Falling Fortunes

Evidence is mounting of a crippling decline in the unorganised sector

Unofficial data on the unorganised sector points to massive job losses in the wake of demonetisation and the goods and services tax. sanjit das / bloomberg / getty images
30 January, 2019

The pressure-cooker manufacturer Prestige reported soaring profits last year, as did its primary rivals in the cookware market. But the good news for these companies came with bad news for the economy. The chairperson of Prestige told The Hindu that increased profits had come hand in hand with a fall in competition from the unorganised sector. “There are three or four organised players” in the industry, he said, listing a few rival brands. “The rest are all unorganised.” Since the government had implemented the goods and services tax, or GST, “the unorganised competition is reducing.”

Official data claims that the Indian economy is growing at more than 7 percent per annum. But unofficial data contradicts that contention. A recent survey by the All India Manufacturers’ Organisation revealed that the economy has not yet recovered from the blows of demonetisation and the GST. The survey, based on data from 34,700 of the AIMO’s 300,000 member units, showed that the number of jobs in micro and small enterprises had declined by roughly a third since 2014. In medium-scale enterprises, about a quarter of jobs had been lost, and among traders the decline was over 40 percent. Data from the Centre for Monitoring Indian Economy, a business-intelligence firm, shows a loss of 11 million jobs last year, most of them in the largely unorganised rural economy. Between 2004 and 2007, when the economy was actually growing at 7 or 8 percent, there was a clear “feel good” factor across both the organised and unorganised sectors, and almost all segments and industries did well. Today, large sections of society—farmers, traders, young people, and many more—are protesting. Recently, more than 25 million people applied for 90,000 relatively low-level positions in the railways. The desperate applicants included holders of engineering, business and commerce degrees.

The dissonance between the government’s claim of 7-percent-plus growth and the lack of a “feel good” sentiment is explained by vastly different rates of growth between the organised and the unorganised sectors. But that crucial difference is not reflected in official numbers, partly for methodological reasons.

The government collects data on growth in the unorganised sector once every five years. The last time it did this was in 2015. In the years between successive datasets, official numbers for the unorganised sector are calculated on the basis of various assumptions. For example, there are projections based on figures from the preceding year, and on data on the organised sector—on the assumptions that old trends persist, and that the organised and unorganised sectors share similar fortunes. These assumptions are valid if the economy does not face a structural break.

Such assumptions do not hold anymore. Demonetisation hurt the organised sector much less than the unorganised sector, since the latter is far more dependent on cash. The GST has also had a disproportionate impact on unorganised enterprises, even though they are exempted from registering for it. GST compliance in the organised sector has forced the digitisation of business transactions, and a preference for organised-sector suppliers. The informal sector has struggled to deal with the reconfigured complexities and priorities, and so lost lucrative contacts with the organised sector. In the wake of these shocks, the organised sector can no longer serve as a proxy for the unorganised sector, and old numbers have no connection to the new reality.

Worse, the official method used to calculate the government’s quarterly growth estimates is based only on data from the corporate sector. These do not even fully represent the organised sector, since the corporate sector is only one part of it. Further, if the organised sector is growing at the expense of the unorganised sector, as seems to be the case, then the former cannot at all represent the latter.

All of this implies that the economy’s rate of growth is nowhere close to what the government claims it is. If we take the official word for this, the organised sector, which accounts for 55 percent of gross domestic product, is growing at 7 percent; and agriculture, which is part of the unorganised sector and accounts for about 14 percent of GDP, is growing at around 3 percent. For the non-agricultural unorganised sector, which accounts for the remaining 31 percent of GDP, the scale of job losses shown in the studies cited above points to a decline of at least 10 percent, even by a conservative estimate. If all this is added up proportionately, the overall rate of growth only comes to around 1 percent. This is the true measure of the post-demonetisation and post-GST economy.

This reality—that the unorganised sector is in sharp decline—accounts for many of the adverse symptoms that the economy shows today. Consider the crisis of joblessness. The unorganised sector employs 93 percent of the workforce. If it declines, employment gets hit. Growth in the organised sector creates few jobs, since it is highly automated. Take the example of local retail stores competing against e-commerce, reported to be growing at 30 percent per annum. The automated operations of Amazon, Flipkart, Big Bazaar and the like need far fewer workers to accomplish the same amount of work compared to unorganised retailers. Further, if the organised sector grows at the expense of the unorganised sector, the result is a net decrease in jobs—hence the millions of desperate job-seekers amid an official growth rate of 7 percent.

The decline in unorganised employment is reflected in the high demand for work under the National Rural Employment Guarantee Scheme since demonetisation. In the last three budgets, the government has had to increase the budget allocation for the scheme, from Rs 38,000 crore to Rs 48,000 crore to Rs 55,000 crore. Now, a supplementary demand for another Rs 6,000 crore has raised the total allocation for the current budget year to Rs 61,000 crore. Those who have lost jobs in urban areas have gone back to their villages to seek work. The fact that demand for rural employment remains so high implies that the lost urban jobs have not returned.

