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Business News/ Opinion / Views/  There’s nothing OK about the ‘K’ in descriptions of our recovery

There’s nothing OK about the ‘K’ in descriptions of our recovery

We mustn’t conflate pre-covid economic trends with patterns of India’s recovery, for that only trivializes the issue of inequality

Photo: iStockPremium
Photo: iStock

There is a tendency among some to import and implant vague notions and jargon, as if that adds to our comprehension. A “K-shaped recovery" is an example of this. I understand what it means in the US, since, following a covid-induced recession, a graphical representation establishes a ‘K’—demonstrating that some sectors recovered while others continued to suffer. (I might have been more impressed, if, following the current penchant for using Greek letters, Indian commentators had used the term “Kappa-shaped recovery".) The Roman, or the Greek, is tautological and nothing more.

K is relative, while poverty is absolute. There was the health shock of covid and the economic shock of lockdown. Assorted people have claimed millions of Indians have slipped below the poverty line because of one or the other. Examining this requires defining a poverty line and sourcing data. Niti Aayog’s multi-dimensional poverty index doesn’t allow inter-temporal comparisons. The last National Sample Survey consumption expenditure survey was for 2011-12, not beyond. I know of only two other surveys that can be used: ICE (undertaken by People Research) and another by the Centre for Monitoring Indian Economy (CMIE). Ignoring problems of methodology/sampling and issues of statistical control, findings of an increase in poverty are for urban India, not rural, which confirms anecdotal impressions. This can happen because of: (a) a health shock; (b) a lockdown shock. An exogenous increase in medical costs can drive people below the poverty line, hypothetically. But (a) is less plausible as a poverty-inducing factor than (b), at least for India. Consider various measures the government has taken for the rural sector, catalogued in the Economic Survey and Union budget, and vindicated by the National Family Health Survey (NFHS)-5 undertaken in the midst of the pandemic. It’s clear that rural India suffered less from both (a) and (b). Using CMIE data, there is a December 2021 National Bureau of Economic Research (NBER) paper by Arpit Gupta, Anup Malani and Bartosz Woda that also documents this rural-urban divide. Therefore, assertions should be made with due care. Urban isn’t all-India. In logic, that error is called the fallacy of composition.

Growth can increase inequality, depending on how inequality is defined. There is a Kuznets-Oshima hypothesis to that effect. The fact that there was inequality, or that inequality has been increasing, is not the same as saying that covid and the subsequent recovery increased inequality, which is the assertion of the “K-shaped" expression. Yes, covid led to loss in incomes. But did its impact vary across income layers? Yes, covid affected health and educational outcomes adversely. But were those impacts differential? If the employment elasticity of growth isn’t as high as it used to be and if the labour force participation rate has been in decline, that’s part of a secular trend. How have covid and the recovery contributed to that? With (b) easing and growth picking up, CMIE data now shows a decline in unemployment rates, as is to be expected. Labour markets react with a time lag. In that sense, the ‘recovery’ has a time dimension. If growth widens inequality, growth per se is K-shaped. What additional point is made by asserting the recovery is K-shaped, as if there is something wrong with the recovery?

As I said, at one level, this is tautological. The lockdown may have gone, but contact-intensive sectors, with direct human interfaces, remain constrained. Therefore, these won’t grow by as much as other sectors until those restrictions ease.

In the ‘K’, one shouldn’t form the impression that the upper and lower lines of it, respectively going up and down, are constant over time. They are dynamic. In the US, the K-shaped recovery argument was used to lobby for fiscal concessions for specific sectors. I suspect part, though not all, of the argument in India is for the same purpose. Growth always involves churn, and, to use Schumpeter’s expression, “creative destruction". That’s desirable, and to attribute it to a recovery is neither here nor there.

Lest I be accused of being uncharitable, there is a churn among micro, small and medium enterprises (MSMEs), part of the process of formalization. This ante-dates covid, the goods and services tax being one reason, though covid may have accentuated it. Apart from highlighting measures needed for MSMEs and a time lag along the recovery path, ‘K’ adds nothing to our comprehension.

Finally, one can interpret ‘K’ along the lines of Kaldor-Pasinetti growth models, distribution between wages and profits, capital markets vis-à-vis labour markets. In this, one must distinguish between a stock and a flow, wealth versus income. Wealth, particularly when computed through stock market valuations, isn’t a relevant variable, though it does raise blood pressures. Corporate profitability is. There is legitimate concern about the declining employment elasticity of growth, not the recovery. There is legitimate concern about the composition of growth and increased capital intensity of manufacturing. There are issues of generating employment and reforming labour markets. These issues pre-date covid and will remain even after (a) and (b) have passed. Blaming them on the recovery fails to distinguish the secular from the transient, an exogenous shock from something more permanent. Thus, an expression like “K-shaped recovery" does us a disservice on three counts. First, it suggests profundity in analysis when no additional insight exists. Second, it reduces heterogeneity across sectors and geographical areas to a common aggregate assertion. Third, by conflating growth issues with a post-covid recovery, it trivializes the matter.

Bibek Debroy is chairman, Economic Advisory Council to the Prime Minister

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Published: 03 Feb 2022, 10:23 PM IST
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