There is now a real danger of structural damage to the economy; the govt must quickly come up with a new relief package
The biggest casualty of the pandemic—and the painstakingly slow vaccination rollout—will be joblessness. The country’s unemployment rate has risen through much of April, having hit 7.4%, and threatens to climb further to around 8% significantly higher than the 6.5% in March, according to CMIE. Approximately 10 million salaried jobs have been lost, across urban and rural India, and one is not sure how many people will get back their livelihoods.
And demand for MGNREGA work is already outstripping supply; data for April shows 2.6 crore households and 3.7 persons were looking for work, higher by 91% and 85%, respectively, over April 2020. That these are the highest levels seen in seven years indicates how bad things are. What may have happened is that some workers who returned to their homes last year—following the stringent lockdown—are still there and haven’t gone back to their workplaces. As Mahesh Vyas, CEO& MD, CMIE, recently observed, there has been an increase in farm-hands, much of which is really disguised unemployment.
The situation is not very much better in urban India where joblessness has seen a sharp increase. While it might appear the labour participation rate (LPR) is showing signs of stability, one must remember there has already been a steep fall; in March, the LPR was 40.2, about 2.5 percentage points lower than the average of 2019-20. While the 30-day moving average did show a slight rise until mid-April, it may have peaked. The deceleration in the job market is pretty much broad-based across manufacturing and services and, not surprisingly, the perception on employment opportunities a year from now has worsened; a much bigger share of people now believe conditions will deteriorate.
By all indications, that could well be true.
Thanks to the ferocious second wave of the pandemic, and the attendant restrictions, the recovery is faltering. Most recovery trackers are showing a sharp downtick; Nomura’s NIBRI has slipped ~24pp below pre-pandemic normal while HSBC’s tracker is running 20% below normal. High-frequency data have been showing a declining trend since mid-April, with some of them retreating to levels seen in October 2020; not that they were very robust before that. Even resilient sectors like electricity are showing signs of weakness, while traffic congestion is at August 2020 levels. Also, loan growth has all but collapsed; non-food credit increased by a measly 5.4% year-on-year (yo-y) for the fortnight ended April 9. Analysts at Care Ratings pointed out that this is the first time the y-o-y growth rate has fallen in April in the last five years.
There is now a real danger of structural damage to the economy with the weaker sections, across industry, enterprise and households, becoming even weaker This would hold true for the vulnerable sections of the population in both urban and rural India, with the situation probably worse for the urban poor. The government needs to address this distress with a new package of relief measures. Following the outbreak of the pandemic and the consequent lockdown in March 2020, the government had rolled out a series of measures; it upped the allocations for MGNREGA, distributed free food-grains and also transferred cash. In the absence of meaningful relief measures, the situation could deteriorate.
While there are expectations that normalcy would be restored in a month or two, there is no clear visibility. One reason for this is the complete lack of clarity on the pace at which the vaccination drive will progress. As of now, it appears just about 50% of the population would be inoculated by December this year. While there is every possibility of the key affected sectors—hospitality, retail, restaurants, aviation—getting back on track by September or so, the fact is many of the smaller enterprises and units have been debilitated over the past year. It is possible many of the smaller businesses can’t be revived, which, in turn, means the loss of livelihoods.
Interest rates might be at their lowest levels in decades, but most of these units will be unable to access formal credit because banks are turning even more risk-averse. In June 2020, CRISIL had observed that MSMEs were facing an existential crisis and suggested lenders use new credit assessment paradigms; the ratings agency had pointed out that their finances could slip badly and they would struggle to manage working capital challenges. Given these small and micro units collectively employ in large numbers, the government needs to follow up its earlier credit guarantee scheme with another one to help them.
In 2020, although the economy was in a very poor state—following the deleterious effects of demonetisation—the rural economy was faring reasonably well on the back of two good monsoons. However, after a year of distress, and with some part of the workforce still not having returned to their work places, rural incomes are expected to be under pressure. Economists say they are already seeing signs of sluggishness in rural consumption. The Reserve Bank of India (RBI) has done much of the heavy lifting, it is now the turn of the government to step up spending. The economy needs a punchy fiscal stimulus, a big booster dose, targeted at the small and unorganised sectors.