Vijay Kumar Gaba: Unemployment

Showing posts with label Unemployment. Show all posts

Monday, December 20, 2021

Economy – Uneven recovery to pre-pandemic levels, accelerators missing

The latest macro data indicates that the Indian economy may be standing at an inflection point. Having survived a major accident in the form of Covid19 pandemic, the economy looks stable, having progressed well to reach closer to the pre Covid level of activity. Of course, for next few quarters the economy may still need to use the support of government spending, before the virtuous cycle of higher investment and consumption kick starts.

Post pandemic, the challenges before the government are multifold; and so are the opportunities. A successful resolution of these challenges could trigger a virtuous cycle of growth and catapult the economy to the higher orbit. A failure may not be an option, as it could cause a disaster of unfathomable proportion.

Besides, merely achieving a full ‘V’ recovery to the pre pandemic level of economic activity will be inadequate, since pre pandemic the economy was slowing for many years and was completely unable to generate adequate jobs for the burgeoning youth population. The government will need to apply multiple accelerators for the sustainable growth to reach to the target of 8% plus.

The pandemic has widened the divide in the society, as the recovery so far has been rather ‘K’ shaped. Income and wealth inequalities have widened. Disparities in access to digital infrastructure have amplified the divide in social sectors like healthcare and education. The gap between organized and unorganized sectors has enlarged materially. To maintain harmony and peace in the society, these gulfs would need to be managed.

As per a study done by the Azim Premji University scholars, “one year of Covid-19 pandemic has pushed 230 million people into poverty with a 15 per cent increase in poverty rate in rural India and a 20 per cent surge in urban India."

CMIE data showed that “the unemployment rate has gone up as high as 12 per cent in May 2021, 10 million jobs have been lost just on account of the second wave and 97 per cent of the households in the country have experienced declines in incomes”.

The labour force participation rate was at 40.22% in the period between May-August 2021, according to latest data by the CMIE. It has remained at about 40% since the start of the pandemic, compared to about 43% before it. This is the lowest the labour force participation rate has been since 2016, when data was first compiled.

Exports, one of the key growth drivers, have persistently failed to deliver in past one decade. There is no sign of any major improvement in exports, especially when the global growth has already plateaued after post pandemic push. Considering that India’s capex is closely related to exports and global trade, the probability of any material pick up in private capex appears slim.

Poor export growth and high petroleum and gold imports have resulted in sharp increase in trade deficit for India. Consequently, INR has come under pressure. USDINR is its weakest level now and looking even more vulnerable given its outperformance vs EM peers in past one year.

Persistent food and energy inflation is key concern, though other industrial input prices have shown signs of stabilizing. Given the poor wage growth for semi-skilled and unskilled workers, a large part of the population is reeling under the impact of stagflation, hurting the consumer sentiments. Consumption slowdown is one of the key economic concerns currently.

The best thing for Indian economy is that the government has sufficient fiscal leverage available to accelerate the investments. At Rs5.5bn the FY22e gross fiscal deficit is lower than the pre pandemic years. The April-October 2021 fiscal deficit is just ~36% of budget estimates. The government has thus gathered enough ammunition by adhering to higher duties on fuel and lower revenue spending to manage its fiscal balance. Buoyant revenue and aggressive disinvestment may help in improving it further.

Wednesday, May 27, 2020

Farm sector economics in India - 2

Continuing from last week (See Farm sector economics in India)

The issue of laborers migrating from large cities and industrially developed towns to villages & towns of industrially backward UP, Bihar, Jharkhand, Chhattisgarh, etc has caught everyone's attention in past few weeks. This migration is being widely seen as a fall out of COVID-19 induced lockdown of socio-economic activities. Indubitably, the lockdown has prompted many workers to wind up their household and move back to their home towns. But it would be a grave mistake to assume that lockdown is the only reason for the migration.

The rate of unemployment amongst migrant and other workers was rising consistently since past few years. Demonetization and GST dealt a major blow to the jobs in unorganized and MSME sector. Besides, these workers were faced with the double whammy of stagnant to declining wages and rising cost of living. To highlight my point, I would cite my favorite example again.

The rikshaw fare from the nearest metro station to my house in Delhi is stagnant at Rs20 for past 6years. The number of rikshaws has increased almost 3x while the passenger growth is less than 50%; the cost of living has risen at least by 30%. The rikshaw pullers/drivers have been forced to live in sub-human conditions.

The only lure that has kept them in the city is a better future for their children. If they are assured of MNREGA wage and city like education in their villages, they would have migrated long back. While making a strategy for farm sector growth, it is important to note the following:

(a) The employment elasticity of growth in manufacturing, agriculture and construction sectors has been decreasing consistently. This trend shall only accelerate in future. Most of the growth shall come from higher productivity through automation, innovation and consolidation. Elimination of redundancies and economies of scale shall lead the growth effort. The number of jobs, especially unskilled and low skill jobs shall remain limited.

