Background: Onset of COVID-19 and the Government Response

Second, the analysis has highlighted an intriguing inconsistency between the relative declines in income and consumption across households headed by informal and formal wage workers. In contrast to income, the percentage drop in per capita household consumption expenditure in the early phase of COVID-19 was significantly larger in households headed by formal workers (who tend to be richer) than in households headed by informal workers. This inconsistency is puzzling in light of standard theories of how household consumption responds to temporary income shocks. These theories predict that households will use savings or borrowing to smooth consumption intertemporally if the incomes of the households fall temporarily. Relative to informal households, formal households are expected to have better access to consumption-smoothing mechanisms. Yet, the patterns the analysis has uncovered suggest that the former were able to smooth consumption more efficiently during the early COVID-19 income shock.

Although a full investigation of this issue is beyond the scope of this chapter, the analysis has reviewed potential explanations. The first explanation relates to the fact that the lockdown shock not only affected household incomes but also directly restricted household consumption opportunities. Specifically, it may be that the lockdowns imposed more restrictions on the consumption possibilities of richer formal households because these households tend to consume disproportionately more nonessentials. A second explanation relates to a potential differential mismeasurement of real consumption. Thus, it may be that the prices of items consumed more intensively by informal households rose more quickly during the lockdowns so that the real consumption of these households fell relatively more precipitously than suggested by the drop in nominal household expenditures. According to a third explanation, it may be that formal households expected the initial COVID-19 income shock to last longer, while informal households did not have this same expectation. Consequently, the former adjusted their consumption expenditure by larger amounts, leading to a larger decline in these expenditures. This is also consistent with the observation that the incomes of households headed by informal workers eventually recovered more quickly.

The rest of the chapter is organized as follows. A brief timeline of the pandemic and the lockdowns is summarized in the next section. The subsequent section describes the data, the variables used in the analysis, and the sample. The section entitled “Descriptive Analysis” presents relevant descriptive statistics. The section entitled “Empirical Specification: Event Study Analysis” introduces the empirical specification. The final section concludes and sets out the results of the difference in differences event study.

The timeline of COVID-19 in India begins on January 30, 2020, when the first COVID19 case was confirmed in the state of Kerala (Andrews et al. 2020). The daily number of