Push for broad-based growth to curb unemployment

INDIA’s unemployment rate reached a 16-month high of 8.3 per cent in December — according to data provided by the Centre for Monitoring Indian Economy (CMIE) — giving rise to questions as to why this should be so even as the economy seems to be set at an even growth rate of around 6 per cent.

The earlier high in unemployment, reached in August 2021, could be explained by the then raging Covid-19 pandemic, which had seriously curbed economic activity, but currently there is no surge and no hindrance to the pursuit of normal economic life.

Going behind the aggregate, we find that it is the urban unemployment rate of 10.1 per cent which is the culprit, so to speak. It has been on the rise since October. The rural unemployment rate of 7.4 per cent, on the other hand, has been on a downward path since the same month. The lower rural unemployment rate can be explained by the cycle of the agricultural seasons, with the end of the year marked by the sowing of rabi crops.

But deeper disaggregated data from the CMIE indicates that rural agricultural jobs have held on to their own in the current year. It is rural services that lost jobs and that means a lot of shops had closed down. This tells us that essential purchases by the rural folk have continued to suffer, which is a signal that FMCG (fast-moving consumer goods) companies are not out of the woods yet.

On the other hand, the high urban unemployment rate needs more explaining. It points to slow business activity. Here we see the hand of the prevailing high interest rates which have risen in line with the RBI jacking up policy rates by over 2 percentage points through 2022 to bring down the inflation rate running above the comfort level of 6 per cent. Dearer money means businesses being hesitant to borrow more to expand business.

However, the rising interest rates do not seem to have affected the demand for bank credit. In the last 12 months, credit growth rose form 9.2 per cent in December 2021 to 17.4 per cent in mid-December 2022. That is probably explained by the fact that it is the large businesses and corporates which have gone in more for bank borrowing despite the higher costs because there is demand for them to meet.

Seeking to solve the riddle of this contradictory pull of statistics, a leading statistical authority, Mahesh Vyas, chief of CMIE, is of the view that too much should not be read into the high unemployment figure. It comes along with a healthy labour participation rate of 40.5 per cent which is the highest in 12 months. This rate is derived by dividing the labour force (employed and unemployed) by the total working age population of 15-64.

One reason why this can be happening is that more people are out looking for jobs in the expectation that now that the pandemic surge is gone, there will be more jobs on offer and it will be worth their while going out to look for one. When the popular perception of the likelihood of finding jobs is gloomy, people will not go out looking for work leading to a counter-intuitive lower unemployment rate.

An explanation can be found in the total number of employed persons which rose to a peak of 486 million in the pre-pandemic year of 2019, then fell precipitously to 447 million in the lockdown year of 2020, and recovered sharply to 470 million in 2021, according to the Organisation for Economic Cooperation and Development data.

Closer to now, the labour force shrank from 432 million in September to 430 million in October. Simultaneously, employment also fell from 404 million to 396 million. While the count of the unemployed rose by 5.6 million, 2.2 million quit the labour market. Seeing that people were losing their jobs, those without a job stopped looking for one. Thus, the unemployment rate was moderated by fewer people looking for jobs.

The overall sense that one gets is that spending on essentials is doing none too well. The reasonably good growth rate being achieved is driven by a good agricultural performance (agricultural jobs holding on) and ample industrial demand driven in part by spending on infrastructure and activity triggered by the fiscal sops coming via the production-linked incentive scheme.

Besides, exports have held up, driven in part by the developed countries and those aligned with them seeking to find alternative suppliers under the ‘China Plus One’ programme. Indian toys’ exports, for example, have zoomed as a good part of the world is trying to avoid buying from China, till recently the world’s leading supplier of cheaper toys.

The key policy prescription that follows from all this is that small and medium businesses should be handheld a bit (maybe through subsidised credit) so that they can expand their activity, produce more and sell more without raising prices. More business activity at this end of the economy will put more income into the hands of unorganised workers, enabling them to buy all essentials they need. This will boost the FMCG companies.

As business activity is sustained and taken forward addressing the spike in unemployment, indirect tax collection like GST will remain buoyant. That will take care of the fiscal balance.

A counterpoint can be made that it is difficult to subsidise the interest paid by small and medium businesses as they mostly borrow not from banks but from the market, that is non-formal sources. For the likes of moneylenders to charge a lower interest rate, the overall interest rate structure has to be brought down.

This can only happen if the arbiter of interest rates, the RBI, starts signalling down interest rates. But how can the RBI do this until inflationary bout is fully tamed? It can only do this if it perceives that the latest inflationary bout has not been caused by excess liquidity — too much money chasing too few goods.

This is, in fact, the case as inflationary bout has been caused by the price rise in imported fuel and commodities, which is the result of the global disruption caused by the Ukraine war. So a somewhat unorthodox case can be made for the central bank to bring down interest rates even before inflation has been fully tamed.