On 24 March 2020, the government of India under Prime Minister Narendra Modi ordered a countrywide lockdown for 21 days with the aim of slowing down the rise of COVID-19 infections.
On 14 April, the government extended the lockdown until 3 May, with a conditional relaxation after 20 April for the regions where the spread had been contained. Then on 1 May, the lockdown was further extended by two weeks until 17 May.
Gradual relaxation in economic activities were made from the second phase of the lockdown. These included allowing agricultural businesses, public works programmes, cargo transportation, banks and government centres distributing ration and other critical services. Further relaxations were made by grading areas into red, orange and green zones, based on the number of cases and other factors.
By then, the largest and harshest lockdown in the world had already come crashing hard on its economy, both organised and unorganised.
It is significant to note that the lockdown came at the back of an already slowing economic growth, persistent structural weaknesses in the financial sector and increasing unemployment. Economic growth had moderated from 8.3 percent in FY17 to 6.1 in FY19. It slowed to 5.1 percent over the first three quarters of FY20. Though the poverty rate had declined to 13.4% in 2015, the deceleration in GDP-per-capita growth had already magnified the risks for the poorest households and real average daily rural wages had fallen by 4 percent between FY19 and FY20.
The World Bank predicts a sharp growth deceleration in FY21 to 2.8 percent in a baseline scenario. Some agencies have predicted an even lower growth, down to zero. According to noted economist, Professor Arun Kumar, growth is already in the negative.
Job losses due to COVID-19 and lockdown
According to a recent study by the Centre for Monitoring the Indian Economy (CMIE), the COVID-19 lockdown has already hit the Indian employment scenario. By 3 May, India’s unemployment rate was at a record high of 27.1%. As the government lifted some of the restrictions, it dropped to 23.97% by 13 May.
In April alone, the lockdown caused 122 million job loses. Just to put that in perspective, the total job losses due to demonetisation was about 1.5 million. Predictably, the most immediate casualty of the lockdown has been India’s estimated 139 million daily wage workers and small businesses – the most vulnerable in the economic ladder.
The sudden and ill-planned lockdown saw mass exodus of migrant workers amidst fear of unemployment and starvation. This included street hawkers, daily wage earners, construction labourers and others whose subsistence is dependent upon a daily functioning economy. In a matter of hours, they were left with no means of income at all. Proving all their fears true, of the 122 million who have lost their jobs, 91.3 millions are small traders and labourers.
Arguably, and hopefully, some of the daily wagers may be able to return to their jobs after the lockdown. The other possibility is that they might be absorbed in agriculture, a trend already represented by increase of 6 million farm jobs in April 2020. This trend is set to increase with the winter Rabi sowing season and states allowing migrant labourers to return to their home states in the lockdown’s third phase. The trend, however, is not a sustainable one with farm jobs becoming less remunerative with economic stress.
But a fairly significant number of salaried workers – 17.8 million – and self-employed people – 18.2 million – have also lost their jobs. When India entered the lockdown, unemployment was already at a 43-month high of 8.7%, up from 3.4% in July 2017. Interestingly, 18 million large entrepreneurs have reported loss of employment in April 2020. This is significant as business persons do not declare unemployment unless they feel the loss in business is irreversible. This loss also reduces employment opportunities for jobs created by the businesses.
In addition to job losses in the formal sector, the economy is also set to witness recruitment freeze and salary cuts. The sectors worst affected by hiring freeze are aviation, travel and hospitality industries. Also badly affected are retail, auto and auto ancillary, pharmaceuticals, insurance, accounting, finance and IT.
According to a report by LinkedIn, 25% of the Indian workforce has reported a decrease in their incomes, while 39 per cent reported a dip in personal savings due to the impact of COVID-19 pandemic. According to a Crosby Textor India survey, 86% of Indians are worried about losing their jobs due to the COVID-19 crisis.
The worst affected might be India’s youth, under the age of 35 years, who constitute 65 percent of India’s population and form the majority of the labour force in the organised sector or unorganised sector.
World Bank’s South Asia Economic Focus Spring 2020
The World Bank just published its South Asia Economic Focus Spring 2020, which discusses the economic impact of COVID-19 on South Asia. Unsurprisingly, it doesn’t look good.
The economic slowdown due to the pandemic and the subsequent lockdown is unique in comparison to regular economic slowdowns – the crisis has been caused by supply constraints; service sectors are hardest hit; and consumption is decelerating faster than Gross Domestic Product (GDP). A revival in domestic investments is likely to be delayed given enhanced risk aversion on a global scale, and renewed concerns about financial sector resilience.
According to the report, the service sector will be the hardest hit, with workers directly affected by the lockdown measures. Worse, India’s major export sectors are business services, textiles, transport, IT and communications – all of which are severely hit by the lockdown.
The fall in service activities is particularly challenging because of low-income, and often informal, workers in the hospitality and transport sectors. In India, they form a large group, employing about 32 percent of the working age population. It is also a heterogeneous group since it comprises people with very different earnings.
Though workers in the affected service sectors are not concentrated among the poorest; the worst affected represents on an average, about 5 percent of the total population, about 17 percent of the working age population and about 25 percent of non-agriculture workers.
The lockdown is also having an adverse economic impact on self-employed and casual workers. The closure of shops, hotels and restaurants alone will affect 11 percent of such workers in these sectors.
Workers in the sectors that will be hit hardest have similar characteristics to the overall employed labour force, but there is heterogeneity within these affected sectors. They are not homogeneous. The largest four sub-sectors – retail trade, land transportation, personal services, and accommodations and restaurants – are the most labour-intensive. Moreover, workers in these sub-sectors have lower daily earnings, fewer years of schooling and are more likely to be self-employed or unpaid compared to workers in tourism, air transport and water transport.
Would COVID-19 be the end of India’s demographic dividend?
India’s demographic dividend began in the early 1980s and is expected to come to an end towards latter part of 2030s. As of 2019, India had 62.5% of its population in the age group of 15-59 years which is ever increasing and the country was predicted to be in a position to maximise its demographic dividend.
The demographic dividend situation, however, was already looking grim even before the COVID-19 crisis hit India, with the labour force growth being far lower than its employable population. In 2017, only 5.5 million jobs had been created, compared to the 8 million who entered the job market. In 2019, CMIE had predicted that the Indian youth is the first casualty of this state of things, as the unemployment rate reached 34 percent among the 20-24 years old in the first quarter of 2019. The rate was 37.9 percent among the urban youth.
With poor employable skills and poorer skilling policy, it seemed that India was already set to miss its demographic dividend bus.
Now with the bloodbath that the job economy is faced with, everyone will be affected. Yet, it will hit some the hardest – the young, those with less experience and less education, are at higher risk of being the first to be laid off, and to be affected by hiring freezes.
Using survey data, the World Bank estimated a Probit regression model to assess the likelihood of being in an employment or unemployment status given a set of household and individual characteristics. The results of the estimation are as expected:
Males in urban households are more likely to be employed vis-à-vis females or those in rural households. Similarly, individuals who are not married are less likely to be employed than married individuals are. In terms of education and experience, the results show clearly that years of schooling and age also matter. Using these results it is possible to determine the group that that is most likely to lose – younger, less educated, unmarried, female, and rural workers. Within them, the worst affected would be the subset engaged in informal employment in service sectors.
Given that a substantial number of the most vulnerable are migrants in large urban centres who might no longer have work and would find cost of living prohibitive, the extended lockdown might soon see a second wave of out-migration of workers from urban to semi-urban and rural areas – all of which have limited opportunity for service sector, IT, communication and infrastructure growth.
While high tech services and capital intensive manufacturing will find it relatively easier to go back into operations, the bulk of India’s manufacturing, including those for exports, is done by Micro, Small and Medium Enterprises (MSMEs). Most of the semi-skilled, less educated youth, especially females, are employed in this category.
According to the 2018-19 Annual Report of Ministry of MSMEs, there are 6.34 crore MSMEs in the country – 51 percent of these are situated in rural areas while 55 percent are employed in urban MSMEs.
All anecdotal evidence points to the fact that MSMEs have already been suffering under the lockdown, with most of them shut down. The fiscal stimulus announced for MSMEs on 13 May was a welcome relief. But it targets about 45 lakh units, relatively larger ones, which leaves out majority of the MSMEs.
By an informed guess, the most adversely affected would be the 51% of rural MSMEs and the ones operated by women, minorities and dalits, as they have lesser access to formal finances. Even after the lockdown, shortage of labour due to the migration is set to hit them, triggering a vicious cycle of lack of production and joblessness. Again the youth stands to lose first and lose the most.
What can be done
Unless the government can create temporary jobs, which could help mitigate both health and economic costs, India stands to lose its demographic dividend irreversibly due to the COVID-19 crisis. Data on migration may provide a way of predicting high sending areas and jobs can be created in consultation with state governments in catchment areas.
The World Bank suggests immediate and innovative measures linked to the pandemic – using social media or other media outlets to recruit people who can provide public services that are in high demand, such as food delivery, cleaning of public buildings and buses, setting up temporary hospitals, call centre clerks who check up on quarantined people and others, providing debt service moratoriums for young employees, students and the unemployed.
Increased infrastructure expenditure can also accelerate the revival of economic activity. Construction and infrastructure spending could be ramped up, and interrupted infrastructure projects can be restarted, especially those in semi-urban and rural areas, since the construction sector’s large employment provides a multiplier effect.
Using public sector banks for direct cash transfers through bank accounts would ramp up consumption post lockdown. In cases where there may be limited access to bank accounts, governments should support institutions that are likely to provide social security, including microfinance institutions and rural banks. Creating more jobs across the farm and food supply chains can absorb reverse migrants. And the government must focus on as many urban-centered social protection programs as possible to prevent reverse migration.
The ability to micro-plan and implement with a certain degree of flexibility would be key in implementing these measures effectively. These will come only with more effective devolution of powers in the federal structure.
Read our COVID-19 coverage here.