Informal Sector To The Fore

Context: One big learning from the pandemic has been that India can’t wish away the informal sector. Neither can it be assumed that the fortunes of the formal and informal sectors move together.

Issues of Informal Sector in India

• The lack of frequent and up-to-date economic indicators makes it hard to track India’s large informal sector, which employs around 80% of the labour force and produces about 50% of GDP.
• High jobs and income losses: Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.
• Impact on the informal non-agricultural sector: In rural, most of them involved in construction, trade and manufacturing have seen wage growth fall, while in urban, they are employed across the trade, hotels, transport, manufacturing and construction sectors
• There is a rise in urban unemployment and self-employment, with the latter category seeing the highest earnings loss.
• Induces high inflation: India was one of the few countries with high inflation throughout pandemic-stricken 2020. 
• Some of this is likely to be associated with the disruption in informal firms, which in normal times are very active in the production of essential goods like food and textiles.

Prospects in the informal sector:

• The prospects for the 40% in the informal agricultural sector have been surprisingly resilient.
• Rural wages have held up well over the pandemic, led by good monsoons, an exemption in the food trade, and high agricultural exports. Higher government spending in various social welfare schemes has also helped.

Fortunes of the formal sector: The fortunes of those in the formal sector, who make up 20 per cent of the workforce, have been relatively good.

• Large and listed firms have done better than smaller firms
• A combination of cost-cutting, a lower interest rate environment, access to buoyant capital markets, and ongoing formalisation are likely to have helped keep profitability high.
• The salaries of individuals working at these larger listed firms have also held up relatively better.

Issues with Formalisation

• Formalisation can be a double-edged sword: While traditionally known for efficiency gains, if it comes at the cost of putting small informal firms out of business and the disruption in the informal sector, it can impact demand.

Way Forward: Bringing the informal sector to the forefront of policy decisions can lead to a significant pay-off for the entire economy for years to come.

• Differentiate between “forced” and “organic” formalisation: Formalisation that comes only on the back of external pressure or leads to deep distress in the informal sector may not be sustainable.
• On the contrary, formalisation that happens on the back of policy changes that help small and informal firms grow over time into medium or larger formal sector firms is more sustainable.
• Providing social protection: There is a case for remaining generous with programmes such as the rural MGNREGA scheme for longer. There is a good case for setting up a more permanent direct urban social welfare structure.
• Promote reforms that are needed to help small businesses grow are critical—for example, lowering the regulatory burden associated with growing firms.