The high cost of India’s illusive quest for formalization

News: Formalisation of India’s economy has not benefited the informal workforce in India

A recently released report by the State Bank of India (SBI) research team has claimed that the informal sector’s share in the overall economy has shrunk from 52% in 2017-18 to 15- 20.

While the decline of the informal sector looks like a sign of an economy being formalized and therefore worth celebrating, the reality is much more complex.

Why the recently released report by the State Bank of India (SBI) research team is said to be inaccurate?

The report is inaccurate and also reveals an inadequate understanding of the informal economy on several accounts.

Firstly, increasing digitalization and registration in official records is neither a necessary nor sufficient condition for any enterprise/worker to be classified as formal.

Secondly, the registration of workers on the e-Shram portal is no indicator of formalization of jobs like the registration of National Rural Employment Guarantee workers in official records does not make them formal workers.

For example: 92% of the workers registered on E-shram have monthly incomes of under ₹10,000, which is lower than the minimum wages of unskilled manual workers in most states.

Thirdly, the findings of the report are in contradiction to the findings of the PLFS survey. According to the PLFS reports of 2019-20, the proportion of workers in informal enterprises in the non-agricultural sector rose from 68.2% in 2017-18 to 69.5% that year. This trend is also confirmed by more than the government’s own reports.

Fourthly, the SBI research team has defined formalization as a measure of improvement in the economy. However, the real scenario is different. For example, the Indian economy is characterised by declining national output, job and income losses, and a worsening of human-development outcomes.

The real issue is whether the material condition of workers has actually improved, in terms of job availability or income earned.

In reality, the economy has performed poorly, with a worsening of India’s employment situation, decline in incomes and setbacks on human-development indicators such as nutrition.

What is the way forward?

It is important to recognize the role of the informal sector and create an institutional regulatory framework to improve the working conditions and well-being of those engaged in it.

Source: This post is based on the article “The high cost of India’s illusive quest for formalization” published in the Livemint on 12th November 2021.