What India’s informal sector needs right now

Syllabus– General Studies 3(economy) 

Context

•  The lack of frequent and up-to-date economic indicators makes it hard to track India’s large informal sector, which employs around 80 per cent of the labour force and produces about 50% of GDP.

Background

• Ignoring problems in the informal sector can be costly as it can lead to job and wage losses, higher inflation and even risk the livelihood of migrant workers. 
• For instance, following demonetisation, a disproportionately higher number of jobs were created in rural India which isn’t the positive it might seem as wages are 2.5 times lower than in urban India. 
  • As a result, overall wage levels and GDP declined over the next few years.
• Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts. 
• With an inadequate safety net, there were painful accounts of displaced informal workers trying to get back to their rural homes.
• Such disruptions can be inflationary too. India was one of the few countries with high inflation throughout pandemic-stricken 2020. 
  • Some of this is likely to be associated with the disruption in informal firms, who in normal times are very active in the production of essential goods like food and textiles.

Furthermore

• Of the 384 million employed in the informal sector, half work in agriculture, living mostly in rural India, and the other half are in non-agricultural sectors. 
  • Of those, about half live in rural India and the remaining in urban areas. Each of these groups have fared differently through the pandemic.
• The fortunes of those in the formal sector, who make up 20% of the workforce, have been relatively good. Through the pandemic, large and listed firms have done better than smaller firms. 
• The salaries of individuals working at these larger listed firms have also held up relatively better, though they are lower than the pre-pandemic trend. These individuals may also have benefitted from buoyant stock markets.

Impact on India

• The urban affluent class led the rise in demand post the first Covid-19 wave in 2020 by buying consumer durables like furniture, electronics, cars and even houses. These items are generally not purchased year after year. As vaccinations are rolled out, these consumers may instead switch from spending on goods to services.
• Over the longer term, the prospects for this group will depend on the progress of policy reforms and economic growth, which are the leading drivers of real wages.
• The prospects for the 40% in the informal agricultural sector have been surprisingly resilient too. Rural wages have held up well over the pandemic, led by good monsoons, an exemption to the food trade from the various lockdowns, and more recently, higher agricultural exports. Higher government spending in various social welfare schemes has also helped.
• Longer-term consumption will depend on agricultural reforms which will help diversify income sources and raise agricultural productivity.
• The 40% in the informal non-agricultural sector is the most worrying. These workers are most vulnerable as they have borne the brunt of the economic disruption that the pandemic has unleashed.
• Several surveys over this time also show a rise in urban unemployment and self-employment, with the latter category seeing the highest earnings loss.

Way Ahead

• What is, perhaps, needed now is protection for informal sector workers via social welfare schemes so that the disruption they are facing does not lead to a permanent fall in demand. 
• India doesn’t have an equivalent urban social welfare scheme. Government capex doubles up as one, providing short-term jobs. But this source of expenditure can be unreliable. We believe there is a good case for setting up a more permanent direct urban social welfare structure.
• In the meantime, steps to promote reforms that are needed to help small businesses grow are critical. For example, lowering the regulatory burden associated with growing firms.
• On a broader level, one big learning from the pandemic has been that India can’t wish away the informal sector. And neither can it be assumed that the fortunes of the formal and informal sectors move together.
• Bringing the informal sector to the forefront of policy decisions can lead to a significant payoff for the entire economy for years to come.

Question- What reforms are needed to ensure informal sector recovery which is struggling because of pandemic?

The Indian Express Link- https://indianexpress.com/article/opinion/columns/india-informal-sector-economy-gdp-covid-7461928/