Issue of K-shaped recovery: How government budget can deal with it?

Issue of K-shaped recovery: How government budget can deal with it

Synopsis The macro-implication of K-shaped recovery and labour market pressure. How the government budget will deal with it? 

Introduction-   

  • COVID Vs Economic Mobility  India has broken the link between COVID virus proliferation and mobility earlier and more successfully. 
  • India’s GDP estimates for 2020-21 show that the economy is expected to perform much better than earlier projections. 
  • However, the present economic recovery is very hopeful developments but, juxtaposed with a stronger-than-expected recovery, is confirmation of labour market scarring. 

What are the present economic developments in India?  

  • Industrial sector - The large firms have endured the crisis better and are gaining market share at the expense of smaller firms. 
      • Although it will increase medium-term productivity, but it will also increase the dominance/pricing power of big companies in the market.  
  • Employment  CMIE’s [Centre for Monitoring Indian Economy] labour market survey reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.  
      • These labor market projections not incompatible with a sharper near-term rebound, as this recovery is led by capital and profits, not labour and wages 
  • Household sector– Households at the top of the pyramid are seen their incomes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption. 
      • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes. 

What are the implications of a K-shaped recovery? 

K-shaped recovery happens when, following a recession, different sections of an economy recover at starkly different rates or magnitudes. The macro-implication of K-shape recovery in India are- 

  • Firstly, issue of Income- Upper-income households have benefitted from higher savings for two quartersPresent recovery is led by these savings.  
      • But lower-income household are facing 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, the issue of Consumption– To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-hindering because the poor have a higher marginal propensity to consume (i.e. they tend to spend (instead of saving) compared to higher marginal propensity to import among rich.  
      • Consumption pattern– Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 per cent since October while two-wheelers have contracted 15 per cent. 
  • Third, increases the inequality– COVID-19 reduces competition or increases the inequality of incomes and opportunities between rich and poor. 
      • This could affect the trend growth in developing economies by hurting productivity and tightening political economy constraints. 

 How upcoming budget may help India to deal with K Shape recovery?  

Policy needs to look beyond the next few quarters and anticipate the state of the macroeconomy post the sugar rush, for the wellbeing of poor citizens and increase its income level. 

  • First, Policy will look for the private sector to start re-investing and re-hiring, and thereby sets the economy onto a more virtuous path. Barring that, the labor-market hysteresis could sustain with the manufacturing and service sectors. 
    • Private investment revival policy may be implemented first for recovery of the private sector. 
  • Second, Ensure exports should benefit from increasing global growth as the world gets vaccinated steadily.  
  • Third, Government may invest in large physical and social (health and education) infrastructure push. It may provide employment for who lost job due to COVID. It may reduce inequalities. 
  • Fourth, a reliable medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability. 
  • Lastly, the investment model for public investment must be balanced to push and financed by aggressive public asset sales.

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