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Thursday, June 04, 2020

Breaking the value chain: How the lockdown migration will impact other parts of the economy

Going forward, governments should better plan the reverse migration because market forces might work with a lag under uncertain economic environment due to the pandemic.

Published: April 12, 2020 10:07:09 am
india lockdown, india lockdown extension, india coronavirus, india lockdown impact, india lockdown migrant workers, india lockdown impact on economy, india economy, coronavirus impact india, nikhil damodaran Migration in India relies on existence of networks which ensure a flow of workers from villages to urban centers for work. (Express photo/Pawan Khengre)

Written by Nikhil Damodaran

India’s CoVID-19 response has been making headlines around the globe. These are not related to lapses in the public health system or inaction against the then impending pandemic. Instead the attention is on its administrative inability to plan the lockdown.

However, the mismanagement of India’s lockdown goes beyond the negative international publicity to cause a potential persistent shortfall in demand for goods and supply of inexpensive migrant labour. Further, the macroeconomic spillover effects of reverse migratory exodus makes apparent the disconnect between policymakers and reality.

While the lockdown was intended to prevent community transmission and put a cap on spread of the pandemic, the resultant mass migration has increased the possibility of an escalation. It has also dealt a body blow to the livelihoods of these migrants.

The administrative debacle was further fueled by shutdown of public transport which shows the lack of anticipation on the part of policy makers. All this has worsened the plight of the migrant worker.

Migrant based mini economies as sources of demand

This mass movement of workers back to their villages is only the starting point of India’s troubles. Migration in India relies on existence of networks which ensure a flow of workers from villages to urban centers for work. These networks often support mini economies which sustain labour supply in urban centres as well as add to the aggregate demand in the overall economy.

For instance, a thela who makes egg rolls or retails kadhi chawal, caters to demand by migrant workers. This in turn generates incomes for the local economy based on demand from the migrant consumers. These are considered ancillary services which are essential offshoots of the migrant networks.

The establishment of these local ancillary service economies is not automatic. They rely on a critical mass of migrant workers in order to ensure profitability. If there are enough number of customers, then the street vendor finds it profitable to sustain his service. After the reverse migration, their incomes would be adversely affected.

Further, these migrant workers are typically hand-to-mouth consumers — those who earn subsistence living and spend a large part of their income in the local economy. This contributes to another layer of demand, which would now cease to exist. Hence neither would the thela wala earn any income, nor does the migrant earn his livelihood.

Both of these, in their capacity as consumers are a part of an informal economy which generate and sustain volumes for the FMCG industries. For instance, Parle-G’s already falling fortunes would dwindle further due to this drop in demand.

From informal demand to possibly a generalised downturn

This lack of demand from the migrant workers and the mini economies they sustain imply that forward and backward linkages to formal sector are also weakened. For instance, the informal sector directly employs approximately 450 million people without formal contracts or job security. Part of these sustain production in the small and medium enterprises (SME).

After the lockdown, the overhead costs, administrative expenses and mounting debt of the SME would make it difficult for these industries to survive without adequate support from the government. Moreover, expecting them to sustain wage payments as advised by the government, without a corresponding flow of incomes is an unrealistic scenario for the near future.

Even in the presence of the recently announced moratorium on loan payments, these industries lie in the grey zone left to the discretion of the banks. Instead, if India could direct its fiscal resources to support these payments, it might be able to prevent massive drops in demand as implemented by Australia and France.

Now parts of the economy which seemed to have the capacity to pause during the lockdown would experience a strain eventually due to their linkages with the SME’s. Unable to obtain ancillary inputs, the larger enterprises will end up with a clogged value chain. This is the domino effect of an unanticipated demand drop which permeates into a general adverse effect on the overall economy.

These spillover effects on the formal economy will only be exacerbated by the disruption in flow of footloose labour which diminishes the possibility of a revival. The networks of migrant labour supplemented local workforce and plugged regional resource gaps to expand the productive capabilities of the region. Without them, this ostensibly demand problem might turn into a supply bottleneck too.

The exodus and the foreseeable restrictions on migrants not only worsen their own lives, it affects other parts of the economy which were thought to be shielded from such adverse outcomes. But this does not end here.

India comprises of high growth industrial or trade centres, dependent on this constant stream of migrant labour through these networks. The aggregate growth in GDP relied on these regions which spearhead production and generate momentum for the rest of the economy. The lockdown strips these centres of their capability and threatens India’s overall macroeconomic stability.

Some pre-planning which included the local state machinery was necessary to avert this migration crisis instead of a top-down approach, and the government finally seems to realise this. However, going forward, governments should better plan the reverse migration because market forces might work with a lag under uncertain economic environment due to the pandemic.

The real cost of the pandemic would then be measured by the extra effort required to oil the machinery and promote growth centres till the time they work on autopilot. The mismanagement of the lockdown now becomes a significant barrier and acceleration to maintain the $2.5 trillion economy needs planned policy. For the foreseeable future, we can forget about the $5 trillion dream.

The author is an Assistant Professor with the Jindal School of Government and Public Policy.

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