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Friday, May 29, 2020

In our pursuit of economic growth, we ignored voices of India’s informal sector for too long

As we grapple with a health, economic and humanitarian crisis of epic proportions, the immediate need is to provide emergency relief to cushion the effects of the dual shocks of the virus and lockdown on informal workers.

Written by Radhicka Kapoor | Updated: May 4, 2020 9:54:13 am
As we grapple with a health, economic and humanitarian crisis of epic proportions, the immediate need is to provide emergency relief to cushion the effects of the dual shocks of the virus and lockdown on informal workers, writes Radhicka Kapoor.

COVID-19 is causing havoc across the world, destroying both lives and livelihoods. Developing countries such as India are particularly vulnerable as their vast informal workforce, which has no labour, social or health protection, is woefully ill-equipped to cope with the medical and economic shocks of the virus. This is largely a consequence of the continued neglect of the informal economy over the years in the belief that it is a marginal or temporary sector where people subsist while they wait for formal jobs.

Statistics suggest that the size of the informal economy is far from insignificant. At the last count, 90.6 per cent of India’s workforce was informally employed (Periodic Labour Force Survey, 2017-18). This estimate includes those who are employed in informal enterprises (unincorporated small or unregistered enterprises) as well as informal workers in the formal sector (workers in the formal sector who are not provided any social security benefits by employers). The previous employment unemployment surveys suggest that the share of informally employed has been persistently high.

Between 2004-05 and 2017-18, a period when India witnessed rapid economic growth, the share of the informal workforce witnessed only a marginal decline from 93.2 per cent to 90.6 per cent. While there was some decline in the share of workers employed in informal enterprises over this time period (from 87.4 per cent to 81.1 per cent), the share of informal workers in the formal sector increased from 5.8 per cent to 9.5 per cent. Hence, the total share of informally employed didn’t change much. Looking ahead, it is likely that informal employment will increase as workers who lose formal jobs during the COVID crisis try to find or create work (by resorting to self-employment) in the informal economy. Also formal enterprises are likely to continue hiring informal workers as they seek more flexibility and attempt to cut labour costs to cope with the COVID-19 induced economic uncertainty.

Thus, informality is here to stay and there is an urgent need to place the informal economy at the centre of the policy debate. This requires a comprehensive understanding of the heterogeneities in the informal economy and the various drivers of informality. Some self-employed persons choose to be in the informal economy voluntarily to avoid registration or taxation, whilst others do so out of necessity to eke out a subsistence living in the absence of alternative employment opportunities. Typically, few informal enterprises, except perhaps some survival activities, operate in isolation from formal firms. They source raw materials from and/or supply finished goods to formal firms either directly or through intermediate (formal/ informal) firms. But they choose to remain in the informal sector as they are deterred by the costs of formalisation or don’t see much benefit from formalisation. On the other hand, the phenomenon of informalisation of wage employment in the formal sector is a consequence of formal firms trying to avoid payroll taxes and employer’s contributions to social security or pensions to reduce labour costs.

The prevailing discourse on informality revolves around the recommendation that the informal economy should be formalised — a desirable objective indeed. However, given the multiple drivers of informality described above, a multi-pronged and comprehensive approach is needed to facilitate the transition. It requires creating more formal jobs through labour intensive growth so that informal workers can move to these jobs. Further, it requires registering and taxing informal enterprises. The Indian experience of compelling informal firms to register and become tax compliant through demonetisation and introduction of GST formalised them only in a legal sense. But formalisation processes are not simply about legal considerations, they are also about increasing productivity of informal enterprises and incomes of the informal workforce by providing them with technical and business skills, infrastructure services, financial services, enterprise support and training to better compete in the markets. Many people working in the informal economy have real business acumen and dynamism and could flourish if obstacles in the path to entrepreneurship were removed. This would enable an organic process of transition and many informal enterprises would welcome efforts to reduce barriers to registration and related transaction costs as they expect to reap the benefits of formalising.

Clearly, the transition from informality to formality is a complex and long term process, one that cannot be achieved overnight. The policy discourse on informality needs to focus not just on formalising informal enterprises but also reducing the decent work deficit in informal employment. This requires protecting informal workers by providing them a social protection floor, ensuring a set of basic working conditions such as adequate living wages, limits on hours of work and safe and healthy workplaces and increasing their collective representative voice. While, there is growing consensus around the need for each of these elements, there is little agreement on how this is to be achieved. Questions around the role of government and who bears the onus of protecting workers deserve careful consideration in the backdrop of the rising incidence of informal employment in the formal sector and the growth of the gig economy.

As we grapple with a health, economic and humanitarian crisis of epic proportions, the immediate need is to provide emergency relief to cushion the effects of the dual shocks of the virus and lockdown on informal workers by providing not just adequate income support but also free public provision of basic food items, other essentials and effective health services. The COVID-19 crisis has brought to the fore the vulnerabilities and precarities of the informal workforce. It is apparent that in our relentless pursuit of economic growth, we have ignored the voices of India’s informal sector for too long.

The writer is senior fellow at ICRIER

This article first appeared in print under the headline Unheard and unseen

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