The formal-informal divide

The formal-informal divide

Context:

• There is an investment slowdown in India, which is delaying a fully fledged recovery in the economy.
• The fall is so severe that it has more than offset the government’s macroeconomic stimulus of increased public investments.

Reasons for the slowdown:

• The private investments slowdown is statistically visible chiefly in the informal segment of the economy.
• The sharpest pullback has been by the household sector, its investments are down 6.6 percentage points since the start of the slowdown.
• There is negligible change in the investment behaviour of public and private finance corporations.
• Public non-financial corporations reduced investments marginally.

The household sector:

• Households can be producing or non-producing, in which case they are consuming households.
• The 73rd round of the survey by the National Sample Survey Office had found about 6.34 crore unincorporated non-agricultural enterprises in the country.
• A chunk of private investments is undertaken by these firms that often operate out of homes, with, typically, less than 10 workers.
• The investments estimates (Gross Fixed Capital Formation) cover physical investments in plants, machinery and equipment, and dwellings and buildings, but not land.

Informal and formal economies:

• The two largest investing segments in the economy, households and private non-financial corporations, correspond roughly to the informal and formal economies.
• The formal-informal divide shows up also in savings.
• When the government (Centre plus the States) mops up larger portions of what net savers can provide, corporates can still access capital, but the unincorporated are left without recourse.
• Corporates can, and have, borrowed overseas and raised funds from the capital markets but the informal sector has not had the sophistication or resources required.

Measures to be taken:

• The Economic Survey 2018  recommends urgent prioritisation of investment revival to arrest more lasting growth impacts, with policy focus on both big and small companies, creating a conducive environment for the smaller industries to prosper and invest.
• Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments.