Ishan Bakshi writes: Between April 2020 and September 2021, 23 per cent of India’s formal labour force availed of an advance from EPFO to meet Covid-19 expenses
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.
Take the formal labour force. 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. (Members were allowed to do so twice from June 2021).
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.
For the informal labour force with no such safety net, dealing with the economic fallout would 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.
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 (assuming a congruence in definitions) 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. Over time, the distress at the firm level, at least among the formal ones, is showing signs of easing.
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.
The second quarter results of 2,000-odd companies point to a similar trend. Among the smaller firms (those with net sales of 0-25 crore which account for 40 per cent of the sample), 50 per cent had surpassed their pre-Covid sales at the end of the second quarter of 2021-22, up from 37 per cent in the first quarter. While the corresponding numbers for the bigger firms are 80 per cent and 53 per cent respectively, these numbers, nonetheless, do suggest that smaller firms are recovering to their pre-pandemic levels, even if at a glacial pace.
But if this is the pace and extent of the recovery among formal MSMEs, considering that the relief package was largely disbursed through formal monetary channels, to what extent the stress among the millions of unregistered or informal MSMEs would have abated is difficult to ascertain. As only entities with reserves would have been able to survive during this period, it is likely that firm death rates in the informal sector would have risen dramatically. But the question is, have birth rates also picked up? Among the informal MSMEs that did survive, those with stronger linkages to the formal economy would probably recover faster than the informal ones.
Naturally, the pace at which unorganised enterprises, and the smaller formal firms recover, will have a bearing on how quickly the labour market distress eases, and how India exits from this pandemic. Considering this the upcoming Union budget must continue to provide support to the economy, nurture the recovery.
Written by Ishan Bakshi
Source: The Indian Express, 21/01/22
