India's big problem

Unemployment continues to worry

The eleventh round of the periodic labour force survey (PLFS), covering the months of April to June 2021, has been released. It underlines the fact that unemployment continues to be the most pressing economic problem in India, as well as adding detail to the effects of the Covid-19 pandemic on the job market. The onset of the pandemic in early 2020 had led to the draconian national lockdown from late March 2020. This, in turn, had ensured that the unemployment numbers for April to June 2020 were remarkably high, with the PLFS for that quarter providing a figure of about 21 per cent. This came down over the following year as the lockdown gradually eased.

It is now known what the effects were of the second wave of the pandemic, driven by the delta variant, which hit India in April/May 2021. Without the nationwide lockdowns, the effect was less than in the same quarter of the previous year. But nevertheless the quarter saw a double-digit unemployment rate of 12.6 per cent. This built on an existing high unemployment base of over 9 per cent in the January to March quarter. The labour force participation rate continued to fall, as did the worker population ratio; and the share of those reporting they were self-employed rose. Thus, the 11th round of the PLFS has demonstrated that the existing structural flaws in India’s economy and employment systems have been exacerbated by the pandemic and are gathering intensity over time.

The question is whether policymakers are sufficiently engaged with this problem to act on it. The recent context of the Assembly elections is instructive. Those elections were conducted in the shadow of concern about mass unemployment, which led among other things to what were perilously close to job riots in UP and Bihar. Yet in UP, in particular, the electorate clearly did not feel the job situation was sufficient for them to change their mandate. One explanation for this is the buildup of an increasingly effective welfare state, featuring services from gas cylinders to piped water. Many of these welfarist measures must be welcomed on their own terms, alongside improvements in the delivery system. But in the long run, building up a state structure in which political success depends upon the expansion of welfare while the employment base of the economy shrivels and withers away is a recipe for disaster and instability. The less the worker population ratio, the harder it is to create a solid revenue base for the government and productive base for the country as a whole — and the harder it is, therefore, to expand entitlements or even pay for those that currently exist.

The effect of the pandemic, as the employment surveys have demonstrated, is to speed up a problematic dynamic that threatens to derail India’s future. Regular employment decreases in size and scope, while demands for welfarist protection will grow louder. Politicians have an incentive to respond to the second and are not punished for ignoring the first. Over time, this will lead to a breakdown in the Indian growth machine and must be avoided.