Listening to the call of the informal (The Hindu)

• Mains Paper 2: Social Justice 
• Prelims level: Formalisation trap
• Mains level: Development of informal sector 

Context:

• A week after the Budget, it is clear that successive policies of the government over the years have left the informal sector stigmatised. 
• The government and its policy advisers want to dress the sector up to their preferred versions of formality. 
• However, in the process, they could dampen its growth potential, as two recent papers reveal.

The formalisation trap:

• The state finds it easier to monitor and to tax the firms that adopt its version of formality. An imposed formality can reduce the last-mile costs for banks also.
• However an imposition of forms for the convenience of the state (and other powerful actors) can harm societies and produce adverse outcomes.
• In India, which currently faces an unemployment problem, the informal sector provides the vast majority of opportunities both for its youth and for people coming off the farm to earn incomes. 
• Hence, India’s policymakers need to look at the demerits of formalisation from the perspective of informal sector enterprises.
• The thrust of the Indian government’s policies should not be to reduce the size of the informal sector. Rather, it must be to improve working conditions for the citizens who earn incomes in the sector. 
• Their safety at work, their dignity, and their fair treatment by employers must be the thrust of any reform. 
• Even in developed industrial countries, the informal sector is growing with advances in technologies, emergence of new business models, and growth of the gig economy. 
• There too, policymakers are struggling to invent new systems to protect the rights of workers while maintaining the dynamism of an entrepreneurial economy.

Reorienting policies:

• India’s jobs, incomes, and growth challenge necessitates a reorientation of policies towards the informal sector.
• The government and its policy advisers must stop denigrating the informal sector and trying to reduce its size. 
• The development of an economy, from agriculture to the production of more complex products in industry, is a process of learning. 
• Informal enterprises provide the transition space for people who have insufficient skills and assets to join the formal sector.

Support informal sectors:

• The policymakers must learn to support informal enterprises on their own terms. And they should not impose their own versions of formality on them for their own convenience. 
• Merely making it easy for MNCs and large companies to invest will not increase growth of the economy if enterprises and incomes at the bottom of the pyramid do not grow. 
• Therefore, voices of tiny entrepreneurs in the rural heartlands and on the fringes of Indian cities must be listened to while developing policies for ‘ease of doing business’.

Developing oft skills:

• The policymakers must learn how to speed up the process of learning within informal enterprises by developing their ‘soft’ skills. 
• Large schemes to provide enterprises with hard resources such as money and buildings, which the government finds easier to organise, are necessary but inadequate for the growth of small enterprises. 

Strengthening network and clusters of small enterprises:

• Networks and clusters of small enterprises must be strengthened. They improve the efficiency of small firms by enabling sharing of resources.
• They give them more clout to improve the terms of trade in their favour within supply chains; and they reduce the ‘last mile costs’ for agencies and providers of finance and other inputs to reach scattered and tiny enterprises.

Drumbeat for labour reforms must be changed:

• A vocal crowd has been harping on the need for bold reforms to make it easier for employers to hire and fire workers. They advocate the raising of the size of enterprises (in terms of numbers of employees) to which laws should apply. These hire and fire laws are already not applicable to the small sector, where the vast majority of enterprises employ less than 10 persons. 
• There is an urgent need for labour reforms in other ways. The laws should be simplified, and their administration improved. And, their thrust should be to improve the conditions of workers.

Way forward:

• The social security framework for all citizens must be strengthened, especially for those who have to scramble for work in the informal sector. 
• Health insurance and availability of health services must be improved, and disability benefits and old-age pensions must be enhanced. 
• The purpose of ‘labour reforms’ must be changed to provide safety nets, rather than make the workers’ lives even more precarious with misdirected attempts to increase flexibility.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions: 

Q.1) With reference to the Global Misery Index (GMI), consider the following statements:
1. American economist Steve Hanke of Johns Hopkins University, an applied economist has popularised the GMI concept. 
2. It is based on the three parameters namely unemployment rate, inflation rate and lending rate. 

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both  
(d) None
Answer: C

Mains Questions: 
Q.1) How development of informal sector became significant for India’s economic growth and sustainable development?