Unmask The Distress

Context: A massive distress in informal sector have various consequences in Indian Economy.

Informal Economy in India

• Impact of 2^nd wave of COVID in Economy: As per the recent data on Indian economy:
  • 2^nd wave has less impact on Indian Economy than the 1^st
  • Large parts of the economy are almost back to pre-Covid levels.
  • These data hide the large distress in informal Economy of India.
• Informal sector and labour force: The informal sector in India accounts for roughly half of the total value added in economy and employs around 90% of the labour force.
• Number of households demanding work under MGNREGA:
  • In 1^st quarter of 2021, the demand was lower than in 2020 due to higher distress in the labour market 2020 and less registration under MGNREGA.
  • In the 2^nd quarter of 2021, the demand was significantly higher than the pre-Covid level, due to: large parts of the informal economy were operating well below their pre-Covid levels in the 2^nd quarter and the employment opportunities were available in informal labour force simply opted for work that available at depressed wage rates, supplementing its income by seeking work under MGNREGA.
• Urban informal labour force: As per Quarterly Employment Survey, sectors like trade, accommodation and restaurants has been badly hit, implies that even a downward trending unemployment rate will not be an accurate gauge of labour market distress.

Consequences of distress in informal labour market

• Continuous divergence in formal and informal economy: If both were rebounding at an equal pace, then the labour market distress in both segments should also have been dissipating, even if with a lag, at similar momentum.
• Expansion in formal sector: The data suggests that in sectors with a large informal presence like construction, trade, etc., the relatively larger firms in the formal sector would have gained at the expense of the unorganised.
• Thus high-frequency indicators indicating that the economy is operating at more than 90% of its pre-Covid level do not reflect the distress in the informal economy.
• Worsening the income-distribution: The sustained divergence between the formal and the informal labour force would be worsening the income distribution.
• Loss in purchasing power: Increasing number of households demanding work under MGNREGA results into loss in purchasing power of the lower half of the distribution chain.
  • It raised demand for the less labour-intensive services and high-end/imported manufactured products and reinforce the current labour market trends.

Conclusion: During demonetisation, a badly bruised informal sector clawed its way back, the disruption in informal sector 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.