Nothing is right about the ‘K’ in our recovery description

K is relative, while poverty is absolute. The health shock of Kovid and the economic setback of the lockdown. Mixed people have claimed that millions of Indians have slipped below the poverty line for one reason or the other. There is a need to define a poverty line and obtain data to test this. NITI Aayog’s multi-dimensional poverty index does not allow for inter-provisional comparisons. The last National Sample Survey Consumption Expenditure Survey was for 2011-12, no further. I know of only two other surveys that can be used: ICE (conducted by People Research) and the other by the Center for Monitoring Indian Economy (CMIE). Ignoring methodology/sampling problems and statistical control issues, the findings of the increase in poverty are for urban India, not rural, which confirms the true impressions. This may be due to: (a) a health shock; (b) A lockdown setback. An exogenous increase in medical costs could drive people below the poverty line, hypothetically. But (a) is less plausible as a poverty-inducing factor than (b), at least for India. Consider the various measures taken by the government for the rural sector, listed in the Economic Survey and the Union Budget, and confirmed by the National Family Health Survey (NFHS)-5, conducted amid the pandemic. It is clear that rural India suffered less than 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 Bartoz Voda that also documents this rural-urban divide. Hence, the claim should be made with due caution. Urban is not pan-India. In logic, that error is called the fallacy of creation.

Depending on how inequality is defined, development can increase inequality. There is a Kuznets-Oshima hypothesis to this effect. The fact that there was inequality, or that inequality is increasing, is not the same as saying that Covid and its subsequent recovery increased inequality, which is what the “K-shaped” expression claims. Yes, there was loss in income due to covid. But did the effect differ across income levels? Yes, covid adversely affected health and educational outcomes. But were those effects different? If the employment elasticity of growth is not as high as it used to be and if the labor force participation rate has been in decline, it is part of a secular trend. How has covid and recovery contributed to this? (b) With easing and growth, the CMIE data now shows a decline in the unemployment rate, as expected. The response of labor markets with a time lag. In that sense, ‘retrieval’ has a time dimension. If growth increases inequality, then growth per se is K-shaped. What additional point K-shape comes from claiming recovery, as if something is wrong with recovery?

Like I said, on one level, it’s taut. The lockdown may have gone, but contact-intensive areas, with direct human interface, are constrained. So, until those restrictions are eased, they will not grow like other sectors.

In ‘a’, one should not make the assumption that its upper and lower lines going up and down respectively are constant with time. They are dynamic. In the US, the K-shaped recovery logic was used to lobby for fiscal concessions for specific sectors. I suspect that part of the logic in India, though not all, is for the same purpose. Development has always involved brainstorming, and, using Schumpeter’s expression, “creative destruction”. This is desirable, and to attribute it to recovery is neither here nor there.

Lest I be accused of being unrighteous, there is a churn among the Micro, Small and Medium Enterprises (MSMEs), which is part of the process of formalization. This pre-dates Covid, one reason is the Goods and Services Tax, although Covid has extended it. Apart from highlighting the measures needed for MSMEs and a time gap along the recovery path, ‘K’ adds nothing to our understanding.

Finally, one can interpret the ‘K’ along the lines of the Kaldor–Pacinetti growth model, the distribution between wages and profits, of capital markets rather than labor markets. In this, one must differentiate between stocks and flows, money versus income. Wealth, especially when calculated through stock market valuations, is not a relevant variable, although it does increase blood pressure. Corporate profitability. There is a legitimate concern about declining employment elasticity of growth, not recovery. There is legitimate concern about the structure of growth and the increased capital intensity of manufacturing. There are issues of creating jobs and improving labor markets. These issues are pre-Covid and will remain after (a) and (b) have passed. Blaming them on recovery fails to separate the secular from the transient, an exogenous trauma from something more permanent. Thus, an expression like “K-shaped recovery” harms us in three respects. First, it suggests depth in the analysis when no additional insights are present. Second, it reduces disparity across regions and geographies into a common overall claim. Third, by combining development issues with a post-Covid recovery, it makes the matter trivial.

Bibek Debroy is the Chairman of the Economic Advisory Council to the Prime Minister