Post-Covid, India's Weakest Link May Be Its Informal Sector
Close to 80% of India's workers are employed in the informal sector, which accounts for nearly 50% of the India's GDP. Few high frequency economic indicators capture the health of this segment of the economy.
"But a lot is at stake. Ignoring the informal sector can hurt jobs, wages, and even macro stability," wrote Pranjul Bhandari, chief India economist at HSBC, in a note dated July 15.
The 20% of workers in India's formal sector doing relatively well. But the fortunes of the remaining 80% are split in two halves, with those working in agriculture better off than those working outside of the agrarian economy, Bhandari wrote.
The 20% Formal Economy
The formal economy, particularly larger firms, have rebounded relatively quickly.
Data from the Reserve Bank of India, released on Friday, showed that sales of 1,633 manufacturing companies surged by 31% in the fourth quarter of FY21 compared with 7.4% in the previous quarter. Staff costs rose in the manufacturing sector but fell across the non-IT services companies.
According to Bhandari, while larger listed firms have done better than smaller ones, broadly this segment of the economy has done weathered the crisis well.
"Recall that the urban affluent class led the rise in demand post the national lockdown in 2020," she said in the report. "They bought consumer durables such as electronics, furniture, passenger vehicles and even new houses."
This support from pent-up demand for goods, however, may wane after the second wave, or at least shift towards services. This is true because repeat purchases in this segment of consumer durable may not come so quickly and pent-up household financial savings have been used up. Household financial savings fell to 8.2% of GDP in the December-ended quarter, below the 9.8% in the March 2020-ended quarter.
Still, some pent-up spending will emerge.
As vaccination spreads, urban consumers may instead switch from pent-up goods demand to pent-up services demand, with the overall spend being lower than last year.Pranjul Bhandari, Chief Economist, HSBC India
The 40% In Agriculture
Within the informal sector, the 40% workers who are employed in the agricultural sector may have weathered the Covid crisis reasonably well.
Landless agricultural workers, whose main source of income is wages, saw wage growth hold up well in 2020-21, led by good monsoons and elevated reservoir levels. The fear that reverse migration may put pressure on wages by adding sudden supply of workers in the agriculture sector, did not prove to be correct.
"It helped that agricultural production and distribution were exempt from the various lockdowns, and being an ‘essential’, the demand for food remained robust," said Bhandari. Strong agricultural exports also helped, as did the government's support via increased spending on the rural employment guarantee scheme.
The landed in agriculture sector, where cultivation is the main source of income, also benefitted from a strong monsoon and robust production. "This class is also more indebted than the landless, and here, there is some data to support that real indebtedness has moderated in recent years," Bhandari wrote.
As rural Indians emerge from the second wave, they may want to consume goods that make them feel more secure, funded by the relatively resilient agricultural incomes of 2020/21. These goods could include discretionary items such as two-wheelers, as well as home repair/renovations services.Pranjul Bhandari, Chief Economist, HSBC India
The 40% In Non-Agricultural, Informal Sector
The remaining 40% of India's workforce, which is in the informal non-agricultural sector, is hurting the most.
This includes those in rural India, where non-agricultural wages have suffered. It also includes those in urban India working in informal enterprises. "We worry that this group has borne the brunt of the economic disruption that the pandemic has unleashed," Bhandari said.
Crises, such as demonetisation and the pandemic can lead to what Bhandari terms as "forced formalisation".
"We find that historically, nominal GDP growth has been a good indicator of the formal sector corporate sales. But during demonetisation, and also the pandemic period, formal corporate sales overshot nominal GDP growth," she explained. "We believe this means that some demand, which was previously catered to by the informal sector, began to be catered by the formal sector."
This "forced formalisation" can lead to job losses and a resultant increase in self employment, Bhandari said.
Formalisation can be a double-edged sword. If it happens at the cost of putting small informal firms out of business, then the disruption in the informal sector can weigh on demand in subsequent periods.Pranjul Bhandari, Chief Economist, HSBC India
Bhandari thinks this segment will need support from policy reforms.
Overall GDP growth is the strongest driver of real urban wages, she said. "Within this, it is the investment rate that raises the capacity of the economy to create sustainable jobs. We believe reforms are the foremost driver of both potential growth and within it, the investment rate."
Watch a conversation with Pranjul Bhandari on her report below: