Three economic fault lines will determine India’s trajectory over the next decade

In the context of the current global macro-economic situation, there are three deep currents for the Indian government to be aware of. How it understands and responds to these challenges will shape the country’s socio-economic trajectory over the next few years.

The first undercurrent: the deepening of income and wealth inequalities. Second: a rupture in labour markets because of the economic impact of the pandemic. The third: rising unemployment with weak worker contracts and declining female labour income.

Widening inequalities

To understand the first undercurrent, it may be helpful to look closely at the World Inequality Report 2021 data. The report estimates that the share of the bottom 50% of the world’s population of global wealth is 2%, while the share of the top 10% is 76%. Since wealth is a major source of future economic gains, and of power and influence, it presages even more increases in inequality.

This has been taken further in measuring access inequality to basic social and economic opportunities in a recent study ranking the performance of states across India.

Consider the two figures below.

The wealth of the top 10% globally, which constitutes the middle-class in rich countries and the merely rich in poor countries, is growing slower than the world average. Those in the top 0.1% saw their share of wealth rising from 7% to 11% in just a year, as is evident from the stock market boom and rise in corporate profits of the top billionaire firms.

In India, the top 1% of the population earned more than 21.7% of the country’s total national income in 2021, while the bottom 50% made 13.1% of the money.

The authors of the World Inequality Report argue that the deregulation and economic liberalisation policies pursued since the 1980s resulted in an extreme increase in income and wealth inequality (as explained here).

The authors add:

“While the top 1% has largely benefited from economic reforms, growth among low- and middle-income groups has been relatively slow, and poverty persists…. Gender inequalities in India are (also) very high…Over the past three years, the quality of inequality data released by the government has seriously deteriorated, making it particularly difficult to assess recent inequality changes.”

Labour market shake-up

In understanding the second and third undercurrents, we need to dig deeper to study the labour market, particularly from the perspective of the last two years. In a recent paper measuring the beliefs of German workers about rents and outside employment options, economists Simon Jager, Christopher Roth, Nina Roussille and Benjamin Schoefer find that 13% of jobs concentrated in the low-wage segment of the German job market would not be viable at current wages.

Most workers remain employed in low-wage work because of being “overpessimistic about outside employment options”. This belief tends to give “monopsony power” (undue competitive advantage) to employers where low-paid workers are concerned.

As the authors state:

“When comparing workers’ subjective outside (employment) options against objective measures of pay premia from matched employer-employee data… many workers mistakenly believe their current wage is representative of the external labor market-and therefore, objectively low-paid workers remain over-pessimistic about their outside (employment) options.”

If such low-paid workers change their conceptions about external employment and look for, say better wage opportunities, the shock this causes will forces a massive shake-up of the entire labour market. Two years of Covid-19 and its subsequent economic fallout have done just that. Economists are calling this shake-up in the global labour market “The Great Resignation”.

In the US, more than four million workers quit their jobs in September, shattering the record for resignations set only the month before. Forty per cent of remaining employees were thinking of quitting too, according to a Microsoft report. More than 72% of US-based technology employees were thinking of quitting their jobs in the next 12 months.

What is going on in the labour market? Under normal circumstances, an exodus of job-quitters signals that a given labour market is dealing with a great shortage of jobs (a demand-side problem). But the last two years have not been normal. The spate of resignations is not restricted to the US alone but is a cause for global concern.

To explore the structural reasons, economist Bradford DeLong, argues in the context of the US:

“One obvious factor (for the Great Resignation) is fear of Covid-19, especially among those who live with elderly or immunocompromised relatives. Low-wage workers do not want to log long hours in service-industry settings that require them to come into close contact with other people, not least the sizeable share of the population remains unvaccinated.”

There are other structural reasons. Working from home has changed the beliefs and expectations of workers, especially in the technology and other service industries, about their own jobs and outside employment prospects. The “misinformation” or “over-pessimistic” attitude (explained above) that many low-paid workers held earlier has been gradually reoriented. Workers are expecting better pay and social security from their current employers now and in the absence of these, are willing to quit.

In the US, pandemic support gave many workers the confidence to quit their jobs. In Europe, particularly Western Europe, where workers have a robust social safety net, the rate of those resigning was lower. The quality of social security made available to the workers during the pandemic and later on helped reorient expectations about low-paid, unpleasant work.

For parents, under a more taxing work-from-home situation and without adequate childcare support, many were forced to focus on managing household chores and children. In patriarchal settings, the adverse impact of this additional care responsibility was evident in the number of women moving out of the workforce.

The widespread shift to remote white-collar work, the rapid automation of substantial parts of service work (such as education and healthcare) and the transformation of retail (which, for instance, now needs more delivery drivers and fewer store sales workers) are among the observed realities shaping the dynamics of a post-Covid-19 world.

Still, the concern remains that the people responsible for taking decisions and influencing the design of policies to kickstart economic recovery seem to be missing out on these trends. The problem of widening income-wealth inequality and the worsening labour-market conditions needs to be viewed holistically.

In a world where worker expectations are changing, employers, under a worker-focused economic policy framework, need to provide better contracts to low-wage staff who are quitting en masse in search of a better bargain. Employers need to create jobs that recognise new work demands: with security needs that may not just include health insurance or pension, but also support for childcare while providing more leisure time.

The Indian situation

In India, the abysmal labour market continues to worsen. The Periodic Labour Force Survey data for January-March 2021, released earlier this month, shows that unemployment rates for that quarter were close to pre-Covid-19 levels of 2020. Women, as this writer has noted in 2020, bore the brunt of the pandemic in terms of the economic fallout.

For men, the unemployment rate was 8.6%, both for the January-March 2021 quarter and the corresponding quarter the previous year. In case of women, the rate 11.8% in the January-March 2021 period as against 10.6% in the same quarter the previous year.

The labour force participation rate, or the percentage of people who are working, seeking work, or available for work, was 47.5%. For women, the labour force participation rate has been 18% on average for the last few decades. The worker-population ratio, or the percentage of employed people in the population, stood at 43.1%.

Jobs in the macro-organised space in India have been shrinking for the educated workforce from much before the pandemic. This has obviously added to the concerns about inequality. Even during the second wave of the pandemic in India, only a few sectors (such as construction) added jobs as the service sector struggled.

However, the third undercurrent of weak work contracts across these job-creating sectors continues to make the conditions of workers more exploitative. As per the Periodic Labour Force Survey data for 2020, less than 43% of all employment contracts in India’s organised workforce ensure basic social security such as provident fund coverage, gratuity, healthcare and maternity benefits. Only 40% of regular salaried workers have at least one social security benefit (according to 2019-’20 data).

Indian workers in health, education and utilities are increasingly being employed on ad-hoc contracts, while those in the lower-paid category (even in the low-end-manufacturing space) continue to be absorbed by the swelling vulnerable, unorganised sector. Those with capital and more privilege than informal workers are preferring to be “self-employed”, reports the Centre for Monitoring Indian Economy.

In India, The Great Resignation appears to go much beyond any analysis that sees it as part of a supply-side problem alone. Like with the German survey, what is needed in India (as attempted in a recent study by the Centre for New Economic Studies) is a scrutiny of the demand-side problem in the labour market, through a deeper understanding of the psychology of worker expectations. This could help in undertaking fiscal policy interventions to minimise access inequality, which will help bring down existing wealth and income inequities.

For now, the challenge to understand each of the crises at hand holistically and then respond to them remains an enormous challenge for most developing nation-states, especially India.

Deepanshu Mohan is an Associate Professor of Economics and Director at the Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University.