According to Periodic Labour Force Survey,2017 and 2018, India’s unemployment rate in 2017-18 was 6.07% and it came down to 5.8% in the 2018-19. This declining trend may not continue further because of the slowdown of economic activities that occurred in the last quarter of 2019-20 due to outbreak of COVID-19 pandemic. The countrywide lockdown witnessed a tragic scenario of unemployment. Streams of unemployed labour force in various parts of the country came on to the street just after the countrywide lockdown started on  25th March 2020. Since June 2020, the lockdown has been opened in various phases. But till today the economy is not back to its pre-lockdown phase.

There is no correct estimate of the unemployment rate at present but our economic surroundings reflect a grim scenario. This piece presents various facets of unemployment challenges intending to help strategize public policy interventions.

  • Present Status of Unemployment

There are diverse views regarding the status of unemployment during the post-lockdown phase in India. An effort to have a real-time measure of unemployment on a daily basis has been made by the Centre of Monitoring of Indian Economy (CMIE). Sources from CMIE claim that unemployment rate had come down to 7.43 per cent in August, 2020 which is closer to the estimated unemployment rate during the pre-lockdown phase in February and an early week of March (Figure 1).

 

A sudden downfall of unemployment rate from a level of above 20 percent in May and June as estimated by CMIE raises questions on the unemployment estimates.

First, the economy is not fully functional yet. Even today, we witness complete lockdown in some districts of  Odisha, Bihar, and a partial lockdown in many states like Punjab, Madhya Pradesh etc.

Second, the labour force migrated to their places of domicile during the lockdown are not yet back to their workplace as transport and communication facilities are limited in these states. The inter-state communication had been stopped as Indian Railways, which serves as the largest carrier of inter-state migration, was not been fully operational. Therefore, the CMIE sources of information regarding the unemployment rate may not be a correct estimate.

It is possible that the unemployment rate for August could be closer or a little less compared to that during the lockdown phase i.e. May and June. As the economy is fully functional yet, a certain section of casual or daily wage labour is possibly out of job even today. Importantly, this section of the labour force has a larger share of about 22.9 per cent of the total labour force according to the Periodic Labour Force Survey (PLFS),2017-18 (Figure 2).

 

Assuming 50 percent of casual or daily wage workers were  absorbed by the economy in July and August, the rest 50 percent that constitute about 11 percent of the total labour force which remained unemployed .

The survey further states that about 12.7 percent of labour force are employed as helpers in household enterprises. Some of the household enterprises such as grocery shops, saloons, hardware and others remained closed as the markets did not open in many places. Importantly, these enterprises shelter a larger share of disguised unemployment. Some of the labour force employed in these enterprises have limited contribution to its gross asset value creation and they have been part of the enterprises’ economic activities as they do not have anything else for them to get engaged. Notwithstanding disguised unemployment, some of the household enterprises are temporarily closed till today, a certain share of labour force from these enterprises may be fully unemployed at present.

Third, the pre-existing unemployed labour force could have added to the crisis. The PLFS shows that in 2018-19, 5.8 per cent of the labour force was unemployed. Assuming this unemployment rate remained constant during the pre-lockdown phase, the unemployed labour force from the section of casual or daily wage labour and household enterprises could add to the present rate of unemployment estimated at 20 per cent.

  • Informal, Insecure and Insure

Structure of employment in India has not changed since its independence. The informal sector has remained predominant in terms of employment. During the post-1991 i.e. macro-economic reforms stage, Indian economy witnessed some structural changes. The service sector share in India’s Gross Domestic Product (GDP) increased from 42 per cent in 1991 to 56 per cent in 2019. Whereas both the agriculture and industry sector combined share came down below 50 per cent of GDP. Individually, agriculture and allied sector share was about 16 per cent in 2019.  Back in 1991, this sector share was about 32 per cent. However, this structural change in the economy has less impact on the employment structure.

 

Today, the informal sector provides the largest share of about 78 percent of total employment (Figure 3). The formal sector which includes Government/Local Body, Public/Private Limited Company, Public Sector Enterprises, Co-Operative Societies, Autonomous Bodies share the rest 22% in total employment.

