What the continued distress in informal labour market says

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Economic data released over the past few weeks suggests that the Indian economy has emerged from the second wave of the pandemic better than most expected. Two broad points emerge. First, although the second wave was far more virulent, the impact of the localised restrictions imposed during this period on economic activity was less damaging than observed last year. And second, in the weeks and months thereafter, large parts of the economy are almost back to pre-Covid levels. However, these data points mask the distress lingering in large parts of the informal economy.

The informal/unorganised sector in India accounts for roughly half of the total value added in the economy (52.4 per cent in 2017-18), and employs around 90 per cent of the labour force. The extent of distress that continues to persist in this part of the economy — at least in rural areas — can be gauged from the state of the informal labour force. This can be gleaned from the MGNREGA data.

In the first quarter (April-June) of the ongoing financial year, the number of households demanding work under MGNREGA, while higher than pre-Covid levels, was lower than last year. There could be two possible explanations for this. One, that the extent of distress in the labour market last year was of a much higher magnitude. Or two, that the spread of the pandemic in rural areas this year curtailed the registration of households demanding work under MGNREGA.

In the second quarter (July-September), however, the number of households demanding work this year was not only around the same level as last year, but was also significantly higher than the pre-Covid level (2019-20). This signals two possibilities.

First, that sections of the informal labour force in rural areas and the migrant households who have not returned to urban areas, were unable to find non-farm employment, and had to rely on MGNREGA. This implies that large parts of the informal economy — sectors like manufacturing, construction, trade and transport, where those currently demanding work under MGNREGA would have normally found jobs — were operating well below their pre-Covid levels in the second quarter as well.

Second, it is also plausible that to the extent that employment opportunities were available, a section of the informal labour force simply opted for whatever work was available at depressed wage rates, supplementing its income by seeking work under MGNREGA. After all, in the absence of safety nets, at current per capita income levels, few can afford to stay unemployed for long and look for remunerative employment. (MGNREGA also provides an avenue for these households to rebuild their buffers, which would have been depleted while dealing with the fallout of the second wave.)

The situation is unlikely to be materially different for the urban informal labour force considering that even formal employment in some of these sectors (trade, accommodation and restaurants) has been badly hit, as revealed by the latest Quarterly Employment Survey. This implies that even a downward trending unemployment rate will not be an accurate gauge of labour market distress.

This level of sustained distress in the informal labour market points towards a continuing divergence in the fortunes of the formal and informal parts of the economy. For, if both formal and informal segments were rebounding at an equal pace, then surely, the labour market distress in both these segments should also have been dissipating, even if with a lag, at similar momentum. After all, the value added per worker is unlikely to rise dramatically in the informal economy. It is more likely to rise in the case of the relatively larger firms in the formal sector. This is in line with the first quarter results of the listed companies which show that while the bigger companies flourished, the smaller ones (those in the range of Rs 0-25 crore) continued to be mired in distress.

This also suggests that in sectors with a large informal presence — construction (where three-fourths of the overall value-added was by the informal segment in 2017-18), trade, transport and communication (value added by the informal segment ranges from 47.7 per cent to 86.6 per cent), real estate and professional services (roughly half the value-added is by the unorganised segment) and manufacturing (where between 20-25 per cent of the value-added is by the unorganised segment) — the relatively larger firms in the formal sector would have gained at the expense of the unorganised.

Thus high-frequency indicators, which indicate that the economy is operating at more than 90 per cent of its pre-Covid level — even surpassing it in many sectors — do not reflect the distress in the informal economy or among the smaller firms in the formal economy. Simply extrapolating the performance of the organised sector to that of the unorganised, as may be the case with some estimates, would thus present an inaccurate picture of the Indian economy.

One outcome of this sustained divergence between the formal and the informal labour force is the worsening of the income distribution. To the extent that it endures — even when the economy had recovered to pre-Covid levels during the second half of last year, the number of households demanding work under MGNREGA remained significantly higher than pre-Covid levels — this loss in purchasing power of the lower half of the distribution chain would translate to the aggregate household consumption basket shifting towards that of the relatively affluent households. This would raise demand for the less labour-intensive services and high-end/imported manufactured products and reinforce the current labour market trends.

How quickly, and to what extent, the informal economy can return to its pre-Covid level of value-added and employment is debatable. While during demonetisation, a badly bruised informal sector clawed its way back, the disruption this time is of a much higher magnitude. This labour market scarring has broader implications for aggregate consumption and investment, and indicates subdued medium-term growth prospects.

This column first appeared in the print edition on October 4, 2021 under the title ‘Unmask the distress’. ishan.bakshi@expressindia.com



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