Formalizing India’s informal economy

Disruptive technology is bringing about a fascinating transformation in India’s informal economy

Photo: Ronjoy Gogoi/HT
Photo: Ronjoy Gogoi/HT

Last week, Nandan Nilekani, the former boss of Infosys Ltd and probably more famously the man who gave us Aadhaar, shared a fascinating factoid. Not only does it tell us about a fascinating transformation underway in India in the informal economy, it shows us that collateral gains from disruptive technology outweigh the losses.

“Aggregation by platforms (provided by aggregators such as Amazon, Flipkart, Uber, Ola, etc.) is the way jobs creation will happen. This platform aggregation will also lead to formalisation of the economy. India’s economy is largely informal. But once a taxi driver becomes part of Ola, then in fact he becomes part of the formal economy. He is able to use data, get a loan, buy a car and start paying taxes. So the formalisation of a few hundred millions of Indians will spur growth,” Nilekani wrote in India Today.

Nilekani (an elaboration of his argument is available here ) has put the spotlight on one critical collateral gain from tech disruption: the formalization of India’s informal sector. Coincidentally, it happens at a time when the government and the Reserve Bank of India, in tandem, have begun a big push towards a cashless economy, which again formalizes the informal.

At present, only 10% of India’s over 470 million workforce is in the formal sector. In other words, 90% of India’s workers do not have the privileges—like social security and workplace benefits—enjoyed by their counterparts who are formally employed.

This is patently unfair. In the past, public policy conspired with political parties to retain this status quo—as the returns of being part of the anti-poverty industry were lucrative. Now, technology is forcing a change. It is enabling their entry into the formal economy and thereby even availing of the benefits.

Anecdotally, this is so true. There is no survey, but the scores of Ola and Uber drivers are surely for the first time using smartphones to guide them to their destinations, e-wallets to receive payments and so on.

In our personal space, too, we now pay monthly salaries to our various household helps (cooks, plumbers, electricians, painters, etc.) not even through cheques but through direct bank transfers. The intersection of their financial lives with ours automatically brings them into the formal economy, though this is only the first step.

This is happening at a scale we can’t even begin to imagine, especially since these are not sexy enough to grab front page headlines or be classified as ‘Breaking News’. Recently, one of India’s top e-commerce retailers shared two facts in an informal interaction with Mint: one, most of the merchants of non-electronic items sold on their site come from Tier-II and beyond; two, using the transaction data of these merchants, the company has begun to create credit history and then extend working capital loans to them (which otherwise would be almost impossible for them to obtain from the formal banking sector).

All this is possible because of the enabling circumstances: a young population—65% of India is less than 35 years of age—of which a greater proportion are more literate than the older age-groups; growth; adoption of mobile-based apps; and a push towards a cashless economy.

This trend is likely to get a fresh boost when the next battle in the Indian telecom sector unfolds with the formal entry of Reliance Jio. A soft launch of the service has already been initiated, including the launch of Lyf brand of smart phones beginning at Rs.2,999. Such a low entry price (together with generous data plan offers) should create an influx of an entirely new set of users of data (who otherwise have to either economise because of high costs or piggyback on free WiFi), especially from the so-called bottom of the pyramid. Internet users are likely to see a big spike.

What all of this is doing is creating an information technology highway seeking to connect over 1 billion people. This is the key to the vision Nilekani espouses. As a result, a generation of small businesses and micro entrepreneurs can now be part of the platforms that are springing up on this national IT highway. Surely, this integration of the informal into the formal economy can only augur well for India and its denizens.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus

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