Answer: 

Introduction:

Globalization means free trade in goods, services, and capital. Globalization boosted the economy’s multidimensional efficiency, but it also promoted flexible employment and informalization. Although informalisation has provided livelihood to many, it has not raised the living standard as was expected.

Body:

Globalisation and the reduction of formal employment:

• Restrictive labour laws: With restrictive labour laws and lack of labour reforms after liberalisation, industries went for contract hiring. It was done in order to circumvent rigid hiring and firing provisions. This led to reduction of formal jobs and more contractual jobs of short-term nature.
• Global Competition: The impact of global competition encouraged formal firms to shift formal wage workers to informal employment arrangements without minimum wages, assured work or benefits.
• Service-sector led growth: Globalisation led to growth of service sector in India. Service sector requires skilled labour that was not available and formal jobs were not created. Also many jobs were outsourced which were fulfilled by the informal sector.
• Capital intensive industries: The newer industries were capital intensive rather than labour intensive, thus absorbing lesser workforce. Due to this labour remained out of formal sector employment.
• Mechanisation: With globalisation and growth of internet and automation, many jobs were replaced by machines. Further, most of the inflowing FDI went into technology and capital intensive sectors like information technology, engineering, automobile etc. which mostly are automatic requiring less human resource.

Effect of informal sector on development:

• Livelihood: The Informal economy is a source of livelihood to majority of poor and is an important means of survival for people in countries lacking proper social safety nets and unemployment insurance and especially those lacking skills for formal sector jobs.
• Economic growth: The informal economy is very large in developing countries, as formal sectors are not well developed and unable to absorb their available working population.
• Low wages: Informal sector has very low wages and even these wages are not paid on time. Lower wages lead to increasing inequality, which is detrimental to inclusive growth.
• Lack of formal benefits: Informal workers lack welfare benefits such as healthcare, insurance, and education facilities. This leads to increased out of pocket expenditures on those things and extra burden on the poor.
• High informalization reduces the tax to GDP ratio: India’s ratio is around 16%, while OECD countries have over 30%. Informalisation reduces the tax base and reduces economic efficiency. This reduces overall revenue and thus hinders public investment in infrastructure, economy and social welfare. This hinders the development of the economy.
• Reduced productivity: Productivity of the economy decreases as a whole since companies lose the incentive to skill the employees, and focus on contractual workforce.

Conclusion:

Although the informal economy provides much needed jobs for the poor, it does so with little to no protection and social benefits for the workers. Apart from harming the workers in the short term, it also affects the long-term growth of the worker as well as the nation as a whole. Thus, increased informalisation is detrimental as it impacts the long-term goals.

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