India’s Emerging Unemployment Problem And The Potential Economic Growth Enhancers

India’s overall unemployment rate touched a nine-week high, in sync with economists’ assessment that the drop in joblessness was due to agricultural activities and, thus, temporary in nature.

The national unemployment rate climbed from 8.67% in the week to 9 August to 9.1% in the week ended 16 August, according to data from the Centre of Monitoring Indian Economy (CMIE).

The previous high was 11.6% in the week ended 14 June. In fact, it was even higher than the monthly joblessness rate of 7.43% witnessed in July, and the pre-covid monthly unemployment rate shows CMIE data.

The rural unemployment rate climbed from 8.37% in the week ended 9 August to 8.86% in the week to 16 August. Rural unemployment rate was also at a nine-week high since the 10.96% recorded in the week ended 14 June.

The lowest rural unemployment rate in recent months was recorded in the week ended 12 July when summer crop sowing was in full swing across Indian with the acreage far higher than last year.

Similarly, the urban unemployment rate was at 9.61% in the week ended 16 August, compared to 9.31% in the previous week. Urban unemployment crept up for the second consecutive week, and experts said it will continue to remain high in the short- to medium-term.

“A good crop season managed to taper down the unemployment post-reverse migration. But agriculture activities is seasonal and, this year, we saw a high absorption of people in that sector. Despite low productivity, it helped the employment scenario at least from the statistical point of view, but the current situation is different and the unemployment rate in the immediate to medium range will remain a tough task," said Arup Mitra, a professor of economics at the Institute of Economic Growth.

“The gradual return of migrants to cities despite a spreading pandemic shows that rural India is in need of work. It will also create a demand-supply mismatch in urban areas as unemployment opportunities are not back to pre-covid-19 times." Mitra said, adding that the labour force participation rate in August must be lower than the previous month as agriculture activities have dipped, people have started coming back to cities despite lack of jobs amid partial lockdowns across several states.

“Migrants who were earlier employed in construction or manufacturing may not be facing a big challenge as real estate construction has started picking up, but those who were in retail and hospitality sectors has a huge challenge at hand because demand is still low, people are not visiting markets and malls," said K.R. Shyam Sundar, a labour expert and a professor of XLRI Jamshedpur.

India's economy contracted by 23.9% in the three months to the end of June, making it the worst slump since 1996. A grinding lockdown brought on by the coronavirus pandemic has disrupted business and left millions out of jobs, reports the BBC's Nikhil Inamdar.

For the last five months, since India imposed one of the world's strictest lockdowns, Aditi Limaye Kamat's restaurant business has been bleeding money.

Her four popular eateries occupy prime real estate space across Dadar, an expensive neighbourhood in Mumbai, the country's financial capital.

"Only deliveries are being permitted. And that's not helping very much. It amounts to merely 10 to 15% of our overall business in normal circumstances and doesn't even cover salary as well as running costs," Ms. Kamat told the BBC.

She wants the government to permit in-restaurant dining at the earliest with strict social distancing guidelines like in other parts of the world. "If not, many of us will be out of business by January," she adds.

India's National Restaurant Association has predicted that 40% of the country's restaurants will not survive the pandemic.

A fine print of the April to June GDP data released by the government on Monday reflects the pain of people like Ms. Kamat.

Hotels and trade saw the sharpest contraction at 47% during the lockdown period, only preceded by construction activity which halved.

Barring agriculture, which posted modest growth of 3.4%, everything from mining to manufacturing and electricity to services contracted at alarming levels during this period.

"The time has come to unlock all the restrictions imposed in the lockdown phase at the earliest," Milan Thakkar, who runs a company that manufactures wall putty and plaster, said. His company, Walplast, saw sales plunge by a third during the lockdown and expects no incremental growth this year.

Calls from desperate Indian business owners to open up the economy are getting louder, despite India's coronavirus tally of 3.6 million cases, with nearly 80,000 new ones being reported every day.

