The formal economy – not just the informal sector – is in distress
The dominant narrative in public debate is that much of the lingering economic distress is concentrated in the informal or unorganized parts of the economy. That organized sector businesses and the formal workforce emerged relatively unscathed is a view that resonates widely. However, contrary to this notion, there are signs that distress not only envelops the informal economy, but also that large swaths of the formal economy continue to face considerable financial difficulties.
Take the formal workforce. Since the start of the pandemic, the Employee Provident Fund (EPFO) has allowed members to benefit from an advance to meet expenses related to Covid-19. EPFO data shows that between April 2020 and September 2021, 1.5 crore of such claims were received. This means that 23 percent of India’s formal workforce (an upper limit, based on those who contribute to the EPFO) have taken advantage of this facility. (Members were allowed to do this twice from June 2021).
Of these 1.5 crore claims, 87.2 lakh were received in 2020-21. This equates to an average of 7.26 lakh claims per month. In comparison, in the first six months of 2021-22 (April-September) alone, 63.4 lakh of such claims were received, at an average of 10.5 lakh per month. This suggests that not only has the formal workforce continued to face economic hardship, but it has been of a similar, if not greater, magnitude in the current fiscal year.
For the informal workforce without such a safety net, coping with the economic fallout would undoubtedly have been much more difficult. Although there are no firm estimates, it is possible to arrive at some understanding of the extent of distress using data from people seeking work under MGNREGA.
In the pre-Covid year of 2019-20, 7.88 million people obtained work through NREGA. In 2020-21, the first year of the pandemic, this figure rose to 11.19 crores. In the first nine months of 2021-22, this figure touched 9.33 crore. Considering that labor demanded by households under the program tends to increase during the lean season from January to March, the final number for this year could end up being closer to last year’s number.
This persistent and increased demand for labor signals either the continued absence of other forms of employment, the need to replenish reserves, or the need to supplement incomes because wages for other jobs remain depressed. It also implies that distress in the informal labor market, at least in rural areas, has not yet receded and is similar to levels seen last year. It is possible that in the coming weeks, with budgetary constraints, states will begin to reduce the registration of households requiring work, in which case the work demanded under the NREGA will cease to be an indicator of the distress of the labor market.
At the enterprise level, the distress among small formal businesses has been severe. Data on the Emergency Credit Line Guarantee Scheme (ECLGS), which was designed to extend credit facilities to businesses, provides some understanding.
According to the RBI, the total number of guarantees issued to MSMEs under this facility stands at around 1.10 crore, or Rs 1.7 lakh crore. As this facility was extended up to 20% of the outstanding loan, it implies that these entities had a loan exposure of around Rs 8.5 lakh crore (upper limit). To put this into perspective – according to RBI, the total flow of credit to MSMEs by banks (assuming congruence in definitions) stood at Rs 17.8 lakh crore out of 4.2 crore accounts at the end of 2020- 21. About 85% of ECLGS disbursements go through banks.
This gives an idea of the extent of the financial difficulties of formal MSMEs and the extent of the use of this facility during this period. However, unlike labor force data, these numbers are biased towards the initial period of the pandemic. Over time, the distress at the enterprise level, at least among formal enterprises, shows signs of easing.
Of the 1.10 crore collateral, 95.3 lakh was issued in 2020-21, while only 20.6 lakh was issued in 2021-22, despite the possibility of doing more. Similarly, under the RBI restructuring programs, while 9.29% of eligible MSME accounts were restructured under the 11 February 2020 program, this figure fell to 7.19% under August 2020 program and 5.8% under the May 2021 program. This indicates that at least some of the formal MSMEs are seeing an improvement in their operating climate and are able to meet their obligations.
Second-quarter results from some 2,000 companies show a similar trend. Among small businesses (those with net sales of 0-25 crore which make up 40% of the sample), 50% had exceeded their pre-Covid sales by the end of the second quarter of 2021-22, compared to 37% in the first trimester. While the corresponding figures for large companies are 80% and 53% respectively, these numbers nonetheless suggest that small companies are recovering to their pre-pandemic levels, albeit at a glacial pace.
But if this is the pace and extent of the recovery among formal MSMEs, given that the relief package has largely been disbursed through formal monetary channels, it is difficult to determine to what extent the stress among the millions of MSMEs unrecorded or informal would have diminished. Since only entities with reserves could have survived during this period, it is likely that the death rates of informal sector enterprises would have increased dramatically. But the question is, have birth rates also increased? Of the surviving informal MSMEs, those with stronger ties to the formal economy would likely recover faster than the informal ones.
Naturally, the pace at which unorganized businesses and small formal businesses recover will affect how quickly labor market distress eases and how India emerges from this pandemic. With this in mind, the next EU budget must continue to support the economy and foster recovery.