Urban unemployment is high; it needs relief on steroids

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Unemployment is rising. It was 11.6% in the week ended 28 May. Both rural and urban unemployment rates are in double digits. This is unusual, says Mahesh Vyas of the Centre for Monitoring Indian Economy (CMIE) which compiles the data. The last time the unemployment rate was in double digits was in April and May 2020, when there was a strict lockdown. This means, the current restrictions instituted to deal with the second wave of the pandemic have really hurt.

Of the total working age population aged 15 years and above, 40.34% or 428.5 million were active job seekers during the January-April period. This is unlikely to have changed much during May. An unemployment rate of 11.6% would mean that nearly 50 million persons couldn’t find jobs despite seeking them. Urban unemployment was more pronounced at 13.6% in the week ending 28 May, which means 19 million job seekers were unemployed. The unemployment rate in rural India was 10.6%. Assuming that the number of job seekers there was unchanged from April, 31 million of them would have been unemployed.

(The unemployment rate is a subset of job seekers who currently constitute only 40% of those eligible to work. Many eligible persons may not seek work. Among women aged 15 and above, only 9.45% are job seekers – one of the lowest rates in the world. The rest may want to study or be homemakers for reasons of tradition).

Disguises unemployment The unemployment rate in rural India is lower because extra hands are absorbed in agricultural work without necessarily adding to productivity. In that sense, it disguises unemployment. The national rural employment scheme which guarantees at least 100 days of unskilled manual work in a year to rural adults seeking it, is a distress absorber. Last year nearly 112 million persons got on average about 35 day s of work at Rs 200 per day. In the previous pre-pandemic year 78.8 million were employed for an average of 34 days.

There is no such shock absorber in urban areas. Urban workers at the bottom of the heap lead a hand-to-mouth existence as last year’s migrant crisis revealed. Distributing free wheat and rice, pulses and oil will help stave off hunger till workplaces reopen. Distributing wheat and rice liberally can reduce stocks which have swelled to 83 million tonnes as of end April ─ 18.8 million tonnes more than a year ago. With wheat procurement continuing in May, the stocks would have increased. Distributing the grains will reduce storage and interest costs and the government’s subsidy bill. It is necessary to provide free or subsidized cooking oil as even palm oil which is the cheapest has shot up by 53% over the past year to Rs 133 a kg.

Pulses are also 11 to 15% more expensive. Roping in civil society groups, including religious institutions like gurudwaras that have the means to provide cooked meals at scale, and the centralised kitchens that supply mid-day meals to schools would help in mitigating hunger.

Put money in the hands of people The banker Uday Kotak has said that the government must put money in the hands of people. This it can do by borrowing more than the current 6.8% of GDP. But it cannot go overboard on this without raising bond yields and interest rates, which will hurt economic revival. He suggests that the Reserve Bank should print money as a short-term measure. In rural areas, all farmers with land holdings get Rs 6,000 a year from the government. There is no comparable scheme for urban workers. But targeted transfers can be done. The Delhi government is paying Rs 5,000 to drivers with public service vehicle (PSV) badges. There are 2.80 lakh PSV badge holders and 1.90 lakh permit holders in Delhi who are eligible to apply.

Cash assistance should be provided to street vendors as well. The National Association of Street Vendors of India had estimated there were 10 million of them in 2014, of which 3 lakh are in Delhi. In May last year, the government had announced a special credit of Rs 5,000 for them. But what’s the point in giving loans to those already in debt? Loans do not help when only fruits and vegetables are allowed to be hawked. Cash transfers are easy to make because quite a few of them have bank accounts and take micro-loans based on their daily turnover. This could also be an occasion to get more of them to migrate to online platforms. Hotels and restaurant workers are another category that would need financial support. Targeting relief shouldn’t be difficult in urban areas, once the vulnerable sections are identified.

Beyond relief, we need calibrated opening up starting with the construction sector and export industries (like those engaged in making garments and leather goods) which also employ large numbers of migrant workers. The export industries can gain from stimulus-induced economic growth in developed countries which are opening up and returning to normality due to higher vaccination rates.

Credit guarantees For stressed small and medium industries, it would help if the government gave credit guarantees or the Reserve Bank told banks to delay provisioning for loans that have gone sour. Beyond that, banks themselves should restructure the loans based on commercial prudence making the necessary provisions in their books for debts that could go bad. As Kotak said many banks and non-banks are adequately capitalised. The capital adequacy ratio of Kotak Mahindra Bank is 22%, that of HDFC Bank 18.8% and of Axis Bank 19%. Even public sector banks like SBI (13.74%), PNB (14%) and Canara (13%) can be a bit more aggressive in lending.

Economic slowdown began before the pandemic. It was government spending that shored up the economy. Now private consumption needs a boost. Reducing taxes on motor fuels will leave more money in people’s wallets. Only if there is enough demand, will investment happen. There is some slack because aggregate capacity utilisation in the December quarter was 66.6%, as per the RBI’s survey. The government also needs to quicken the pace of vaccination so that the fear of a third wave recedes and people are persuaded to spend rather than save.