long time.
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This means that you must start thinking
about earning from different sources
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and hence you must start
developing your income sources.
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It also means that you must shift
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from growth oriented instruments
into income generating instruments.
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So investments in stocks which give you
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dividends investments
in FDs may be a good idea.
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This is not a standard formula.
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You have to do your own research and you
have to do your own homework in this.
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However, I'm just giving you an indication
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of what different recoveries
could mean for different people.
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Similarly, if it is a V-shaped recovery you
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might not want to pull
out your investments.
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You might want to stay put and remain
invested because this means
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that the economy is going to reach
back to its pre recession level again.
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If it is a W-shaped recovery you might
want to save more because that extra
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savings is going to come in handy
when the economy sees a GDP downfall.
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Again, the bottom line is that you
must diversify your investments.
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You must have multiple sources of income
because you never know when the economy
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might see a downfall and when the economy
might recover from the downfall.
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However, I must give a fair disclaimer
here that while we are in a recession it
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is not easy to predict
the shape of the recovery.
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We do not know how the economy
is going to recover.
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What is the shape that the economy is
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going to take while it is
recovering from the GDP downfall?
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It may be easy to see
the shape only in retrospect.
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Hence, it is important
to diversify your investments.
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It is important to develop multiple
sources of income in order to not bear
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the negative consequences of an economy
going into a recessionary phase.
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While we cannot predict recessions and how
the economy is going to recover,
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it becomes important to understand how
economic cycles work and how recovery
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takes place in order to be
better prepared for our future.
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I hope you liked this video.
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If you liked the video then do press
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the like button and do
subscribe to the channel.
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I plan on posting more content around
economics, finance and public policy.
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If you have any suggestions for me then do
please drop them in the comment box down
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below and I will definitely try to make
videos on those topics as well.
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With that, see you on the next video.
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Stay safe, take care, bye.
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