Rising informal employment eclipses GDP recovery

The latest data sets on the state of the economy, both released on November 30, 2021, present a mix bag. While Q2 GDP growth of 8.5% (constant prices) over the corresponding quarter of FY21 (-7.3%) is encouraging, the state of workforce is disheartening — informalisation is on the rise, jeopardising both productivity and income critical for future growth.

That is because the latest quarterly PLFS (January-March 2021), which traces urban employment of 15 years and above in its current weekly status (CWS), shows a marked rise in ‘own account worker, employer’, ‘helper in household enterprises’, ‘self-employed’ and ‘casual labour’. From the corresponding quarter of 2020 (just as the pandemic-induced lockdown hit the country), the share of own account workers went up from 30.4% to 32.9%; household helpers from 5.1% to 5.6%; self-employed from 38.3% to 39.3% and casual workers from 11.2% to 12.7%. The only category of employment that saw a fall is the best type of employment: ‘regular wage/salaried employees’. Their share went down from 50.5% to 48.1%.

When it comes to sectoral shares of employment, agriculture, mostly informal and low-paying, saw a rise from 5.1% in 2020 to 5.9% in 2021 (this being the urban employment survey, the share of agriculture is low). Secondary sector (mining, manufacturing, part of construction) also witnessed an increase, though relatively smaller, from 32.5% to 32.7%. Tertiary (services), which has a larger presence of informal workers, saw a fall from 62.4% to 61.4%.

Taken together, these developments mean shifts (i) from formal to informal jobs, and (ii) from high-productive, high- income to low-productive, low-income jobs. This is a reversal of the structural transformation India had witnessed in the previous years.

The quarterly PLFS findings are in line with a study of the state of workforce during the five-year period between FY17 and FY21 by Ashoka University and CMIE. According to that study, (a) manufacturing jobs nearly halved (a 46% decline) in five years (b) agricultural jobs increased by 4% (from 36% to 40% in total employment) and (c) overall employment fell by 7% during the period (from 407 million in FY17 to 378 million in FY21). The last annual PLFS of 2019-20 (pre-pandemic), too, showed the share of agriculture going up from 42.5% in 2018-19 to 45.6% in 2019-20, while manufacturing went down from 12.1% to 11.2%. Another study by Azim Premji University had shown that the pandemic year of FY21 “further increased informality and led to a severe decline in earnings for the majority of workers, resulting in a sudden increase in poverty.”

These are disturbing trends. Even those unfamiliar with these trends have witnessed distressing videos of unemployed youth, protesting or fighting for jobs, even low-paying ones, in multiple states, particularly in Gujarat, Uttar Pradesh and West Bengal.

The Global Perspective

India not only has a very high level of informal workers compared to developed and emerging economies, it also has fewer people working – contributing less to economic growth.

Around 88.2% of the Indian workforce is informal. In emerging countries, their share is 70%, and in developing countries 18%, according to a comparative study by the OECD and ILO. As a result, Indian workers face “greater in-work poverty risk than formal economy workers”, and are also among the lowest paid in the world.

As for the working population, the latest quarterly PLFS (January-March 2021) put labour force participation rate (LFPR) — which combines those working or looking for work in the population — at 47.5% (15 years and above) in urban areas, down from 48.1% in January-March 2020 [pre-pandemic]. The annual PLFS of 2019-20 shows the overall [urban and rural] LFPR for all ages at 40.1% and for 15 years and above at 53.5%. In comparison, the OECD average for 2020 (15 years and above) was 59.5% – ranging from 48.5% in Italy to 77.4% in Iceland.

Low LFPR also means lack of adequate jobs or job creations or lower expectations of getting work (leading to withdrawal from the workforce), because of disappearing jobs and economic slowdown. This is reflected in worker population ratio (WPR), as well.

India’s WPR was 38.2% for all ages and 50.9% for 15 years and above in 2019-20, according to the PLFS of 2019-20. Compared to this, the OECD average (percentage of working age population of 15-64) was 66.1% in 2020 – ranging from 38.5% in South Africa to 80.3% in Iceland.

Sure, India’s LFPR and WPR have improved during the last three PLFS period of 2017-18, 2018-19 and 2019-20, but this has to be read together with the rise in distress in their ranks reflected in the reverse migration to low-paying informal work in agriculture, as non-farm jobs disappeared due to the pre-pandemic slowdown and the pandemic resulted in loss of jobs and livelihoods. More and more people were forced to take up self-employment, work as ‘helper in household enterprises’ etc., as highlighted earlier, to add to household incomes.

Impact on GDP

Why is the wellbeing of the workforce (more and better-paying jobs) important for the economy?

It is because they and their families form a sizable population who create consumption demand and propel economic growth. Their distress is reflected in the latest GDP numbers as well. Private consumption (PFCE) in Q2 FY22 (at constant prices) was lower than the corresponding quarter of FY20 (₹19.5 lakh crore against ₹20.2 lakh crore), even when the overall GDP was marginally higher (₹35.7 lakh crore against ₹35.6 lakh crore). The PFCE’s share in GDP fell to 54.5% from 55.4% in the pre-pandemic quarter of Q1 FY21.

A lower consumption level means there is less demand for goods and services to be produced, which, in turn, reduces the need for fresh capital investment and lower growth momentum.

The government, therefore, has its task cut out.

It needs to work and prepare a national employment policy (NEP) to address structural challenges (job loss, reverse migration etc.) that have emerged in recent years. Post the 2007-08 crisis, even Pakistan (2010), Nepal (2017) and Sri Lanka (2012) prepared and adopted their national policies to address employment challenges. China did it much earlier (2020). In India, work began on NEP during the earlier Congress-led government, but has failed to take off since then in spite of the progressively worsening job crisis.