Covid-19 and the Industrial and Services Sectors

Date: 
July 24, 2020
Author: 
Surajit Mazumdar

[This is the third article in the series on the ongoing economic crisis]

The Covid-19 pandemic has only contributed to aggravating a crisis that the Indian economy was already in the grip of, even before this new element had entered the picture. While mainstream acknowledgement of this crisis happened only when GDP growth and profit levels started taking a clearly visible hit, the real essence of the crisis lay elsewhere – in the increasingly grim reality of 90 per cent of the Indian population which has to work for a living. Large scale unemployment and underemployment combined with extremely low earnings in any available wage employment or self-employment has come to define the horizons of their existence.

If the progressively deepening agrarian crisis – the inability of agricultural activity to generate an income for most of the millions dependent on it – has compelled increasing numbers to seek work outside, the absence of adequate employment opportunities in the industrial and services sectors has limited the extent of such movement. This relative scarcity of employment in these non-agricultural sectors and the downward pressures on wages resulting from it are in turn linked to the extreme narrowness of the Indian market because of the poverty of the majority. The top 10 per cent of the population has benefitted from cheap labour, appropriating the surplus produced by such labour and also by being able to consume a whole range of labour services. However, the demand generated by this minority which is the beneficiary of growing inequality is unable to create employment on a scale large enough to absorb the vast labour reserve. This is the vicious circle which was dragging the Indian economy down when the Corona crisis struck and produced its own specific and extremely severe contractionary effect on production and employment.

Massive Drop in Industrial Production

The evidence of pandemic related massive contraction in industrial production is unambiguous. The Index of Industrial Production (IIP) showed a fall of 16.7 per cent in production in March 2020 compared to the same month, and this was followed by a massive 45.8 per cent contraction in the subsequent April-May period. While all three industrial segments that are included in the IIP – Mining, Manufacturing and Electricity – exhibited contraction, manufacturing was the worst hit. Sharp drops in cement and steel output, of an even higher order than in manufacturing as a whole, also indicates that the story of construction, the last remaining segment of industry, was no different.

This industrial collapse in the last few months comes in a background of a decade long stagnation in the sector that was becoming worse – reflecting a trend of de-industrialization. Not only was the full year industrial production in 2019-20 lower than in 2018-19, its growth since 2011-12 has been consistently poor. In the case of manufacturing the average growth rate for the decade has been abysmal - less than 4 per cent per annum. Employment expansion in manufacturing in the last decade was obviously extremely poor as a result, aggravated also by the increasing squeezing of the more employment-intensive unorganized segment of manufacturing and the increasing mechanization of production in the organized sector. The construction sector has also been going in the same direction even as its boom from the mid-1990s came to an end and relative stagnation set in at the beginning of the current decade.

Services Sector Too in Doldrums   

While no equivalent of the IIP is available in the case of services, and GDP data for the relevant period will become available only much later, the 41 per cent fall in gross GST collections for April-June 2020 compared with the same quarter of the previous year can be said to reflect the drop in both industrial production as well as that of services. Private data sources such as the IHS Markit Purchasing Manager’s Indices in fact indicate that the contraction in services has been of a higher order than in manufacturing. For certain services like transport services, this is corroborated by the data which shows sharp drops in consumption of petroleum products like diesel and aviation turbine fuel and in passenger and freight traffic handled by the railways, airlines and ports.

The impact of the Covid-19 crisis on services represents in many ways a new dimension that the pandemic has contributed to the crisis in India. Usually, services are less prone to the sharp fluctuations that can be seen in the case of industrial and agricultural production. Yet services have for once become the hardest hit precisely because services generally depend more than either agriculture or industry on direct human interaction between the producers and users of services. Indeed, services like wholesale and retail trade, and even transportation, themselves play a mediating function in the interaction between producers and consumers of industrial and agricultural products. Many personal services like those of barbers, maids or drivers also simply cannot be consumed virtually while digitization has its limits in accessing others like education and health. Hotels, restaurants, and transport services depend to a great deal on people physically travelling for work and tourism purposes and congregating in numbers.

The peculiar characteristics of services generally mean that the production of services is employment intensive and less amenable to be exported or imported. In most parts of the world, therefore, services accounts for the major chunk of employment – over 70 per cent in most advanced economies. In India, however, the services share in employment has remained low despite an increasing expenditure on services by high income groups and, in marked contrast to manufacturing, by the rising share of the sector in GDP. This was due to the fact that the employment effect of that expenditure on services was constrained by the smallness of the proportion of people doing that spending. An additional factor holding back employment in services has been the very restricted per capita public provisioning of services like education, health and transport. 

Revival Unlikely in Near Future

The pandemic is far from over and its effects on the industrial and services sector and employment creation in them will operate for some time, and last beyond it too. Both the sectors will confront an additional hit in demand attributable to the income losses caused by the pandemic and its associated containment measures like lockdowns. The imperatives of new safety regulations in both sectors will tend to favour organized sector enterprises in the process of revival of economic activity. Greater digitization and mechanization can be expected in both for this reason as well as part of the efforts of businesses to shore up profits by reducing wage costs. Both sectors will also have several wage- or self-employment providing enterprises that may never be revived because of being financially crippled by the loss of earnings during the pandemic. In both sectors, MSMEs, which employ many more people than larger enterprises, will reflect this phenomenon to a greater extent, having been exceptionally weakened previously by the effects of demonetization and the introduction of GST. Both sectors can thus contribute to increasing debt default, which could mean a hit taken by the banking and financial system despite remaining ‘open’, which will show up in the future. In addition to these will be the changes in the scale and the ways of consuming services that ‘distancing’ has already initiated, some of which may be permanent or long-lasting,   

Govt. Policies Aggravating Economic Crisis

All the effects of Covid-19 on the industrial and service sectors ultimately imply the same thing – a serious aggravation of the unemployment situation and therefore a deepening of the crisis. There is simply no way of avoiding this if the Government beholden to propertied interests remains committed to reviving the cheap labour based high profits regime and maximizing the opening up of investment opportunities for private capital, both domestic and foreign. These commitments have meant that the powers of the state to tax and spend have not been used to redress the problems emanating from the extreme concentrations in the ownership of wealth and distribution of income and to expand demand. This is the commitment which inclines the state towards giving tax concessions to the rich and the corporate sector and to spend less. This inclination becomes even stronger in a crisis of the kind currently faced – particularly because tax revenues take a hit and private capital sees profits disappear too - even though resolution demands the exact opposite. It is this that also leads to attempts to ‘stimulate’ the economy by promoting credit-financed spending by private enterprises – ignoring in the process the fact that there is no incentive for most such enterprises to do so when the crisis had to have reduced their ability of to repay their existing debt and saddled them with unutilized capacity. An insensitive, callous regime lacking in any accountability - because it hopes to use its poisonous politics and money power to cover up its failures and muster public support - will also express all these tendencies to a greater degree. Any hope for the Indian economy therefore depends on a change in the correlation of forces.