India opened its economy by the so-called LPG (Liberalization, Privatization, Globalization) reforms of 1991. Along with abolition of license-quota – inspector raj, it also led to an inflow of foreign capital into the domestic economy.
The reforms propelled India’s GDP growth rate to nearly 7-8% from the prevalent 2-3%, the so-called “Hindu rate of growth”. They have created a robust private sector and thus employment for millions of Indians over the years.
However, a substantial amount of these jobs have either remained informal or have been lost with time. The reasons for this are:
- 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 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 has 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.
Increasing informalization is detrimental to economic development as:
- 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 on those things >> increases poverty and inequality >> 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 >> hampers human resource development.
- Informal sector is predominantly cash-based. This is a major source of generation of black money and tax evasion. Size of Indian black economy is estimated at nearly 24% of GDP. This deprives the State of legitimate taxes, hampering development.
- A low tax base due to low formal sector >> low tax revenue >> increased government borrowing (for counter-cyclical purposes) >> higher fiscal deficit >> higher inflation >> affects the low-wage informal workers the most, thus perpetuating a vicious cycle and hampering development.
- High FD and high inflation also lead to credit downgrades and lead to outflow of foreign investments due to macroeconomic instability. This is catastrophic for a capital-starved country like India.
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. Government initiatives like Make in India, Skill India, labour reforms, Insolvency code et 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.