One of the most severe lockdowns in the world has done little to curb the spread of the virus in India. What it has done is flatten the wrong curve, Rajiv Bajaj, the managing director of Bajaj Auto, one of India's largest manufacturers of auto-rickshaws, said a few months ago.

At -23.9%, India has become the fastest contracting large economy in the world, according to economist Vivek Kaul. And the likelihood is that this number will be further downward revised, given that the government's data collection was severely impaired during the lockdown.

"I suspect the revisions will be much larger," Pronab Sen, the former chief statistician of India, told the news site, Bloomberg Quint.

All of this puts India firmly on the path to the deepest recession in its independent history. The country last contracted by -5.2% in 1979-80. The estimates for a contraction this year range between an optimistic -3% to a more realistic -10%.

The implications of this for India's capacity to lift large swathes of its population out of poverty and generate employment for the youth are significant.

A failure to embark on this path could mean a decade of hardship, signs of which are already visible.

In the more immediate term, the government will need to focus on reversing the collapse in domestic demand and private consumption - which determines 60% of GDP - through more aggressive fiscal and monetary response to get the economy back on track.

"If left unaddressed, a longer period of below-normal activity risks knock-on effects on the labour market and ultimately on the banking system," warns analyst Sonal Verma. She expects India's central bank to reduce interest rates by at least another half a percent, starting in December.

A new report from the McKinsey Global Institute identifies a reform agenda that could be implemented in the next 12 to 18 months. It aims to raise productivity and incomes for workers, small and midsize firms, and large businesses, keeping India in the ranks of the world’s outperforming emerging economies.

Over the decade to 2030, India needs to create at least 90 million new nonfarm jobs to absorb the 60 million new workers who will enter the workforce based on current demographics, and an additional 30 million workers who could move from farm work to more productive non-farm sectors. If an additional 55 million women enter the labour force, at least partially correcting historical underrepresentation, India’s job creation imperative would be even greater (Exhibit 1).

For gainful and productive employment growth of this magnitude, India’s GDP will need to grow by 8.0 to 8.5 percent annually over the next decade, or about double the 4.2 percent rate of growth in fiscal year 2020. Given the uncertainties about economic outcomes during the COVID-19 pandemic, our analysis looks at scenarios beginning in fiscal year 2023, although many of our proposed actions would start well before then, and in fact, be implemented in the next 12 to 18 months.

Net employment would need to grow by 1.5 percent per year from 2023 to 2030, similar to the average rate that India achieved from 2000 to 2012, but much higher than the flat net employment experienced from 2013 to 2018. At the same time, India will need to maintain productivity growth at 6.5 to 7.0 percent per year, the same as it achieved from 2013 to 2018. The two objectives are not contradictory; indeed, employment cannot grow sustainably without high productivity growth and vice versa.

If India fails to introduce measures to address pre-pandemic trends of flat employment and slowing economic growth and does not manage the shock of the crisis adequately, its economy could expand by just 5.5 to 6.0 percent from 2023 to 2030, with a decadal growth of just 5 percent and absorb only about six million new workers, marking a decade of lost opportunity (Exhibit 2).

India has a successful track record to draw on: over the past three decades, the country has been one of just 18 outperforming emerging economies to achieve robust and consistent high growth. Pro-growth reforms lifted productivity and helped the country weather shocks and cycles. Real GDP growth has averaged 6.8 percent annually since 1992, and it has been inclusive; economic prosperity has brought significant improvement in living standards. Since 2005, more than 270 million people have escaped extreme poverty.

According to the report, there can be three growth boosters:

1: Global hubs serving India and the world

This theme offers as much as $1 trillion in economic value. To achieve this, India will need to work now to grasp opportunities presented by forces such as rising wages in other parts of Asia, trade conflicts, and efforts to make supply chains more resilient. Rising flows and volumes of data suggest demand for a range of offshored and nearshored services. Greater affluence and leisure time and a focus on health and safety will also open up opportunities to produce and sell more manufactured goods and services.

