There’s early evidence of labourers going back to their jobs in the cities. Some estimates suggest that 15,500 migrants who had left for their rural homes in other states are returning to Maharashtra every day.About 30 million migrant workers rushed home to their villages during the pandemic. The question now is will they return to their city jobs? And what will happen to wage growth?
About 60 per cent of out-migration from rural India is aspiration-led and the 2.5 times higher income earned in urban jobs may be too attractive to forego, unless rural wages rise. So can incomes in the villages rise? Alas, we are not convinced.
True, there is much excitement about the rural recovery. The countryside didn’t face as strict a lockdown as the big cities, the government has directed plenty of stimulus measures towards it, and monsoon rains and the planting of crops has been good. Yet, this optimism could prove short-lived, as eventually the more long-lasting determinants of rural wages could prevail.
One, while the government has raised the rural employment guarantee programme (NREGA) wages and outlays, demand for the scheme is outpacing supply, which means that it may not be an effective driver of higher rural wages.
Two, a construction slump could be harmful. Many rural Indians, especially those without land, have become building labourers. But 70 per cent of construction is related to real estate and property developers are dependent on funding from struggling non-banking financial companies. Until this type of lending restarts, construction may not normalise. And that means rural wages may not rise quickly either.
Three, rising debt levels could be a drag. The increase in borrowing and the sustained fall in inflation over the last few years has increased the “real” indebtedness of rural Indians, particularly the land owners who pay villagers to farm their land. This is likely to hurt their ability to pay high wages.
It is possible that rural wages could tick up a shade temporarily. Sowing in the current season has been strong, requiring more hands on the ground. But this may not rise sustainably once the current agricultural season is over, implying that “aspirational” labourers may want to return to their better paid urban jobs.
So, are the workers returning to urban India? Unemployment rates have fallen and labour markets have already improved from the April lows.
There’s early evidence of labourers going back to their jobs in the cities. Some estimates suggest that 15,500 migrants who had left for their rural homes in other states are returning to Maharashtra every day. A special train service that was started to ferry labourers back to their rural homes has seen demand dry up since early June (after peaking in late May). In fact, there is demand for trains to bring migrants back to their urban work places.
All of this suggests that the supply-side disruption from reverse migration may not linger long after the current agricultural sowing season is over, assuming the peak of the pandemic is largely over by then. The situation might even be the opposite soon — more rural workers wanting jobs in urban India than are available. So, what will give? Wages.
For three reasons, we think the wage outlook could be dimmer than in the pre-pandemic world. In fact, India may have more of a wage problem than a jobs one.
One, as during demonetisation, workers could find jobs again, but at lower wages. During demonetisation, the unemployment rate declined gradually, but was driven by a rise in rural more than urban employment — rural India created double the jobs that urban India did. And despite the employment rate rising, wage growth declined over this period.
What could this mean? One explanation is that urban job opportunities waned and some workers were only able to find work in rural India, where wages are 40 per cent of those in urban areas. It’s a similar picture this time around. There’s been an improvement in labour markets between April and July, driven by a faster rise in rural jobs (though some of this could just be seasonal).
Two, there could be a second-round of pandemic-led labour market weakness, driven by job losses and falling wages from the first round. If this does materialise, it could be led by a lack of urban job opportunities since sectors like restaurants and accommodation, more prevalent in urban India, are yet to recover.
Three, we find that both rural and urban wages are driven by economic growth, and our expectation of India’s post-pandemic medium-term growth falling by one percentage point to 5 per cent does not bode well. We believe that the banking sector, burdened by rising bad loans, will be the key driver of a fall in potential growth.
What are the key takeaways? The much-feared labour-led supply disruption may not last, but weak wages could keep demand subdued. To offset this and ensure that things don’t spiral down, policymakers have an important role to play.
In particular, they may have to ensure that capital is allocated efficiently — India’s savings are employed where they are most productive, and as a result, investments keep ticking along. After all, investment is the only way to increase the economy’s capacity to create well-paying jobs.
But amid the COVID-19 backdrop, bringing back investment growth would also involve capital re-allocation. This means taking it away from sectors that are not working and redeploying it in sectors that are. Improving the Insolvency and Bankruptcy Code procedure is a key step here.
Another important step is to improve the health of banks as they are the ones allocating capital by giving loans. India’s banks have become risk-averse as a large mountain of non-performing loans threatens to grow further. Implementation of the 5-Rs — recognition, restructuring, resolution, recapitalisation and reforms — for the banking sector may be particularly useful here.
To sum it all up, we believe the supply disruption caused by reverse migration won’t last long, but led by lower wages, demand could remain weak, requiring policy intervention.
The writer is chief India economist, HSBC Securities and Capital Markets (India) Pvt Ltd