Informal Economy

Context:

The Covid-19 pandemic-induced nationwide lockdown revealed that the informal workers of India are invisible, unenumerated and exploited.

The Informal Economy:

• Informal Economy: It is the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. 
• Activities Involved: The informal economy consists of activities that have market value but are not formally registered. Ex, domestic workers, waste pickers etc.
• Difficult to Measure: This is because activities within it cannot be directly observed and most of the participants in the informal economy do not want to be accounted for.
• Need for a Balanced Approach: It is crucial in addressing the informal economy, as it currently represents the only source of income and a critical safety net for millions of people.

Distinction between Formal and Informal Economy

Government Initiatives to formalise Informal Sector:

• Currency demonetisation
• Introduction of the Goods and Services Tax (GST)
• Digitalisation of financial transactions
• Enrolment of informal sector workers on numerous government Internet portals etc

India’s Economy and the challenges of informality:

• Excessive State Regulation in Formal Economy: Some international financial institutions such as the International Monetary Fund (IMF) foregrounds the persistence of the informal sector to excessive state regulation of enterprises and labour.
  • Excessive regulation and taxation ensure the endurance of informal activities.
• The fiscal perspective and tax reforms initiated in the mid-1980s:
  • Such measures led to 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 (like in labour abundant Asian economies).
  • For example, in the 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.
• Political and economic reasons operating at the regional/local level in competitive electoral democracy are responsible for this phenomenon, too.

Informal Economy: Sign of underdevelopment

• Global evidence suggests that legal and regulatory hurdles alone are mainly responsible for holding back formalisation isn’t entirely accurate. 
• A well-regarded study, ‘Informality and Development’, argues that the persistence of informality is a sign of underdevelopment.
• Across countries, the paper finds a negative association between informality (as measured by the share of self-employed in total workers) and per capita income.
• The finding suggests that informality decreases with economic growth.

Transformation in Asia:

• Defining Characteristic: The movement of low- productive informal (traditional) sector workers to the formal or modern (or organised) sector-known as structural transformation.
• East Asia: It witnessed rapid structural change in the second half of the 20th century as poor agrarian economies rapidly industrialised, drawing labour from traditional agriculture.
• India’s Case Study:
  • Informality reduced at a very sluggish pace, manifesting itself most visibly in urban squalor, poverty and (open and disguised) unemployment.
  • Despite witnessing rapid economic growth over the last two decades, 90% of workers have remained informally employed, producing about half of GDP.
  • The share of formal workers in India stood at 9.7% (47.5 million) according to  International Labour Organization’s (ILO) and India’s definitions.
  • Periodic Labour Force Survey (PLFS) data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers.
  • About half of informal workers are engaged in non-agriculture sectors which is spread across urban and rural areas.

Informal Economy has many layers:

• Pandemic exacerbated Informality Challenge: Despite efforts at formalisation, the challenges of informality looms large for India and the novel coronavirus pandemic has only exacerbated this challenge.
• Swift Formalisation During Pandemic: Research by the State Bank of India recently reported the economy formalised rapidly during the pandemic year of 2020-21, with the informal sector’s GDP share shrinking to less than 20%, from about 50% a few years ago.
  • However, these findings of a sharp contraction of the informal sector during the pandemic year (2020-21) do not represent a sustained structural transformation of the low productive informal sector into a more productive formal sector.
  • They are a temporary outcome of the pandemic and severe lockdowns imposed in 2020 and 2021.

Conclusion

It is believed that simplifying registration processes, easing rules for business conduct, and lowering the standards of protection of formal sector workers will bring informal enterprises and their workers into the fold of formality.

News Source: Deccanherald