India would need to raise its competitiveness in high-potential sectors like electronics and capital goods, chemicals, textiles and apparel, auto and auto components, and pharmaceuticals and medical devices, which contributed to about 56 percent of global trade in 2018. India’s share of exports in these sectors is 1.5 percent of the global total, while its share of imports is 2.3 percent. It could also build on its traditional strength in IT-enabled services to reflect digital and emerging technologies like artificial intelligence (AI) and machine learning-based analytics. The country also has an opportunity to develop high-value agricultural ecosystems, healthcare services for India and the world, and high-value tourism.

2: Efficiency engines for India’s competitiveness

The business models in this grouping can eliminate inefficiency in areas that underpin a competitive economy: power, logistics, financial services, automation, and government services. In each case, opportunities for value-creating market-based models could emerge, generating about $865 billion in economic value by 2030.

Examples include next-generation financial services, such as innovation in digital payment offerings, new flow-based lending products, asset resolution and recovery models that could make insolvency processes more streamlined and effective, and a larger range of risk capital investment vehicles such as alternative investment funds. Automation of work and Industry 4.0 could bring greater efficiency; for example, about 60 percent of manufacturing-sector output could leverage predictive maintenance, smart safety management, and product design. These in turn can lift productivity in plants and factories by 7 to 11 percent.

Many workers in these roles will require retraining and redeployment, and some may be displaced. Other opportunities exist inefficient mining and mineral sufficiency; high–efficiency power distribution, which could reduce power tariffs to commercial and industrial customers by 20 to 25 percent; and a push to greater e-governance.

3: New ways of living and working

Indian businesses can create economic value of about $635 billion by 2030 if they can tap into the shifting preferences of Indians aspiring to a higher standard of living. Safer, higher-quality urban environments, cleaner air and water, more convenience-based services, and more independent work in the new ideas-based economy are all opportunities to create millions of productive jobs in service sectors.

Among other examples, India has the opportunity to introduce a robust planning approach for its top cities, which have low capital investment per capita and are less productive than they should be. In retail, if India could increase the share of e-commerce and modern trade to 20 percent and establish digitally enabled supply chains, this could generate $125 billion in economic value by 2030 and lift the productivity of 5.1 million storekeepers and e-commerce workers.

Climate change mitigation and adaptation also are creating opportunities, such as more energy-efficient buildings and factories. India could more than triple its renewable energy capacity, from 87 gigawatts to 375 gigawatts, and increase the share of wind and solar energy in power generation from about 7 percent to best-in-class 30 percent.

Digital communication services provide opportunities in universally available, affordable, high-speed internet connectivity and fast-growing digital media and entertainment ecosystems.

Finally, India’s business leaders would need to raise aspirations and commit to productivity growth through a set of frontier business ideas. Businesses need to develop a long-term value creation mindset coupled with a strong performance-oriented culture; both of these create stakeholder value in the long term. A set of winning capabilities are essential if firms are to emerge as large, high-growth, globally competitive businesses.

At under 1% of GDP, India's stimulus measures so far have been among the most stingy among the world's major economies.

The government has argued that it didn't see the point in pressing both the brake and the accelerator at the same time. But with a gradual unlocking of the restrictions, there are hints that a second stimulus package is being prepared.

Sanjeev Sanyal, principal economic adviser to the finance ministry, told local media recently that India was prepared to build infrastructure at an "unprecedented" scale as well as allow a several percentage points rise in its debt-to-GDP ratio to get back on the growth path.

But economists warn that with revenues plunging, tax receipts drying up and a fiscal deficit already expected to shoot up to four percentage points above the expected levels, the leeway for India to spend its way out of the crisis remains limited at best.

And ultimately, a recovery in the economy will hinge on a recovery in the pandemic curve, which in India's case is yet to peak, according to some experts.

The nation is anticipating to experience how the Indian government takes this growing out of hand situation under control and how it will play a significant role in determining India's economic future!