The informal economy is burdened by the larger share of India’s labour force. Above 80 per cent of the labour force in India works without a job contract (PLFS,2017-18). In the informal economy, this is close to 100 percent. Work without any letter of contract increases the risk of job loss.

Besides job insecurity, absence of regular salary, lack of health & life insurance and paid leaves etc. characterise informal sector employment. About 75 per cent of labour force employed in the informal sector does not have insurance cover. This increases the risk of financial insecurity and poses a serious challenge to the labour force. Any risk such as COVID-19, therefore, has serious implications on the livelihood.

  • Rising Rural Distress

The rural economy is under stress as most of the reverse migration happened during the lockdown phase was from urban to rural. This number could be above 3.7 crore according to Census, 2011 and adds to the existing problems in the rural economy.  The rural distress can be explained in the following ways

First, the rural economy is overburdened. According to National Account Statistics (NAS) 2017, it shares about 48 per cent of India’s Net Domestic Product (NDP). This 48 per cent serves about 70 per cent of India’s population who live in rural areas. Overpopulated rural economy results in sub-standard living condition of rural mass. The rural per-capita income stands at Rs. 40,928 in 2017, two and half times less than urban.

Second, the rural economy lacks diversity. Agriculture remains the predominant employment sector in India’s rural economy (Figure 4). Though, the composition (mix) of the rural economy has undergone some change from agriculture to the non-agriculture sector. Back in 1970-71, the share of agriculture sector was about 72.4 per cent and it came down to 38.7 per cent in 2017-18. Yet, agriculture plays an important role in determining the growth and size of the rural economy.

 

Third, with the present size of the rural economy, the agriculture sector is already overstretched. Additional growth in this sector has limited to capacity to generate new employment opportunities.. The employment elasticity for the agriculture sector in rural economy estimated to be 0.04 during 1999-2009 (Mishra, Suresh, RBI 2014). It means that 1 percent growth in agriculture sector generates an employment growth of just 0.04 percent.  Inversely, a 1 percent rise in employment would require about 25 per cent growth in the agriculture sector. Since 1990, the annual average growth in the agriculture sector has never touched the double-digit mark. During 2004-05 and 2017-18, the annual average growth was 2.7 per cent with a standard deviation of 6 per cent.

Fourth, the rural concentration of labour force is another factor for the rising rural distress.  The rural economy is not only overpopulated in terms of its dependency factor but also in terms of workforce employed in this sector. According to PLFS 2017-18, 71 percent of India’s total workforce is from the rural economy.  When 71 percent of India’s workforce contributes only 48 per cent of India’s Net Domestic Product (NDP), it questions the productivity of the workforce in the rural economy.

 

Note: The rural economy’s share of 47.7% for the year 2015-16

Last but not the least, rural economy lacks productivity. The labour productivity followed a secular declining trend with the shrinking size of rural economy over the years. Back in 1970-71, the size of rural economy was over 62.4 per cent of India’s NDP and with continuous reduction, it now stands at 48 per cent. The share of rural workforce too followed a similar diminishing trend. In 1970-71, 84 per cent of India’s workforce was employed in rural economy which came down to 71 per cent in 2017-18.

The productivity gap is defined as the difference between rural economy’s share in total NDP, and its share in total workforce has remained almost constant since 1970-71. Higher the difference between the two, greater the productivity and vice versa. The productivity gap in 1970-71 was below 12 per cent and it rose  to 13 per cent in 2017-18 (Figure 5). The declining trend of productivity shows that the rural economy is overpopulated and filled with disguised unemployment. A certain section of the workforce if withdrawn, may not affect its overall size.

  • The poorer states bear the burnt

Poorer states such as Uttar Pradesh, Bihar, Odisha bore the maximum brunt of forced unemployment problem during the lockdown, as a large share of migrant labour force finds work in other states. obs. Migration report of Census,2011 which came in 2019 shows that about 48 per cent of total inter-state migration due to job/employment comes from Uttar Pradesh and Bihar (Figure 6).

