Issues related to the Indian Economy
Source: The Economic Times
Context:
The authors talk about the state of informal sector during the pandemic.
Editorial Insights:
Over the last decade, numbers related to India’s informal sector remained unchanged.
Where the sector accounted for 52% of India’s GDP & employed 82% of the total workforce.
However, the recent SBI study has reported that the Indian economy witnessed accelerated formalization under the distressed conditions of the pandemic & lockdown last year.
It is estimated that the share of the informal economy has fallen to a mere 20% of GDP.
Why?
- During 2020-21, the unorganized sector bore much of the economic contraction.
- The sector has neither the financial nor the technical strength to face the COVID shock.
- Further, the supply side policy measures were mainly focused on the formal sector, ignoring the conditions of the informal sector.
- The main reason for reporting the above fall of informal sector contribution is because there is no actual official data, the reports depend on the sample data & its extrapolation.
What is Informal Sector?
As per ILO, Informal Sector enterprises are defined as private unincorporated enterprises owned by an individual that are not constituted as separate legal entities independently of their owners.
The informal enterprises has no complete accounts available that would permit a financial separation of the enterprise’s production activities from its owner’s other activities.
They are not registered under specific national legislation such as Factories Acts.
On other hand, Formal workers are those having access to at least one social security benefit such as a provident fund.
Challenges /Issues faced by Informal Sector workers:
- The informal sector workers lack Social security benefits making them very vulnerable to economic and political shocks.
- The casual workers among the informal workers are most susceptible to economic shocks as most of them do unskilled, low-paid occupational jobs.
- The problems in the informal sector can be costly as it can lead to job and wage losses, higher inflation, and even risk the livelihood of migrant workers.
- The structural disadvantage in terms of literacy and skills makes them more prone to exploitation.
- The discrimination in the urban informal labour market against these people leaves them with no choice but to accept the offered wage.
- There is a government failure to reduce wage inequality and ensure a bare minimum wage to a large chunk of the urban informal workers during normal times.
- Therefore, the majority of urban informal workers remain highly vulnerable and live in precarious conditions even during normal times.
- The existing government programmes cannot provide gainful employment opportunities to the informal sector workers mainly migrants at their native places.
- Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.
- Often the migrants are part of the gig economy with seasonal employment, which suits the seasonal nature of agriculture.
- Lower coverage under welfare schemes: Due to the identification of the home states, various schemes such as PDS benefits are difficult to avail unless the address is mutated, which is a difficult process.
- Digging deep into an increase in Formalization of Indian economy:
- Transitioning to formality needs a reduction in dualism in production & an improvement in employment quality.
- Though the informal sector’s share in GDP is shrunk due to the COVID shock.
- However, the purported decline in the informal sector’s share in GDP has not been accompanied by an expected reduction in its employment share.
- The PLFS 2017-18 & 2019-20 data reports that employment share in non-agricultural informal enterprises has increased from 68% in 2017-18 to 69.5% in 2019-20.
- This increasing share of the formal sector in GDP but declining share in employment only widens the dualism between the two sectors.
- The dualism ultimately means that much of India’s workforce is engaged in low productivity & low-paying work.
Dualism impact:
- Lack of remunerative jobs for the vast majority implies a lack of growth in demand which adversely impacts investment & economic growth.
- Because a mere 17-18% of the workforce in the organized sector cannot sustain economic growth in the long run.
- The reasons for an increasing share of the formal sector in GDP contribution are:
- Due to COVID, formal enterprises squeezed out informal enterprises.
- Several of them have temporarily ceased production & weighed down by COVID & lockdown impact.
- The main point to be noted is that the increase in formalization is not a consequence of micro & small informal firms transitioning to formality.
- Additionally, as the formal sector rationalized its workforce, the laid-off workers are seeking employment in the informal sector resulting in a rise in the informal employment share.
- However, over the years the economy has officially witnessed a significant drive towards formalization.
- This pushed for registering firms under relevant laws & obtaining a tax number.
- However, it is crucial to recognize that firms exist in the informal sector for various reasons, not just to evade regulations & taxations.
- Several enterprises cannot afford to survive in the formal sector due to their low productivity.
- For them formalization is not just simply about legal considerations, it is about increasing their productivity to enable an organic path to formality.
- Therefore, to boost productivity & extension social benefits for all workers, it is essential to view the process of formalization as a development strategy that needs stepping up investment in physical & human capital.
Concluding Lines:
Indeed formalization is a desirable process both for enterprises & workers in the Indian economy because the final objective of formalization is to improve the working & living conditions of those in the informal economy.
However, it is high time that Indian policymakers need to develop an inclusive, organic & sustainable policy ecosystem to accommodate all the major concerns of the informal sector.
