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The exclusion story of the informal economy

In India, income inequality expands while the rate at which poverty is reducing does not match the rate of growth. This points to  the exclusion of the poor sections who are left behind in the path to progress. In the aftermath of the pandemic, the economy is likely to undergo a long healing process since millions have been pushed into a subsistence level of living standards. One such sector that has been dishevelled is the informal sector, a  vulnerable group that stands outside the purview of the jurisdiction.

Fortunately, the insured workforce heaved a sigh of relief at the relaxed unemployment benefit scheme. Atal Beemit Vyakit Kalyan Yojana (ABVKJ) that was incepted on 14th of December 2018 has been relaxed and amended considering the current pandemic to benefit about 6% of the total workforce, about 4.1 million workers. Those who have lost or will lose their jobs during the period between 24th March and 31st December 2020 will be paid 50% of the average salary for three months as unemployment benefits. 

However, it is restricted to the insured workforce, i.e. those who are covered under the ESIC. From the ESIC’s estimates, 37% of those who have lost a job, merely 0.64% of the aggregate Indian workforce would be the beneficiaries of the amended unemployment benefit. 

In these unprecedented times,  unemployment in the formal sector is accounted for. However, the informal economy that accounts for a major proportion of the workforce, remains ignored. The 2013-2014 report by the Labour Bureau claims that the informal economy comprises more than 90% of the workforce and contributes to about 50% of the national product. The largest group is missed out despite knowledge of its considerable contributions. They have always been outside the scope of such a benefit, and this is just one bit of the exclusion story of the informal sector.

The question at hand is what it means to be excluded and what has nurtured the culture of informality. Before diving into the question, let us first define the informal sector and informal employment. The informal sector refers to small units engaged in the production and sales of goods and services with less than ten workers.  According to the National Commission for Enterprises in the Unorganized Sector (NCEUS) informal employment is defined as “those working in the unorganized sector or households, excluding regular workers with social security benefits provided by the employers and the workers in the formal sector without any employment and social security benefits provided by the employers”. They are unrecognized, unrecorded, unprotected, and unregulated by the public authorities.

Given the enormity of the informal sector, it would be beneficial to look at the factors that have been crucial in fostering the informality. The ILO points at three main reasons that elucidate the rise and persistence of the unorganized sector.

Firstly, India had adopted a growth strategy that promotes the culture of informal organizations. The Second Five Year Plan had embraced import-substituting industrialization which was biased towards the capital goods market. As a developing country with a long gestation period—the time period between the start of an investment and when using it for production can start—huge corporate investment was not appealing. In lieu of this, the plan directed the limited domestic saving toward investing in heavy industry. This encouraged the absorption of surplus labour into non-agricultural works including traditional services and importantly into unorganized micro industries with less than ten employees. In a way, the second Five Year Plan had intensively moistened the soil for the germination of the informal sector. 

Secondly, through the Industries Act 1951, the government had reserved the production of certain goods exclusively for Small Scale Industry (SSI). Beginning with 47 reserved items in 1967, by 1978 it was enlarged to 807 items. Large corporates and medium-sized firms were restricted from entering such a market which incentivizes firms to remain small with a limited number of employees. The rationale behind this are many. Firstly, it influenced the level of employment generation. As small-scale industries were labour intensive this created employment opportunities, favoring the expanding labour force. It also allowed for the diffusion of entrepreneurial skills and the ability to focus on quality production. Nevertheless, they could not exploit the benefit of economies of scale.

Thirdly, the labour laws had to be observed by the large and medium-sized industries. The laws protected the workers under the organized sector; compliance to the law was intensified as the number of employees grew. Social insurance became mandatory and it was assumed to be costly to increase the number of workers. Hence, technology was preferred wherever possible. At the same time, the SSI (Small Scale Industries) was not motivated to grow and provide social insurance. With low levels of technology, employing workers with low levels of skill, low wages, and informal contracts, the informal sector mushroomed and grew in number. 

Moreover, the informal sector is an important source of earning a livelihood, compensating for the lack of opportunities in the organized sector. While the sector offers employment flexibility, it is characterized by a high degree of vulnerability and is often associated with low productivity, income inequality, reduction in tax revenue, and poverty. Their nature makes it difficult to trace and offer protection to the unorganized group. As they are not recognized by the law, they have limited or no social protection and cannot enforce contracts. 

According to the ILO, the informal economy consisting of the informal sector and its workers are denied seven essential securities: labour market security, employment security, job security, work security, skill reproduction security, income security, and representation security. More precisely, ILO finds it most appropriate to define their situation in terms of decent work deficit—poor quality jobs that are under-protected by the legislation which also lack social protection and a sense of rights at work. While some of these concerns are shared by the formal sector too, and the formal and the informal sectors are linked, the bottom end suffers the most. 

Statistically perceiving their state, as per the data from the 2013-2014 report by the Labour Bureau, 82% of unorganized workers, excluding self-employed, report working without any written contract. This group is not eligible for paid leave and for social security benefits. Only 23%, (excluding self-employed), receive paid leave among which  41.9% was the urban population. Only 19% (excluding self-employed), received some sort of social benefit.

Furthermore, the National Statistical Commission reports that the informal sector comprises a large proportion of poor and underprivileged people. Their lack of skills and educational attainment restricts a certain group of people. To escape poverty and establish a better standard of living, this population is drawn into the only option that is open to them—the informal sector. As of 2012, 30% of the workforce was illiterate. In the year 2017-2018, only about 2.4% of the workforce had either formal vocational education or training. The majority of the illiterate engaged in a low productivity work workforce were self-employed or involved in casual labour.

Having seen what the state of the informal sector is, it is essential to understand what awaits this sector. In light of the new labour code 2020, the informal economy is likely to be affected in mixed ways. According to the Industrial Relations Code Bill, 2020 firms with over 300 workers need government permission before any retrenchment. This increase in threshold has eased the hiring-firing rules. This is likely to incentivize small firms to expand. While it might seem that less restriction would promote the informal sector to internally grow and eventually join the formal sector, this view strongly contends in favor of the view that this reform would further the expansion of the informal economy.

On the bright side, for the first time, the Code on Social Security, 2020 is to provide universal social security for the organized and unorganized workers. Clarity on how this will be achieved will be available only after the rules are clearly outlined. Nevertheless, this is good news but would come at some cost and its realization will be most awaited. But, much more reform is needed if the informal economy must be healed of all its ailment.  

Under unprecedented economic shock such as the COVID-19, policy-makers need to prioritize the section that is in dire need of assistance. It is through enhancing and fostering the development of the lives of every individual impartially that it would be possible to build an egalitarian society.

Gby Atee is a second-year student at Ashoka University pursuing her major in Economics.

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