The high cost of India’s deceptive search for formality

The biggest brunt of the double blow was the informal sector, which largely traded in cash and mostly operated outside the regulatory framework. The net beneficiary was the protected organized sector, which benefited not only from a shift of business from the informal sector, but also from government leniency, including massive tax cuts announced in September 2019. The situation has worsened since then, with two waves. The Covid pandemic follows a similar pattern of disproportionately more damage to the informal sector. The rising fortunes of the organized sector, driven by galloping profits at a time when casual wages are showing a real decline in rural areas, are a reflection of how our economy has become two-sided. According to the latest figures from the Labor Bureau for August 2021, the real wages of non-farm workers have declined by 1.6% per annum over the past two years. For agricultural workers, they fell 0.4% per year.

While the informal sector has suffered over the past five years, it remains relevant not only for growth but as the primary provider of jobs to a huge proportion of the Indian workforce. Of course, while its falling fortunes may seem like a sign of an economy formalizing and therefore worth celebrating, the reality is much more complicated. A recent report released by the State Bank of India (SBI) research team claimed that the share of the informal sector in the overall economy has come down from 52% in 2017-18 to 15-20%, which is now an example . This would make it even lower than the share of the informal sector in advanced economies.

The report is not only wrong, but also reveals an inadequate understanding of the informal economy. Enhancing digitization and registration in official records is neither a necessary nor a sufficient condition for any enterprise/worker to be formally classified. The same researchers also claimed an increase in employment based on data from the Employees’ Provident Fund Organization, while denouncing the results of the Periodic Labor Force Survey (PLFS), but now recognize that what we saw was largely informal. There was formalization of jobs. However, registration of workers on the e-shram portal is no indicator of formality of jobs, just as the registration of National Rural Employment Guarantee workers in official records does not make them formal workers. What is really worrying is that 92% of workers registered on e-labor have low monthly income 10,000, which is less than the minimum wage for unskilled manual workers in most states.

But the authors did not have to work hard and use complex assumptions to obtain estimates for informal workers. They are published in the PLFS Annual Report and can also be calculated from their quarterly data. According to the PLFS report for 2019-20, the proportion of workers in informal enterprises in the non-farm sector increased from 68.2% in 2017-18 to 69.5% that year. This does not include workers in agriculture, who are almost all in the informal sector, and informal workers in the organized sector, whose numbers have increased over the past two decades. This trend is confirmed by more than the government’s own reports. The share of our informal sector in Gross Value Added is also available in the Detailed Statement of National Accounts, which shows that it was 44% in 2019-20, slightly higher than 2017-18. Of course, the estimates for national accounts are not robust, as they are derived by applying the estimated growth rate of the formal sector. Nevertheless, these are official estimates, readily available with their defined limits.

The issue is not whether the share of the informal sector has come down. There may or may not be. The real issue is whether formalization, as defined by SBI research, is essentially a measure of recovery in the economy, which has been on a downward trend for five years. Or whether the physical condition of workers has actually improved, as reflected in job availability or earned income. The clear answer is that the economy has performed poorly, in both cases, with India’s employment situation deteriorating, declining incomes and failings on human-development indicators such as nutrition. Most of these estimates are readily available in official surveys and government reports.

Refrain from pursuing policy if the increased formalization of the economy is at the expense of India’s overall well-being, as seen in the decline of national output, loss of job and income, and human-development outcomes. is better. It is also important to recognize the role of the informal sector, which is obviously not limited to providing livelihoods to a significant majority of the country’s population, and create an institutional regulatory framework to improve working conditions and well-being of those engaged in it. To do. ,

Himanshu is Associate Professor at Jawaharlal Nehru University and Visiting Fellow at Center de Sciences Humanes, New Delhi