View: Economic activity back at pre-pandemic levels, but jobs recovery a long haul

The economic news out of India is encouraging, with a swifter-than-expected recovery from the second wave. The Nomura India Business Resumption Index, which tracks the pace of business resumption, crossed a milestone in mid-August, rising above its pre-pandemic level of 100 for the first time since the pandemic began last year. However, despite the sharp economic rebound, the job market challenges appear daunting.


How has the pandemic affected jobs?

Getting a true pulse of the employment situation in India is difficult, mostly due to the absence of timely jobs data. Yet, the inference from various surveys seems clear: Workers have borne a disproportionate economic hit due to the pandemic.

Similar to its impact on growth, the pandemic has also resulted in an uneven impact on the jobs market. For high-skilled jobs in sectors such as IT and finance, the shift to work-from-home (WFH) was easier, but WFH is not feasible in contact-intensive services such as hotels, restaurants, travel and tourism, which require physical close proximity or in low-skilled jobs in the manufacturing and construction sectors.

The pandemic has had a K-shaped impact. Small firms have been hit harder than big firms. Consequently, the employment-intensive micro, small and medium enterprises (MSME) sector has had no option but to cut wage costs to remain afloat. Informal sector workers, self-employed and daily wage labourers have been significantly affected.

The unemployment rate is often used to measure slack in the labour market. According to the Centre for Monitoring Indian Economy (CMIE), this stood at 8% in mid-August 2021, marginally higher than the 7.8% in February 2020 (pre-pandemic). Yet this underestimates the true slack, in our opinion.

Total employment stood at 399.4 million (mn) in July 2021, down from 406mn in February 2020, implying employment loss for 6.6mn workers. Around 10.9mn workers have dropped out of the labour force and are no longer actively seeking work. Those with jobs have often had to take wage cuts, are working less hours or are on unpaid leave. The first wave saw a significant reverse migration of workers returning to their villages. Many reverse migrants are still working on farms, which is often disguised unemployment.


When and how will India’s job fortunes change?

The good news is that the economy and the jobs market have rebounded from the second wave impact. As India’s vaccinations become more widespread and we adapt to living with the pandemic, some of the harder-hit contact-intensive service sectors should also bounce back.

But a more widespread recovery in the jobs market will likely be a slow and gradual process for two reasons. First, vaccinating a majority of the adult population is widely expected to take until end-2021, at the earliest. Until then, the economy remains vulnerable to pandemic shocks. Second, even as demand recovers, firms will want to assess the durability of demand before embarking on full-scale hiring.

The pace of the recovery in jobs may also diverge across sectors and workers. The bounce-back may be swifter for formal sector workers than for the informal sector. Within the formal sector, a faster boom is likely in sectors with greater demand (eg, e-commerce, IT, software and pharma), whereas more traditional sectors (eg, infrastructure, hospitality, real estate, media and entertainment) may be slower to recover.

For informal sector workers, returning to pre-pandemic level of employment is likely to take much longer. Initially, workers themselves may hesitate to leave their homes due to the fear of contracting Covid-19, although this should subside over time as vaccinations proceed. Many MSMEs, restaurants and small businesses have permanently shuttered, leaving no jobs behind for some.


Longer-lasting effects on jobs

Looking beyond the here and now, the pandemic may leave behind other long-lasting effects, while presenting both challenges and opportunities.

For example, the pandemic has accelerated the pre-existing trend towards digitisation and e-commerce. Video conferencing is now widely accepted. Telemedicine, delivery and fintech are a few examples of sectors that have witnessed fast-paced growth during the pandemic. Supply chain relocations as firms adopt a China plus one strategy have opened up a new vista of opportunities for India to integrate into global value chains and to create new manufacturing jobs.

In contrast, business travel will likely decrease in a post-pandemic world. Meetings, incentives, conferencing, exhibitions (MICE) type of tourism will likely decline. Demand for commercial office space may be lower. Automation may reduce employment intensity of manufacturing, hurting low-skilled workers. The pandemic has resulted in more market concentration, as big firms become even bigger, while small firms are squeezed, which could hurt job creation.


Required policy toolkit

These longer-term shifts will require an active policy response. Workers will need both reskilling and upskilling. We need an ecosystem for MSMEs to thrive. This includes less regulatory compliance costs, lower funding costs and ability to scale. More jobs will need to be created in the infrastructure and construction sectors. An ecosystem for startups to gainfully employ India’s youth is needed. Many other such new sectors that can create jobs have to be explored.

In short, reversing the pandemic hit to jobs is only a first step. The real jobs challenge still lies ahead.

The writer is the Chief Economist for India and Asia (minus Japan) at Nomura