Unmask The Distress

The Indian Express     4th October 2021     Save    
QEP Pocket Notes

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

Informal Economy in India

  • Impact of 2nd wave of COVID in Economy: As per the recent data on Indian economy:
    • 2nd wave has less impact on Indian Economy than the 1st
    • 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 1st 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 2nd 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 2nd 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.

QEP Pocket Notes