The prospects of a K-shaped economic recovery from COVID are increasing both in India and across the world.
Q. What is K-Shaped Recovery?
A K-shaped 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.
A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”
Q. What are the macro implications of a K-shaped recovery?
With the top 10 per cent of India’s households responsible for 25-30 per cent of total consumption, one could argue consumption would get a boost as this rise in demand expresses itself.
Upper-income households have benefitted from higher savings.
To the extent that 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.
Second, COVID has triggered an effective income transfer from the poor to the rich.
This will be demand-impeding because the poor have a higher marginal propensity to consume (ie they tend to spend (instead of saving) a much higher proportion of their income.
Third, if COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies.