The IMF World Economic Outlook indicates how urgently the GoI needs to focus on jobs generation in India.
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India in IMF WEO analysis - October 2021
- The story: The IMF’s Oct. 2021 World Economic Outlook (WEO) has underlined that employment growth is likely to lag output recovery after the pandemic. That means while economic output will rise, it would not translate into newer jobs for most people. Why has job growth been slow, and what are the concerns for India?
- Second WEO for 2021: The IMF unveiled its second World Economic Outlook (WEO), a report published twice every year — April and October. It provides regular “updates” to it on other occasions. The WEO reports are awaited as they are based on a wide set of assumptions about a host of parameters — such as the international price of crude oil — and set the benchmark for all economies to compare one another with.
- Key message for the moment: The central message was that the global economic recovery momentum had weakened a bit, due to the pandemic-induced supply disruptions seen in major economies, including China. There is the marginal headline numbers for global growth that can cause some worry, but it is the increasing inequality among nations that is the real trouble.
- Divergent destinies - The dangerous divergence in economic prospects across countries remains a concern. Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 per cent in 2024. But aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 per cent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards.
- Why this divergence - There are two key reasons for the economic divergences: large disparities in vaccine access, and differences in policy support. But possibly the most important takeaway from the WEO this time is about the employment growth likely to lag the output recovery.
- Employment jitters: Employment around the world remains below its pre-pandemic levels, reflecting a mix of negative output gaps, worker fears of on-the-job infection in contact-intensive occupations, childcare constraints, labor demand changes as automation picks up in some sectors, replacement income through furlough schemes or unemployment benefits helping to cushion income losses, and frictions in job searches and matching.
- The gap: Within this overall theme, what is particularly worrisome is that this gap between recovery in output and employment is likely to be larger in emerging markets and developing economies than in advanced economies. Further, young and low-skilled workers are likely to be worse off than prime-age and high-skilled workers, respectively.
- Indian situation: As far as GDP is concerned, India’s growth rate seems doing good. Several high-frequency indicators suggest that India’s economic recovery is gaining ground. But unless new jobs generation picks up, India will not truly prosper.
- Data available with the Centre for Monitoring Indian Economy (CMIE) shows that the total number of employed people in the Indian economy as of May-August 2021 was 394 million (39.4 cr) — 11 million below the level set in May-August 2019.
- To put these numbers in a larger perspective, in May-August 2016 the number of employed people was 408 million (40.8 cr). In other words, India was already facing a deep employment crisis before the Covid crisis, and it became much worse after it.
- As such, projections of an employment recovery lagging behind output recovery could mean large swathes of the population being excluded from the GDP growth and its benefits.
- Lack of adequate employment levels would drag down overall demand and thus stifle India’s growth momentum. And India is a demand-driven economy.
- Reasons why employment lags output growth in India: India already had a massive unemployment crisis. Labour economists such as Santosh Mehrotra cite a number of additional issues.
- India is witnessing a K-shaped recovery, with different sectors recovering at significantly different rates. This holds not just for the divergence between the organised sector and unorganised sector, but also within the organised sector
- Some sectors such as the IT-services sectors have been practically unaffected by Covid, while e-commerce industry is doing good too. But at the same time, many contact-based services, which can create many more jobs, are not seeing a similar bounce-back. Similarly, listed firms have recovered much better than unlisted firms.
- The bulk of India’s employment is in the informal or unorganised sectors. The informal worker is defined as “a worker with no written contract, paid leave, health benefits or social security”. The organised sector refers to firms that are registered. Typically, it is expected that organised sector firms will provide formal employment. So, a weak recovery for the informal/unorganised sectors implies a drag on the economy’s ability to create new jobs or revive old ones.
- IMF Chief Economist Gita Gopinath pointed out that the number of people using the Mahatma Gandhi National Rural Employment Guarantee Act provisions was still 50-60% above pre-pandemic level. This suggests that the informal economy is struggling to recover at the same pace as some of the more visible sectors.
- How informal is India’s economy: Experts tell that the share of different sectors of the economy in the overall Gross Value Added (GVA or a measure of overall output from the supply side just as GDP is from the demand side), and the share of the unorganised sector therein are good metrics. The share of informal/unorganised sector GVA is more than 50% at the all-India level, and is even higher in certain sectors, notably those that create a lot of low-skilled jobs such as construction and trade, repair, accommodation, and food services. This is why India is more vulnerable.
- Summary: The job for the government is cut out. Generate more jobs, put money in people's hand, and let demand rise.
- EXAM QUESTIONS: (1) Explain the key message from the World Economic Outlook (WEO) report of IMF, for India. (2) What are the structural challenges for Indian economy, during the post-pandemic recovery phases. Explain.
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