National Council of Applied Economic Research
Opinion: Bornali Bhandari Samarth Gupta Ajaya K Sahu & KS Urs
We use the quarterly NCAER Business Expectations Survey (N-BES) to understand the differential impact that the Coronavirus pandemic had on manufacturing versus services. In the process we understand the challenges that the sectors faced along with their different coping strategies. Our data comes from surveys of nearly 600 firms conduced in June September and December 2020 across six cities with the ratio of manufacturing to services being 75:25.
The impact of the pandemic was always going to be different on manufacturing and services. Baldwin and di Mauro (2020) argued in “Economics in the Time of COVID-19” that while manufacturing would show a V-shaped recovery services would show a L-shaped one. There would be some permanent loss in the contact-intensive services sub-sectors like aviation travel hospitality and entertainment and would take longer to recover. However the pandemic was expected to have lower negative impact and even in some positive impact on service sub-sectors like IT e-Commerce insurance banking etc. which have the flexibility of moving to ‘working from home’ mode.
Business sentiments had started showing a downward trend during pre-Coronavirus pandemic across both the sectors. Sentiments in both the sectors hit rock-bottom in 2020-21:Q1 which coincided with nationwide lockdown and first phase of unlocking. The phase-wise unlocking of the economy has led to revival of business sentiments in the subsequent quarters albeit they remained weak compared to the same period in the previous year.
Operational status during the pandemic related lockdowns and beyond
A larger share of service sector firms were operational in April and May 2020- 60.3% and 65.6% respectively. The corresponding figures for manufacturing were less than 30% for both the months. Services sectors remaining relatively less affected by the lockdown due to the fact that 42% of these firms were working from home only during this period in April and May 2020 respectively.
After the first phase of unlocking started in June 2020 81.8% of service sector firms were operational. In contrast 91.6% of manufacturing firms were operational in June 2020. The difference was probably attributable to some of the service sub-sectors being not operational like transportation hospitality entertainment education etc.
The difference between the two sectors dissipated in July-September 2020 with approximately 93% firms being operational. But there were substantial differences between modes of operation. During this period 21.5% of service sector firms were working from home alone and another 53.2% were working from home & office. The corresponding shares for the manufacturing sector were 4.6% and 28.6% respectively.
Labour Market during the last three months
The following section discusses how the firms across sectors responded in their labour market decisions.
Overall we find that the labour markets were comparatively weaker for the manufacturing sector versus services. However there were differences in sectoral responses across permanent & temporary workers. 11% of service sector firms responded they had increased hiring of permanent workers as opposed to 4% of manufacturing firms in June 2020 (Figure 2). In September 2020 the corresponding numbers were 29% and 24% respectively. While the share of service sector firms reporting a rise in hiring of permanent workers during last three months fell to 21% in December 2020 the proportion stayed the same at 24%.
For temporary workers we observe a contrasting trend. Between April and June 2020 20% of service sector firms responded that they had increased employment of temporary workers increased compared to 8% of manufacturing sector firms. This proportion increased from 41% in September 2020 to 46% in December 2020 for service sector firms. The corresponding numbers for the manufacturing sector were 33% and 35% respectively.
The contrasting trends across service and manufacturing firms for permanent and temporary workers indicate several important insights. First we observe that service sector firms are slower in hiring of permanent workers. As argued before this could possibly be due to a severe hit on contact-intensive service industries. However a faster uptick in hiring of temporary workers by service sector firms shows a change in labour market policies of service sector firms. Possibly due to the move to work-from-home service sector firms are possibly engaging in short-term employment contracts for workers.
In sum business sentiments in the services sector were slightly better than manufacturing in the April-May period of the lockdown because the former continued to be operational as they could work from home. The services sector outperformed the manufacturing sector in the temporary workers market. However in the permanent workers market after the initial setback in June 2020 the manufacturing sector outperformed the services sector.
Given the large size of service sector in India such a shift in hiring and staffing policies of the service sector firms present a grim outlook for worker vulnerability since temporary work engagements usually have less social safety nets for workers. The lack of response of the Union Budget 2021-22 to these dynamics was surprising!
Bhandari is Senior Fellow Gupta and Urs are associate fellows and Sahu is senior research analyst NCAER. Views are personal