K-shaped economic recoveryDate: 12 January 2021 Tags: Basics of Economics
Economists have sated the prospects of a K-shaped recovery from COVID are increasing both in India and across the world.
A K-shaped recovery happens when different sections of an economy recover at starkly different rates.
Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates forced up during the lockdown, increasing future consumption. Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.
These differences are already visible. Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 percent since October while two-wheelers have contracted 15 percent.
Upper-income households have benefitted from higher savings for two quarters. The current consumption is a result of those savings, which may slowdown after a period of time.
Since households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
Effects of COVID-19
COVID has triggered an effective income transfer from the poor to the rich, which will be demand-impeding because the poor have a higher marginal propensity to consume (they tend to spend a much higher proportion of their income instead of saving).
If COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity.
Policy will, therefore, need to look beyond the next few quarters and anticipate the state of the macro-economy post the current rush.