A stunted middle class: Role of the manufacturing, informal sectors

Source: The post is based on the article “A stunted middle class: Role of the manufacturing, informal sectors” published in The Indian Express on 14^th June 2023.

Syllabus: GS 3 – Growth & Development

Relevance: reasons behind stagnant middle-class population

News: The article explains about the problems persisting with the middle class in India.

Why isn’t the middle class in India growing?

Employment in Informal Sector: The informal sector accounts for 90% of employment but generates only a third of the value added in the economy.

This sector faces numerous constraints, leading to limited efficiency and low productivity. Consequently, it hampers the development of a genuine middle class in India.

The informal workers either work as individual casual labour or in micro enterprises with very small operations with conditions of instability in both employment and income.

These conditions within the informal sector hinder the progress of informal workers in becoming part of the middle class.

Nature of Work in the Informal Sector: The nature of temporary work prevalent in the informal economy discourages employers from investing in productivity-enhancing tools and training workers to use them.

The informal sector not only hampers workers’ access to better tools and learning opportunities but also denies them the benefits of teamwork.

Further, even higher-skilled occupations like carpenters and tailors work independently in digital aggregator platforms, which lowers the efficiency of workers.

As per the International Labour Organization (ILO), in 2017, one-third of Indian workers in the informal sector were the so-called “own account workers”, leading to low productivity in the informal sector.

Other Issues with the Informal Sector: Informal workers and micro enterprises also face problems in accessing finance which further hinders their growth.

The ratio of domestic credit to GDP, is far lower in India than China or the United States. It has also been stagnant for a decade, while it expanded in all the key economies in the world.

Underdeveloped Manufacturing sector: The stunted middle class in India is also linked to the underdeveloped manufacturing sector, which consists mostly of small and micro enterprises. These lack efficiency required for growth and the creation of formal jobs. 

The manufacturing sector in the post-World War II United States allowed individuals with a high school education or less to earn a middle-class income.

However, manufacturing in India has not been able to achieve the same level of success thus far.

Moreover, India has seen success in the IT sector, which can expand the middle class.

Can the IT sector help in the expansion of the middle class in India?

According to NASSCOM, even when the IT industry is defined broadly, the total employment remains at 4.5 million, which is very low compared to the large workforce of India.

Even the rest of the service sector has not been able to create a large scale of jobs. The platform aggregators are also unlikely to create large scale jobs due to the nature of their business model.

What can be the way ahead?

The Indian economy can either opt for a policy push that delivers a large, vibrant and prosperous middle class, or a business-as-usual growth with a massive informal sector that increases consumption but does not create a genuine middle class.

However, in order to rapidly expand India’s genuine middle class, there is a need to create a large-scale manufacturing sector that can drive formal employment.