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Research

Explaining the Income and Consumption Effects of COVID in India

The COVID-19 pandemic led to stark reductions in economic activity in India, as a result of voluntary and forced changes in behavior. We employ CMIE’s Consumer Pyramids Household Survey to examine the timing, distribution, and mechanism of the impacts from this shock on income and consumption.

We document large drops in income even before lockdown policies and substantial heterogeneity in experiences. Some groups, particularly white-collar workers, saw virtually no loss; while incomes fell for nearly 90% for other groups such as daily laborers. Individuals compensated for loss of work in their typical jobs by seeking work in other occupations, with knock-on effects that redistributed COVID losses to those other occupations.

Consumption fell less than income, suggesting households were able to smooth the idiosyncratic components of the COVID shock as well as they did before COVID. Interestingly, consumption fell even among those that did not experience income loss, suggesting precautionary savings that reduced the distributive effects of COVID-19. Finally, consumption of food and fuel fell less than consumption of durables such as clothing and appliances. Following Costa (2001) and Hamilton (2001), we estimate
Engel curves and find that changes in consumption reflect large price shocks (rather than a retreat to subsistence) in sectors other than food and fuel/power. In the food sector, it appear that lockdown successfully distinguished essential and non-essential services, at least to the extent that it did not increase the relative price of food. Moreover, it appears that the price shocks outside the food sector were larger in places with greater COVID-19 cases, even during the lockdown. Either there was differential application of lockdown or part of the shock was a shadow price from fear of COVID-19.

Working Paper

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