The decimation of non-agricultural unorganised employment has contributed to a host of other problems, including agrarian distress. Mass demand for food and basic commodities comes in large part from the overwhelmingly large number of people who depend on the unorganised sector. As their incomes have declined, so has that demand. Low demand has helped depress agricultural prices, which collapsed as a result of demonetisation and have failed to recover even after the immediate impact of that shock waned.

The timing of demonetisation—in November 2016, between the kharif harvest and the sowing of the rabi crop—meant that in large parts of northern India, farmers could not sell their produce, because traders did not have the cash to pay. Farmers’ lack of cash delayed purchases of seeds and other crucial inputs, and pushed back the planting of the next crop. Many farmers had to borrow at high cost to buy inputs and fulfil family needs. In all of this, their costs rose. Consequently, farmers’ incomes were pincered by falling prices and rising costs. Their inability to repay debts has intensified the demand for loan waivers in state after state. It might also have caused a rise in farmers’ suicides—the government has not been publishing data on these for the past two years.

The ripple effect spreads further and further. Data from the Reserve Bank of India shows that for several years now, capacity utilisation in the organised sector is hovering between 70 and 75 percent. This is another consequence of slack demand due to the decline of the unorganised sector. Investment, in turn, depends on capacity utilisation—if companies have spare capacity, they invest little, since more investment would lead to higher unutilised capacity and, as a result, greater losses. Official figures show that investment in the economy, as reflected in gross capital formation, peaked at about 39 percent of GDP in the 2011-12 financial year, and dropped to about 32 percent of GDP in 2017-18. CMIE data shows that demonetisation led to a sharp decline in investment. Confusion and difficulties arising from the GST also exacerbated the problem.

Low demand is also reflected in poor credit offtake, or borrowing, from banks—an indicator of low production and investment in the economy. Credit offtake declined sharply in December 2016, right after demonetisation. It has recovered since then, but not to the levels seen before the present government took power.

There is another aspect to today’s credit woes—the massive burden on banks from non-performing assets. Loan defaults have risen not only due to distress in the unorganised sector, but also, at a much larger scale, due to low overall growth hampering businesses, as well as due to crony capitalism. Many NPAs are linked to the infrastructure sector, including things such as power projects. Companies have created high-cost infrastructure that is not profitable in a poor country. The credit given to such projects often shows a lack of due diligence by banks, encouraged by political cronyism. The high ratio of NPAs has reduced banks’ ability to lend until they can fix the problem. Non-banking financial companies, or NBFCs—the so-called “shadow lenders”—have also faced a crisis of bad loans, and have had to reduce lending. Micro and small enterprises have had to raise funds from the high-cost informal money market—putting another dent in profitability.

The difficulty is that companies that should be investing in the economy are highly indebted, and so ineligible to borrow, and banks are struggling to collect debts, and so unable to lend. This twin balance-sheet problem is further hurting growth, which is already in a quagmire due to the decline of the unorganised sector.

The low rate of growth has led to a tussle between the government and the Reserve Bank of India. The government wants the RBI to boost investment by cutting interest rates, and, by going soft on NPAs, to enable banks to lend. It has also wanted the RBI to offer relief for NBFCs, and to transfer reserve funds to government coffers, so as to fund likely giveaways in anticipation of the coming election. The RBI has so far been reluctant to oblige.

The current government’s economic policies have left the country in a very precarious situation. Besides the internal instability arising from the declining unorganised sector, there is now also external instability arising from global markets. One source of this instability is the United States’ escalating trade war. Another is the turmoil in numerous countries that supply the world with oil and gas. Many of these are confronted by war and social crises—Syria, Iraq, Yemen, Venezuela—and others, such as Russia and Iran, are facing international sanctions. When global petroleum prices rose sharply, India, which imports roughly 80 percent of its petroleum products, saw increased inflation and a rising trade deficit. These two factors led to a sharp devaluation of the rupee vis-à-vis the dollar, which further aggravated inflation. The situation was threatening to get out of hand, until petroleum prices declined in the last few months.

In the past, internal economic stability provided India with a buffer against such external shocks, but now that buffer is gone. Instead, we have two diverging circles of growth—one growing at the expense of the other—and a growth rate of around 1 percent, with all the social and political tumult that this brings. To add to this, the government’s pressure on the RBI, which led to the sudden resignation of the central bank’s last governor and the appointment of another in quick time, also points to a weakening of the institution. One lesson from demonetisation, when the last RBI governor meekly watched the disaster unfold just months after his appointment, is that a new governor does the government’s bidding while finding their feet in the job. It is true that the RBI does not have absolute autonomy, but its independence is important. A strong RBI with strong reserves, able to effect difficult corrective measures when needed, is a crucial safeguard for a besieged economy. If that safeguard is also gone, any fresh shocks to the economy, whether internal or external, could have dire results.