(b) Implementation of a common GST, nationwide agriculture market, ecommerce, automation (AI) etc., are leading to business consolidation in a major way. This may potentially eliminate millions of unskilled and low skill jobs in next decades of or so.

(c) The historical transition of farm workers to industry during the developing stage of growth may not work in the current Indian context. The so called developed economies have transited the labor from farm to factories, when industry and mining were still labor intensive and global competition was not much. The productivity gains were immediate and tangible. It is no longer the case. The industry in India is already capital intensive. Even traditional labor intensive industries like gems & jewellery, textile, leather, mining and construction are becoming increasingly automated to stay viable against the global competition. Emulating China model may not work in India, as our political and economic model is entirely different. Moreover, the skill and training requirement for modern industry do not allow a straight farm to factory transition. So the options get limited to unskilled construction sector jobs and building industry around farms where the skill of the farmers could be suitable employed.

While MNREGA and ambitious rural road program is taking care of unskilled construction jobs, there is little effort to take factories to farms.

The ambitious Make in India program mostly aims to substitute imports. We are trying to compete with manufacturing powerhouses like China, Vietnam, Taiwan, etc. This defies the basic principle of making economic decisions, viz., everyone should do what they can do best to optimize the resource utilization.

....to continue tomorrow

Thursday, January 23, 2020

Unemployment ...before it become unmanageable

Two piece of information regarding the employment condition in the country came to my notice yesterday. The first piece was encouraging. The latest data released by the Employees State Insurance Corporation says "A whopping 19.6 lakh new employees were added to the payroll of Indian companies in November 2019. This is the second highest monthly addition of new employees in the formal sector after 19.86 lacs addition in July 2019.

The second piece of information was rather disturbing. As per the latest release of the Centre for Monitoring Indian Economy (CMIE), the employment rate in the country rose to 7.5% during September - December 2019 period. Reportedly, this is the highest rate of unemployment in 45 years. The unemployment has recorded consistent increase since 2017 (post demonetization).

As per the CMIE data release:

(a) The unemployment in the urban areas is at 9%, much higher than the rural areas and the national average.

This could be due to two factors: (i) lower economic activity in the industrial sector; and (ii) high incidence of disguised employment and under employment in the rural areas.

(b) The unemployment rate in the urban youth, especially educated one, is very high. While youngsters in the age group of 20-24 years reported an unemployment rate of 37%, graduates among them reported a much higher unemployment rate of over 60%. The average unemployment rate for graduates during 2019 was 63.4%. This trend is alarming but correlates well with the multiple waves of urban youth unrest in the country during past few years.

This trend may be interpreted in the following three ways:

(i) Not enough quality jobs are being created in the formal sector. Most of the new jobs that are being created are low paying and do not require technical or professional skills.

(ii) The quality of education is deteriorating faster. More and more grduates passing out of colleges are actually unemployable.

(iii) The economic growth is becoming much less employment intensive due to higher use of technology.

In whichever way we interpret the data, the fact can no longer be denied that unemployment of youth is perhaps the most serious socio-economic challenge India faces presently; and it needs to be addressed before the things become unmanageable.

In my view, urgency of the problem must be understood from the following three dimensions.

1. A large part of the fabled India story is built upon the "demographic dividend". Unless the youth of the country could be employed productively, this dividend could not be exploited. In two decades, India shall begin to grow old. Unless we exploit this demographic divided today and create enough wealth for the future, it will be very tough for Indian economy to sustain even marginal rate of growth in 2040s and 2050s.

2. Being the home of the largest number of youth population in the world, it is fiduciary responsibility of India to nurture, protect and grow this invaluable resource as a trustee of humanity.

3. Persistent unemployment of youth could potentially push our youth towards crime and drugs and turn our nation into a land of uber chaos, much worse than what we have seen in many Latin American countries.

Wednesday, December 11, 2019

Industry and Services sector transformation agenda implemnetation still at take off stage

In the three year agenda released in 2017, NITI Aayog noted that "unemployment is the lesser of India’s problems. The more serious problem, instead, is severe underemployment. A job that one worker can perform is often performed by two or more workers. In effect, those in the workforce are employed, but they are overwhelmingly stuck in low-productivity, low-wage jobs...Therefore, what is needed is the creation of high-productivity, high-wage jobs."

The action agenda therefore emphasized on increased emergence of larger, organized-sector firms that can create high paying jobs. To meet this end, promoting exports was considered a better option rather than trying to substitute imports by producing in India.

