Unemployment falls as states unlock but experts caution slow recovery for formal sector jobs

(Representational image)

Snapping a six-week streak, India's unemployment rate dropped to 8.7 percent in the week ended June 13 from 11.9 percent in the month of May, the think tank Centre for Monitoring Indian Economy (CMIE) said,  reflecting the onset of monsoon rains and lifting of lockdowns enforced to curb Covid-19 infections.

The urban unemployment rate improved to 9.7 percent in the week and the rural rate to 8.2 percent, CMIE said.

Economists credited the improvement in the jobless rate to the start of the monsoon and unlocking ordered by state governments after a drop in the second wave of Covid-19 infections. At least one expert said any celebrations would be premature.

"I think it is too soon to cheer, as the unemployment rate has eased over the last few days because of unlocking in most states and arrival of the monsoon,” said the expert, a senior research fellow at a Delhi-based think tank who requested anonymity. “ While employment would quickly improve in the informal sector due to high absorption of labour, the formal employment in urban India will be slow as it is unaffected by monsoons and is highly dependent upon the overall economic sentiment and demand revival, which is expected to be slow due to the fear of a third wave."

To put things into perspective, India's unemployment rate touched a record high of 23.52 percent in April 2020 at the peak of the national lockdown. By January this year, it improved to 6.52 percent in line with an economic revival.

The second wave of Covid-19 dealt a setback to the economy and the job market in April and May, causing the unemployment rate to touch double digits again  in May.

According to CMIE, around 15 million jobs were lost in May alone this year.

"As the state governments have gradually relaxed lockdown regulations, the aggregate unemployment number will see a moderation (more in manufacturing than in services), but the degree of fall may be less stark than in the previous two weeks,” said Sushant Hede, associate economist at CARE Ratings.

A recovery in employment in the formal sector would hinge on a revival in overall consumer market demand, supported by relaxations in Covid-19-inducted restrictions and faster vaccinations, he said.

Hede expects a gradual improvement in the job market over the next one or two months, and an acceleration of the pace closer to third quarter of the financial year.

“Some sectors like technology/automation, financial services, healthcare, pharma, retail and telecom may see swifter hiring in the coming months against contact-intensive sectors like travel/tourism, hotels/restaurants, printing/packaging and salons,” Hede added.

State governments are dismantling restrictions enforced to curb the spread of the pandemic at a faster pace this year than they did in 2020, said Yuvika Singhal, economist at QuantEco Research.

“This should allow a faster normalisation of businesses operations and labour market slack (attributable to lockdown) Q2 FY22 onwards. However, for growth recovery to get entrenched, averting a third wave is critical, which hinges on maintaining Covid-responsible behaviour and a faster pace of vaccinations," Singhal said.

"Till vaccinations reach critical mass, a trade-off between keeping guard up and regressing into restrictions remains a real threat. This uncertainty is likely to prolong consumption recovery as well amidst a rise in household healthcare expenses and the need to maintain precautionary savings," Singhal added.

"With close to 60% of the population estimated to receive at least one dose of vaccination by the end of 2021, sequential growth recovery should look better Q3 FY22 onwards.  This can be expected to be led by industry and construction sectors foremost, followed by vengeance demand in services overtaking. As such, viewed from the prism of formal sector jobs which are intrinsically linked to services sector performance, reversion to pre-Covid levels of hiring can be expected to take shape by the end of FY22." Singhal said.