The formal economy – and not just the informal sector – is in distress

• The dominant narrative in public discussion is that much of the persisting economic distress is concentrated in the informal or unorganised parts of the economy.
• That enterprises in the organised sector and the formal labour force have emerged relatively unscarred is a view that resonates widely.
• However, contrary to this notion, there are signs that the distress not only envelops the informal economy, but also that large parts of the formal economy continue to face considerable financial hardship.

Indicative data of distress in formal sector

• Since the onset of the pandemic, the Employees’ Provident Fund Organisation (EPFO) has allowed members to avail of an advance to deal with expenses arising from Covid-19.
• Data from EPFO shows that between April 2020 to September 2021, 1.5 crore such claims were received.
• This implies that 23 per cent of India’s formal labour force (an upper limit, based on those contributing to EPFO) has availed of this facility.
• Of these 1.5 crore claims, 87.2 lakh were received in 2020-21.
• This works out to an average of 7.26 lakh claims per month.
• In comparison, in just the first six months of 2021-22 (April-September), 63.4 lakh such claims were received, at an average of 10.5 lakh per month.
• This suggests that not only has the formal labour force continued to face economic hardship, but also that it has been of a similar if not higher magnitude in the ongoing financial year.
• At the enterprise level, the distress amongst the smaller formal firms has been severe.
• Data on the Emergency Credit Line Guarantee Scheme (ECLGS) which was designed to extend credit facilities to firms provides some understanding.
• According to the RBI, the total number of guarantees extended to MSMEs under this facility stands at around 1.10 crore, amounting to Rs 1.7 lakh crore.
• As this facility was extended upto 20 per cent of the loan outstanding, it implies that these entities had a loan exposure of roughly Rs 8.5 lakh crore (upper limit).
• To put this in perspective — as per RBI, the total credit flow to MSMEs by banks stood at Rs 17.8 lakh crore across 4.2 crore accounts at the end of 2020-21.
• Roughly 85 per cent of disbursals under ECLGS are through banks.
• This provides a sense of the extent of the financial distress among formal MSMEs, and how extensively this facility was used during this period.
• However, unlike the data on the labour force, these numbers are skewed towards the initial period of the pandemic.
• Of the 1.10 crore guarantees, 95.3 lakh were issued in 2020-21, while only 20.6 lakh were issued in 2021-22, despite the scope for more.
• Similarly, under the RBI’s restructuring schemes, while 9.29 per cent of eligible MSME accounts were restructured under the February 11, 2020 scheme, this fell to 7.19 per cent under the August 2020 scheme, and to 5.8 per cent under the May 2021 scheme.
• This indicates that at least some of the formal MSMEs are witnessing an improvement in their operating climate, and are able to meet their obligations.

Distress in Informal sector

• For the informal labour force with no such safety net, dealing with the economic fallout have undoubtedly been far more difficult.
• While there are no firm estimates, it is possible to arrive at some understanding of the extent of the distress using data of individuals seeking work under MGNREGA.
• In the pre-Covid year of 2019-20, 7.88 crore individuals obtained work under NREGA.
• In 2020-21, the first year of the pandemic, this rose to 11.19 crore.
• In just the first nine months of 2021-22, this figure has touched 9.33 crore.
• Considering that work demanded by households under the scheme tends to rise during the lean season of January-March, the final number for this year may end up being closer to last year’s number.
• This persisting and heightened demand for work signals either the continuing absence of other forms of employment, or the need to rebuild buffers, or the need to supplement incomes because wages in other jobs remain depressed.
• It also implies that the distress in the informal labour market, at least in rural areas, is yet to recede, and is similar to levels observed last year.
• It is possible that in the weeks ahead, with constraints on budgets, states begin to curtail registration of households demanding work, in which case, work demanded under NREGA will cease to be a proxy for labour market distress.

Way forward

Short term measures

Job creation

• Number of jobs created per rupee invested as well as the types of jobs created and who benefits from them.

Boost to economic activity

• Focusing on the economic multiplier each intervention can deliver, the ability of a project to directly replace missing demand, and its impact on import levels or the national trade balance.

Timeliness and risk

• Assessing whether the project generates stimulus and employment benefits over the very short term and whether they are durable even in the face of possible re-imposition of local quarantine measures.

Long term measures

Long-term growth potential

• Looking at its impact on human, natural, and physical capital.
• For instance, some projects do better at improving human capital, by building the future skills and health of the population, especially if air and water pollution can be reduced, or access to improved drinking water is improved.

Resilience to future shocks

• By building capacity for societies and economies to cope with and recover from external shocks, like COVID-19 today, but also other forms of natural disasters and future climate change impacts.