Expert Speak India Matters
Published on Oct 06, 2017
The shocked informal sector

India and China are no longer the growth poles of the world, according to the recent Trade and Development Report (2017) from UNCTAD, Geneva. The global economy needs a stimulus because its growth rate has slowed down to 2.5 percent from 3.2 per cent in pre financial crisis days and India did provide a boost in the past. Today India’s GDP growth has slipped to a lower position than China’s (6.7 per cent).  While China has experienced high growth for nearly three decades, today it is facing a challenge of high wages and higher input costs.

For India, it is a different story. Industrial and export sectors’ growth have slowed down and service sector growth is facing problems for almost a year.  The informal sector has been badly hit by demonetisation and the GST, and its output has contracted. The decline in the output of the informal sector when it is properly measured will show even a sharper decline in the GDP growth than the 5.7 per cent recorded in the April- June quarter of 2017-18.

The unorganised or informal sector constitutes an important part of the economy contributing according to the landmark National Commission for Enterprises in the Unorganized Sector report ( 2009),  50 per cent of the GDP. Even though it employs around 90 per cent of the labour force, the conditions of work in the sector is dismal and a shock like the demonetization has hit it hard.

According to NSSO 68th Round on the Informal sector and conditions of employment in India 2011-12, 80 per cent of informal sector employees have no written contract and 72 per cent get no social security benefits. The average earning of the informal sector worker is Rs 225 per day while the formal sector average is Rs 401 a day.  Three fourths of all workers in the informal sector are in enterprises with less than six persons.

The informal sector includes workers in manufacturing, construction, wholesale and retail trade, transport, household workers like cooks, maids, drivers, security guards, and agricultural workers.  It also includes child labour. Most of the Informal sector workers are denied social benefits like pension, gratuity, insurance against life and sickness and maternity benefits. They are the most vulnerable section of the population.

The informal sector is cash based and few workers are able to operate their bank accounts even when they have one. In the aftermath of demonetization, thousands of informal sector workers lost their daily earnings and moved back to their villages in droves. Many found jobs in MNREGA the much maligned Employment Guaranty Scheme started by the Congress government in 2005. MNREGA offered a sort of cushioning to the informal sector workers. Many of the workers have not returned back to the cities to work because of the sudden disruption to their lives.

Similarly, Goods and Services Tax has hardly been understood by the informal sector, many owners of enterprises are semi-literate and not used to digital or complicated paper work.

There have been many reports about small producers and exporters finding it difficult to file returns on inputs for which they could claim credit later.  Already GST paper work is blocking their working capital.  Medium sized informal businesses have had to hire accountants at extra costs which they cannot afford. All these are having a multiple impact on manufacturing growth. May be later on all these glitches will be smoothened out.

In any case, the informal sector will not vanish in the future because there are not enough new jobs being generated in the formal sector. There were only 1.5 lakh new jobs in 2016 and even after taking into account the service sector jobs, only 2.31 lakh jobs were created in 2015. As is well known, there has been jobless growth in the earlier period also because of the organized sector adopted capital intensive production techniques to remain competitive. More companies are going for digitalization and artificial intelligence to beat competition. India needs to create 1 million jobs a month as more than 10 million young people are joining the labour force every year.

Informal sector has also been hit by difficulties in obtaining formal sources of credit from Public Sector Banks which are burdened with a mountain of NPAs. Thus they are facing high interest burden.  Even though the informal sector is taking a beating from this shock treatment, yet it will remain important because it absorbs all the unemployed as there are no barriers to entry and no special skills are required. Only thousands of workers will suffer more under unbearable hardships. Even minimum wages which are low by world standards and are binding by law on employers are not given to informal sector workers. Many are denied bonus and sick leave and have no health insurance. According to the NCEUS report, 47 million people recede into poverty every year because of one major illness in the family.

The Modi government has pledged to take a rights based approach to the provision of social security to the informal sector workers and the low premium life and accident insurance and pension schemes were begun in 2014.   

Recently, the Modi government has promised healthcare cover for all in the future. If health insurance and cashless treatment becomes a reality in public hospitals, something really significant would have been achieved by the NDA government.

Currently the budgetary allocation to health has not improved and is below 2 per cent of the GDP. The crowds in front of AIIMS and other major public hospitals are increasing. India’s out of pocket expenditure on health for an average person is one of the highest in the world. The ratios of doctor per 1000 inhabitants at 0.7 and hospital beds per 1000 population at 0.5 remain lower than in all the members of BRICS. Private hospitals are thriving as a result and there is hardly any regulation on how they practice healthcare services or their charges.

Rahul Gandhi has probably hit the right note by targeting informal (unorganised) sector workers because they are not only huge in numbers and are badly in need of a social safety net, but they also want to transition to formal sector jobs. Anyone who looks after their needs and jobs will be successful politically.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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