Last week, the IMF unveiled its 2nd World Economic Outlook (WEO). The IMO comes out with the report twice every year — April and October — and also provides regular “updates” to it on other occasions. The WEO reports are significant because they are based on a wide set of assumptions about a host of parameters — such as the international price of crude oil — and set the benchmark for all economies to compare one another with.
The central message was that the global economic recovery momentum had weakened a tad, thanks largely to the pandemic-induced supply disruptions. But more than just the marginal headline numbers for global growth, it is the increasing inequality among nations that IMF was most concerned about.
“The dangerous divergence in economic prospects across countries remains a major concern. Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 per cent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 per cent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards,” it stated.
There are two key reasons for the economic divergences: large disparities in vaccine access, and differences in policy support.
But possibly the most important takeaway from the WEO this time is about the employment growth likely to lag the output recovery (Chart 1).
“Employment around the world remains below its pre-pandemic levels, reflecting a mix of negative output gaps, worker fears of on-the-job infection in contact-intensive occupations, childcare constraints, labor demand changes as automation picks up in some sectors, replacement income through furlough schemes or unemployment benefits helping to cushion income losses, and frictions in job searches and matching,” the IMF stated.
Within this overall theme, what is particularly worrisome is that this gap between recovery in output and employment is likely to be larger in emerging markets and developing economies than in advanced economies. Further, young and low-skilled workers are likely to be worse off than prime-age and high-skilled workers, respectively.
As far as GDP is concerned, India’s growth rate hasn’t been tweaked for the worse. In fact, beyond the IMF, several high-frequency indicators have suggested that India’s economic recovery is gaining ground.
But what the IMF has projected on employment — that the recovery in unemployment is lagging the recovery in output (or GDP) — matters immensely for India.
To begin with, according to the data available with the Centre for Monitoring Indian Economy (CMIE), the total number of employed people in the Indian economy as of May-August 2021 was 394 million — 11 million below the level set in May-August 2019. To puts these numbers in a larger perspective, in May-August 2016 the number of employed people was 408 million. In other words, India was already facing a deep employment crisis before the Covid crisis, and it became much worse after it.
As such, projections of an employment recovery lagging behind output recovery could mean large swathes of the population being excluded from the GDP growth and its benefits. Lack of adequate employment levels would drag down overall demand and thus stifle India’s growth momentum.
There are several possible reasons. For one, as mentioned above, India already had a massive unemployment crisis. Labour economists such as Santosh Mehrotra, who is Visiting Professor at the Centre for Development Studies, University of Bath (UK), cite a number of additional issues.
“The first thing to understand is that India is witnessing a K-shaped recovery. That means different sectors are recovering at significantly different rates. And this holds not just for the divergence between the organised sector and unorganised sector, but also within the organised sector,” Mehrotra said. He pointed out that some sectors such as the IT-services sectors have been practically unaffected by Covid, while e-commerce industry is doing “brilliantly”. But at the same time, many contact-based services, which can create many more jobs, are not seeing a similar bounce-back. Similarly, listed firms have recovered much better than unlisted firms.
The second big reason for worry is that the bulk of India’s employment is in the informal or unorganised sectors (Table 2). The informal worker is defined as “a worker with no written contract, paid leave, health benefits or social security”. The organised sector refers to firms that are registered. Typically, it is expected that organised sector firms will provide formal employment.
So, a weak recovery for the informal/unorganised sectors implies a drag on the economy’s ability to create new jobs or revive old ones.
Last week, IMF Chief Economist Gita Gopinath pointed out that the number of people using the Mahatma Gandhi National Rural Employment Guarantee Act provisions was still 50-60% above pre-pandemic level. This suggests that the informal economy is struggling to recover at the same pace as some of the more visible sectors.
Table 3, sourced from the 2019 paper ‘Measuring Informal Economy in India’ (S V Ramana Murthy, National Statistical Office), gives a detailed breakup. It shows two things. One, the share of different sectors of the economy in the overall Gross Value Added (GVA or a measure of overall output from the supply side just as GDP is from the demand side). Two, the share of the unorganised sector therein. The share of informal/unorganised sector GVA is more than 50% at the all-India level, and is even higher in certain sectors, notably those that create a lot of low-skilled jobs such as construction and trade, repair, accommodation, and food services. This is why India is more vulnerable.
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