The agenda paper accordingly highlighted that "A focus on the domestic market through an import-substitution strategy, however attractive it may seem, would give rise to a group of relatively small firms behind a high wall of protection. They will not only fail to exploit scale economies but also miss out on productivity gains that come from competing against the best in the world. The electronics industry offers a case in point. Our domestic market in electronics as of 2015 is only USD 65 billion. In contrast, the global market is USD 2 trillion. Our policy of import substitution under high protection has given rise to a group of small firms none of which is competitive in the world markets. In contrast, a focus on the global market can potentially result in output worth hundreds of billions of dollars and hence a large number of well-paid jobs."

NITI Aayog underlined the demographic advantage and wage competitiveness of India vis a vis China, while spotting an attractive opportunity in shift of businesses from China. It noted "Today, with Chinese wages rising wages due to an ageing workforce, many large-scale firms in labour-intensive sectors currently manufacturing in that country are looking for lower-wage locations. With its large workforce and competitive wages, India would be a natural home for these firms. Therefore, the time for adopting a manufactures- and exports-based strategy could not be more opportune. Keeping this context in view, the Action Agenda offers detailed proposals for the implementation of an exports-based strategy. Among other things, it recommends the creation of a handful of Coastal Employment Zones, which may attract multinational firms in labour-intensive sectors from China to India. The presence of these firms will give rise to an ecosystem in which local small and medium firms will also be induced to become highly productive thereby multiplying the number of well-paid jobs."

The Action Agenda in particular offered "specific proposals for jumpstarting some of the key manufacturing and services sectors, including apparel, electronics, gems and jewellery, financial services, tourism and cultural industries and real estate."

After two and half years, the implementation of the agenda is found lacking on almost all fronts.

(a) Industrial production growth has slipped.

(b) Work force participation rate has slipped to multi decade low. Unemployment rate is highest since 2011. Labor productivity growth is at lowest level in a decade.

(d) No significant progress is seen on coastal zones, increase in port capacities. The work on dedicated freight corridor has progressed but still running much behind the revised schedule.

(e) Some impressive projects have been announced by some major global manufacturers. However, on ground little progress is visible. In 2018 the import of telecommunication equipments was highest in five years. FDI has been lower in 2018 and 2019 as compared to 2017.

Friday, September 27, 2019

India's foreign trade at critical threshold

The foreign trade of India is presently standing at a critical threshold. A successful crossover will open abundant opportunities, while a failure will close many more doors.

Before looking at the opportunity, it is pertinent to note the current state of affairs of our foreign trade.

The broader picture of India's foreign trade could be summarized as follows:

(a) India's total exports have mostly ranged between $25bn and $30bn per month since 2011.

(b) India's total imports have mostly ranged between $35bn and $45bn per month since 2011.

(c) India's trade balance has consistently worsened since 2004, and is mostly ranging between $10bn and $15bn since 2011.

(d) India's non oil trade balance has worsened materially since 2004 and stands close to $100bn per annum.

(e) India's foreign trade growth has consistently lagged the overall GDP Growth since 2012.

It is also important to note that the external trade profile of India has seen material transformation in past one decade. Imports have been moving away from traditional oil & gold domination; and exports have diversified away from traditional consumer goods like textile, gens & jewelry, leather etc. The share of manufactured engineering goods has been rising in the total export revenue. Electronics has become a major import item.

With many global leaders like Samsung, MI, Apple, LG, etc. deciding to produce in India; new biofuel policy raising the ethanol blending to 10% in transportation fuel; massive investments in renewable beginning to yield results; electric mobility becoming a viable option in next 10years; and various productivity enhancement missions in pulses and oilseeds achieving targets, we may see a further shift in India's import profile going forward.

Moreover, shifting away from colonial (cheap labor and material source) model, India is also becoming a research and development (R&D) hub for global manufacturers and service providers.

It is widely accepted view that foreign trade, especially exports, could be the most potent source of generating incremental employment opportunities that would catapult Indian economy to a higher growth orbit.

I am therefore viewing the current restructuring of corporate tax rates (see here) as a measure to boost the export economy rather than supporting the domestic consumption demand.

It is important to assimilate that viewing the current developments only as a measure of shift from China due to geo political or tariff reasons would be a mistake. The foreign trade growth will primarily be a outcome of massive investment made in infrastructure development over past 20yrs. We have paid huge cost of this massive infrastructure building drive in terms of crippling of financial sectors due to NPA problem, episodes of massive corruption leading to paralysis of policy administration and disruptions in markets place due to large scale bankruptcies.

But it is also a fact that a high quality capacities terms power generation, ports, road network, railways, civil aviation, financial services, telecommunication, manufacturing, and GSTN have been created and/or shall be put in place in next 2-4yrs. This infrastructure surplus will be the primary driver of India's foreign trade (and trade balance), job creation and socio-economic transition.