 

Underdevelopment is one of the primary reasons behind the large-scale migration from these two states. The National Sample Survey, 2011-12 shows that both Uttar Pradesh and Bihar share about 40 per cent of India’s total poor population. Lower per-capita income in these states is the result of lack of development which further leads to a lack of job creation.

Inter-state regional disparity stands as one of the key factors behind the inter-state movement of the labour force.  Level of development in the state shows a negative correlation with the size of migration out of the state for job/employment. The state with higher per-capita income shows a negative correlation with the number of migrant labours out of the same state (Figure7).

 

The coefficient of correlation between the per-capita income of the state and the number of migrant labours out of the state is -0.33. The negative correlation shows that states with lower per-capita income have greater labour migration.

Lack of development is the reason for low per-capita income which compels a large share of unskilled labour from these states to go to other states in search of employment. Reverse migration due to lockdown added to the existing underdevelopment and unemployment in these states.

On the other hand, the post-macro-economic reforms, the Indian economy witnessed concentrated growth and development in a few states. They attract labour force, both skilled and unskilled from the neighbouring states. The migration report of Census 2011 shows a large concentration of migrant labour in a few developed states that capitalised maximum gain out of the liberalisation process.  Maharashtra shares the largest 19.4 per cent of total migration caused due to work/employment, Andhra Pradesh (9.3 per cent), Tamil Nadu (8.8 per cent), Karnataka (8.5 per cent), Gujarat (8 per cent) and Uttar Pradesh (7.8 per cent). These six states together share about 62 per cent of total migrant labour coming from other states for work/employment.

Since macro-economic reforms started in 1991, the country witnessed an annual average growth of 6.6 per cent and in the last 10 years, since 2007-08, the growth has been above 7.6 per cent. Maharashtra shelters the largest share of India’s total labour migrants and contributes the largest share of  15 per cent to India’s GDP. It is one of the most progressive states in India. Its per-capita income was 1.9 lakh per annum which is far higher compared to all India average per-capita income of Rs. 1 lakh in 2016-17. Higher growth and progress caused a steady inflow of migration to this state. The other five states mentioned above also witnessed a similar rate of migration inflow.

  • Conclusion

The Indian economy is not back to normal yet. The present unemployment rate is estimated to be about 20% which contradicts the CMIE estimates of 7.4%.

A higher rate of unemployment poses a threat to the foundation of the social and the economic system. In India, it is a grave concern as unemployment leads to deprivation of basic minimum necessities like food, clothing and shelter. A large share of the labour force works as daily casual labour, it earns a daily wage which is just enough to earn  food for one day for a five-member family. Any saving from this daily wage for any kind of uncertainty is non-existent. A single day of job loss for a daily wage worker can cause a threat to the life and livelihood of his/her family. Again, in the absence of pension, health or life insurance, the problems for a daily wage worker would multiply when dealing with uncertainties like the COVID-19 pandemic.

Reverse migration added to the unemployment problem and to distress  of the rural economy. The rural economy faces the problem of lower growth and productivity, yet a large share of the labour force is dependent on it for livelihood.

Next, the inter-state disparity in development causes a higher rate of migration of labour from the undeveloped states. During normal conditions, the under-developed states face the problem of labour shortage, both skilled and unskilled and during an abnormal situation like COVID-19 pandemic, there is a large supply of labour. This situation further adds to the problem of underdevelopment in the lower per-capita income states.

References

2020, Data on Unemployment, Centre for Monitoring and Indian Economy

2019, Data on Gross State Domestic Product, Central Statistical Organisation, Ministry of Statistics and Program Implementation

2018, Changing Structure of Rural Economy of India: Implication for Employment and Growth, NITI Aayog

2018-19, Periodic Labour Force Survey, Ministry of Statistics and Program Implementation

2017-18, Periodic Labour Force Survey, Ministry of Statistics and Program Implementation

2017, National Account Statistics, Ministry of Statistics and Program Implementation

2011, Data on Migration, Census of India

Sridhar Kundu : Sr. Research Analyst, Bharti Institute of Public Policy

Email: bipp@isb.edu; sridhar_kundu@isb.edu

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“The views expressed in this article are personal. Sridhar Kundu is  Sr. Research Analyst at the Indian School of
Business.”