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Home >Markets >Mark To Market >As unemployment climbs yet again, India’s consumption purse hit hard

India’s unemployment rate is rising back again and when even government hiring is at its slowest in three years, it is time to take notice. Robust employment generation is a pre-requisite for growth, as it fires up the consumption engine, which typically revs up the economy. In fact, if Indians do not earn, they will not be able to spend.

The unemployment rate rose to double digits in the week ended 23 May, according to Centre for Monitoring Indian Economy (CMIE) data. As the adjoining chart shows, CMIE’s statistics make for a grim, though not unexpected, reading. The second wave has begun to show its impact in both urban and rural areas with the jobless rate rising to 17.4% and 13.5%, respectively.

In May, most states went under strict lockdowns, affecting local businesses and trade. Services, especially the contact-intensive ones, have been shut due to the pandemic since last year. Economists said the overall unemployment rate for May will be in double digits, but milder than the ugly 23% seen last year.

Satish Kumar/Mint
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Satish Kumar/Mint


What should worry us is that the Centre hired 27% less people in FY21 than in the year-ago period, while states hired 21% lower, a Mint report on Tuesday showed. The upshot is that rising unemployment may not only be contributed by unorganized labour, where job security is tenuous, but also the organized and salaried segment.

This could have a bigger impact on an already waning enthusiasm over consumption. Shubhada Rao, founder of economic advisory firm, QuantEco Pvt. Ltd, said unlike the first wave, there could be more hesitation in spending this time around, once the curbs ease. “Rising unemployment will continue to fuel this fear," she said.

Another worrying factor is that in the second wave, the share of rural centres in the infection curve is higher. This could also mean additional pressure on rural employment, as citizens continue to battle health hazards. True, rural centres have the opportunity to find work under the government’s employment guarantee scheme. But, the demand under Mahatma Gandhi Rural Employment Guarantee Scheme has remained elevated, and outstripped the supply of work by the government consistently. This, economists said, is a clear sign of rural distress. This will consequently impact consumption not just in cities, but also in villages.

Uncomfortable unemployment rates may also increase the propensity to build on precautionary savings. Moreover, the second wave has been more brutal on citizens’ financial health, with part of their savings diverted for medical expenses.

“With the second wave compelling higher medical expenses, elevated precautionary savings, and possible uncertainty with respect to jobs and incomes, recovery in big-ticket consumer durables, such as auto or home improvement items, which saw renewed purchases after the first lockdown, may remain limited in FY22 as a part of the pent-up demand may have already been exhausted in these categories," economists at QuantEco wrote in a note.

To be sure, unemployment rate may come down once states begin to ease lockdowns as caseloads drop. However, India’s track record in providing jobs consistently is weak. As the chart alongside shows, the jobless rate has been high among the youth and this translates to poorer spending power even for the most willing consumer.

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