What is a K-shaped Economic Recovery ?| UPSC
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
WHAT IS A K-SHAPED RECOVERY?
- 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.”
SOURCES : INVESTOPEDIA
- Economic performance of different sectors, industries, and groups within an economy always differ to some extent.
- 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.
- 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.
- 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