The large informal sector is a consequence – not a cause – of the low level of development
For decades, one of the central aims of economic policy in India has been to create conditions for workers to move from low- to high-income employment. This has usually implied a shift from the informal sector where productivity is low, to the formal sector where productivity is high. This process of “formalisation” has been excruciatingly slow.
The pace is now quickening.
Demonetisation, which led to financialisation of savings and then to the government-ordained acceleration of digitalisation, was one driving force. So, too, the introduction of the goods and services tax (GST). Formalisation was not the original objective of either; it has turned out to be an ex-post official rationalisation for both. The “forced” formalisation that has been set in motion is, however, not good for working people.
The appreciation in government and international agencies of this kind of formalisation is based on a surprisingly inadequate understanding of the informal sector. So, first a primer:
Informal, unorganised, tiny or whatever you call it, this part of the economy has been defined in different ways. At its core, the informal sector contains small establishments with up to 5-10 workers (family, self-employed, or with hired workers) producing products often of low price and quality. Productivity is usually low, and so too are incomes and wages. The informal sector enterprises are to be found in manufacturing (from handloom to metal-fabrication) and services (small retail, eateries, repair establishments, and the like). It is in essence a very heterogeneous sector in terms of what it makes, how it functions, and where it sells its products.
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