Question

Informal employment constitutes more than three-quarters of the workforce in India, what are the reasons for informalisation of India economy and how it is detrimental to economic development? Also suggest some measures need to be taken in this direction

Answer 1

Approach:

• You can start with present informal sector situation and its challenges in India
• Highlight some reasons for informalisation of workforce in indian economy
• Discuss how Informalisation is detrimental to economic development
• Provide an appropriate conclusion.

The informally employed constitute an overwhelming majority of the workforce in India accounting for between 70 to 90 per cent of the labour force depending on the definition used (NSSO, Government of India, 2011). According to the Report of the Committee on Unorganized Sector Statistics, the informal economy makes a considerable contribution to the economy and caters to the requirements of the formal economy. However, its negative repercussions cannot be ignored.

Informal workers work under worse working conditions with little job security, no perks or protections and with low wages. The protections guaranteed to workers under different legislations are not complied with by the informal sector, and they also escape the purview of the authorities.

Reasons for informalisation:

• Restrictive labour laws which promote contract hiring in order to circumvent rigid hiring and firing provisions
• Predominance of service-sector led growth – which requires skilled labour that was available with a miniscule section of the population.
• Absence of thrust on manufacturing – which can lead to the creation of formal employment for millions looking to move away from agriculture.
• Market-mechanisms and competition led to closure of obsolete industries such as textile mills, reducing formal jobs. The newer industries were capital intensive rather than labour intensive, thus absorbing lesser workforce than what they laid to retrenchment of.
• Lack of an exit mechanism such as insolvency and bankruptcy laws have led to firms remaining small, barely breaking even, and not scaling up. Such small firms can circumvent formal sector laws such as mandatory registrations with the EPFO etc. rendering them informal.
• The advent of the Fourth Industrial Revolution and automation poses even more dangers to present formal sector jobs since workers with current skills will be rendered obsolete unless they undergo skill reorientation.
• India, with increasing integration into global economy, also suffered during various global crises such as the Southeast Asian crisis, Gobal Financial Crisis in 2008 and the Eurozone crisis in 2011. This shelved corporate expansion plans and led to closure of several industries, reducing formal sector employment.

Informalisation is detrimental to economic development in many ways:

• Informal workers lack proper wages. Lower wages lead to increasing inequality, which is detrimental to development.
• Low wages lead to a low savings rate, which is detrimental for the credit cycle and further lending, hampering development.
• Informal workers lack welfare benefits such as healthcare, insurance, and education facilities. This leads to increased out of pocket expenditures and increases poverty and inequality and so it is detrimental to development.
• Contract labour has no affinity or loyalty towards the company, thus hampering productivity and economic development.
• Informal sector workers usually lack financial literacy, depriving them of access to institutional credit, thus reducing domestic consumption and harming development.
• Productivity of the economy decreases as a whole since companies lose the incentive to skill the employees, so that they can better reorient themselves to the demands of the economy.
• Lack of formal sector benefits such as maternity leaves etc leads to improper development of the child and so hampers human resource development.

With India at the cusp of a demographic transition and adding a million workers to its workforce every month, there is a dire need to create formal sector jobs. Policy aimed towards education and skilling the labour force needs to go hand-in-hand with ensuring employment security and provision of basic social security benefits. Government initiatives like Make in India, Skill India, labour reforms, Insolvency code etc all have to work in tandem to ensure that this workforce is formalized and the fruits of development accrue equitable to all workers within the country.