Unemployment rises in August 2018

India’s real GDP grew by an impressive 8.2 per cent in the first quarter of 2018-19. This was much higher than almost everybody’s expectations. If there was a sleeping doubting Thomas in an analyst's head he was woken out of his slumber when the numbers were released. Questions are raised about the veracity of the estimate and whether the elevated growth rate is sustainable. It is at least worth wondering why the estimates did not generate as much joy as it should have but, it generated doubt and scepticism even among the optimists.
 
The GDP growth estimates are at odds with employment estimates. While the GDP grew by 8.2 per cent, employment declined by 1 per cent in the same year-on-year comparison of the first quarter of 2018-19.

 
Quarterly GDP growth estimates are generated largely by considering the performance of organised sectors. However, the employment/unemployment estimates generated by CMIE’s Consumer Pyramids Household Survey covers organised and unorganised sectors and is therefore a lot more comprehensive than the CSO’s quarterly estimates of GDP. It is possible, therefore, that the organised sectors did see an acceleration in growth as seen in CSO’s GDP estimates but, deceleration in the unorganised sectors more than offset this growth.
 

In the meanwhile, we see the employment situation in the country deteriorating in the second quarter of the current financial year. The number of total persons employed in July was 1.4 per cent lower than it was in July 2017. In August it was similarly lower by 1.2 per cent. The count of employed persons has been declining since November 2017.

 
Interestingly, the labour force is expanding. This was not the case earlier. The labour force shrunk after demonetisation. It was 444 million in October 2016, that is, just before demonetisation. Then it fell sharply. By July 2017 the labour force had shed 27 million to whittle down to 417 million.
 
The unemployed who had left the labour markets are returning. The labour force has been expanding since July 2017. At 428 million in August 2018, it was 11 million higher than its July 2017 level.
 
But the expanded labour force is not finding jobs. While the labour force has expanded, the count of those employed has declined. As a result, the unemployment rate has gone up.

 
The unemployment rate rose to 6.4 per cent in August 2018. This is higher than the 5.6 per cent rate seen in July and much higher than the 4.1 per cent unemployment rate recorded in August 2017. It is quite likely that the labour force and the labour participation rate will keep rising. The labour force had shrunk following demonetisation because the shock led the unemployed to believe that there weren’t enough jobs around and it was futile to look for them.
 
We saw this phenomenon on a smaller scale recently in Kerala where migrant workers returned home as floods devastated homes and, jobs as well. The destruction was so widespread and so devastating that migrant labour had no hope of finding jobs. Something similar on a much larger scale happened around demonetisation in November 2016.

 

After nine months (that is, after July 2017), the unemployed labour started coming back to the labour markets in search for jobs with a hope that the shock would have subsided and there could be jobs on the offer. Data suggest that while hope among the unemployed may have returned, sufficient jobs have not sprung to absorb them.
 
Continued lack of jobs can throttle the flow of labour to the labour markets. This is what happens to women. Potential women workers are effectively dissuaded from joining the labour force when they notice the high unemployment rate among the few who attempt to join the labour force.

 
It is possible that we could return to the equilibrium prior to demonetisation when the labour force participation rate was about 48 per cent and the unemployment rate was about 9 per cent. Currently, the labour participation rate is about 43 per cent and the unemployment rate is about 6 per cent. The labour participation rate has stopped falling and the unemployment rate has started to rise. The accelerated GDP growth rates and the elevated investment levels seen in them are good signs for the labour markets. While real GDP grew by 8.2 per cent, gross fixed capital formation (GFCF) grew by 10 per cent, y-o-y. This was the third consecutive quarter of impressive growth in GFCF.

 
This impressive growth is, however, not reflected in CMIE’s CPHS nor is it reflected in CMIE’s CapEx database, which tracks investments across the country. Of course, some sectors, such as automobiles, steel, cement and electronics do show higher growth rates but this growth is not broad-based enough to assuage labour markets.


The author is managing director & CEO, Centre for Monitoring Indian Economy P Ltd