Explaining the Income and Consumption Effects of COVID

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Explaining the Income and Consumption Effects of COVID

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

With regards to income, the authors 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 percent for other groups such as daily laborers. Individuals compensated for loss of work in their typical jobs by seeking work in other sectors, with knock-on effects that compounded direct COVID losses in those other sectors.

With regards to consumption, the data show that consumption fell even among those that did not experience income loss, suggesting precautionary savings and consumption behavior that reduced the distributive effects of COVID-19. Moreover, consumption of food and fuel fell less than consumption of durables such as clothing and appliances.

Following Hamilton (2001), the authors estimate Engel curves and find that changes in consumption changes reflect large price shocks (rather than a retreat to subsistence) in sectors other than food and fuel. Future work will explore geographic heterogeneity in that price shock.

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