The prospects of a K-shaped economic recovery from COVID are increasing both in India and across the world.

  • 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.”

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.

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