What is a K-shaped Economic Recovery ?| UPSC

What is a K-shaped Economic Recovery ?| UPSC

      HEADLINES:

What is a K-shaped economic recovery and what are its implications?

      WHY IN NEWS:
Policy will need to look beyond the next few quarters and anticipate the state of the macroeconomy.

SYLLABUS COVERED: GS 3: Economy

      ISSUE: 

WHAT IS A 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.”

What is a K-shaped Economic Recovery ?| UPSC

SOURCES : INVESTOPEDIA

KEY TAKEAWAYS

  • Economic performance of different sectors, industries, and groups within an economy always differ to some extent.

In a K-shaped recovery some parts of the economy may see strong growth while others continue to decline 

  • Unlike other letter-shaped descriptors, which focus on large aggregates, a K-shaped recovery is described in terms of data broken out across different parts of the economy.
  • The meaning of a K-shaped recovery really depends on the choice of how to disaggregate data across the economy.
  • 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 in- comes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption.

MACRO IMPLICATIONS OF A K-SHAPED RECOVERY

  • 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 pent-up demand expresses itself.
  • But it’s important not to conflate stocks with flows, and levels with changes.
  • Upper-income households have benefitted from higher savings for two quarters.

Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes

  • 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.
  • What we are currently witnessing is a sugar rush from those savings being spent.

      IASbhai WINDUP: 

  • 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 a much higher proportion of their income.
  • 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 and tightening political economy constraints.
  • Policy will, therefore, need to look beyond the next few quarters and anticipate the state of the macroeconomy post the sugar rush.
     SOURCES:   IE  | What is a K-shaped Economic Recovery ?| UPSC

 

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