Editorials/Opinions Analysis For UPSC 28 January 2022
- India’s economy and the challenge of informality
India’s economy and the challenge of informality
The COVID-19 pandemic has exacerbated the challenge of Informality with the informal sector’s GDP share shrinking to less than 20%.
GS III: Employment, Growth & Development, Inclusive Growth
Dimensions of the Article:
- Reasons for Endurance of Informal Sectors
- Why the impetus for formalisation?
- Persistence of informality is a sign of underdevelopment
- Structural Transformation
- Status of Formal employment in India
- Multi-layered Informality
- Efforts for Policy induced formalization
- Way Forward
Reasons for Endurance of Informal Sectors:
- Informality as an outcome of structural and historical factors of economic backwardness.
- Excessive taxation and regulation ensure the endurance of informal activities.
- Tax reforms: The fiscal perspective has a long lineage in India going back to tax reforms initiated in the mid-1980s.
- To promote employment: India protected small enterprises engaged in labour intensive manufacturing by providing them with fiscal concessions and regulating large-scale industry by licensing. This was done in an attempt to promote employment.
- This led to booming of many labour-intensive industries getting diffused into the informal/unorganised sectors.
- Further, they led to the formation of dense output and labour market inter-linkages between the informal and formal sectors via sub-contracting and outsourcing arrangements
- Textile Industry: The rise of the power looms at the expense of composite mills in the organised sector and handlooms in the unorganised sector best illustrates the policy outcome.
- While such policy initiatives may have encouraged employment, bringing the enterprises which benefited from the policy into the tax net has been a challenge.
- This is partly attributed to administrative reasons, political and economic reasons operating at the regional/local level in a competitive electoral democracy are responsible for this phenomenon.
Why the impetus for formalisation?
- Formal sector is more productive than the informal sector
- Workers of formal sector have access to social security benefits.
- Efforts made by the government to Formalise the economy since 2016:
- Currency demonetisation,
- Introduction of the Goods and Services Tax (GST),
- Digitalisation of financial transactions and
- Enrollment of informal sector workers on numerous government Internet portals
- The above-mentioned efforts are based on the “fiscal perspective” of formalisation.
- This perspective appears to draw from a strand of thought advanced by some international financial institutions such as the International Monetary Fund, which foregrounds the persistence of the informal sector to excessive state regulation of enterprises and labour which drives genuine economic activity outside the regulatory ambit.
- How to bring formality? The following efforts can bring informal enterprises and their workers into the fold of formality.
- Simplifying registration processes,
- Easing rules for business conduct, and
- Lowering the standards of protection of formal sector workers
Persistence of informality is a sign of underdevelopment:
- Though widening the tax net and reducing tax evasion are necessary, global evidence suggests that legal and regulatory hurdles alone are mainly responsible for holding back formalisation is not providing the required results.
- As per ‘Informality and Development’ study: It argues that the persistence of informality is, in fact, a sign of underdevelopment.
- The study finds a negative association between informality and per capita income across countries and informality decreases with economic growth.
- Periodic Labour Force Survey (PLFS): As evident across major states of India, PLFS also shows the persistence of a high share of informal employment in total employment seems nothing but a lack of adequate growth or continuation of underdevelopment.
- Economic development is characterised by movement of low-productivity informal (traditional) sector workers to the formal or modern (or organised) sector. This is referred as structural transformation.
- In East Asia: The region witnessed rapid structural change in the second half of the 20th century. The poor agrarian economies rapidly industrialised, drawing labour from traditional agriculture.
- In other Developing countries: In many parts of the developing world, including India, informality has reduced at a very sluggish pace.
Status of Formal employment in India:
- Definition: As per ILO and India’s official definition, ‘formal jobs’ are those provide at least one social security benefit — such as EPF.
- Over 90% of workers in India are informally employed despite rapid economic growth over the last two decades, producing about half of GDP.
- The share of formal workers in India stood at 9.7%
- Official PLFS data: About 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers.
- Non-agricultural sector: It has the highest prevalence of informal employment.
- About half of informal workers are engaged in non-agriculture sectors which spread across urban and rural areas.
- The fact that informality is now differentiated and multi-layered needs to be appreciated.
- ‘Petty Production’: The percentage of Industries thriving without paying taxes is only few. A Large part of low productivity, informal establishments are working as household and self-employment units which represent “petty production”.
- Survival and uncertainty of their existence are the biggest challenge of informal workers and their enterprises.
- Despite the efforts to formalize, the challenge of informality looms large in India. The coronavirus pandemic has in fact exacerbated this challenge.
- Research by State Bank of India: The data showed that reported the economy formalised rapidly during the pandemic year in 2020-21, with the informal sector’s GDP share shrinking to less than 20% about from 50% a few years ago.
- This is attributed to severe lockdowns imposed in 2020 and 2021.
- Informal sector is more likely to move on tracks soon to produce whatever it can, using its abundant labour and meagre resources.
Efforts for Policy induced formalization:
- The Policy efforts to alleviate legal and regulatory hurdles to formalise the economy is significant.
- However, these initiatives fail to appreciate that the bulk of the informal units and their workers are essentially petty producers who are struggling for their subsistence out of minimal resources.
- Hence these cannot yield the required results.
- Formalization can occur when the informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.
- Access to social security cannot be ensured by mere registration under official portals, considering the poor record of implementation of labour laws.
-Source: The Hindu