Is informal the new normal?

One of the issues that continue to haunt the Modi government after three years of rule at the centre is the problem of job creation. By all estimates, the economy has seen a deceleration in the pace of employment creation with actual employment generation in the economy not even a fraction of the estimated 20 million jobs that need to be created every year as per government’s own commitment.

Recent reports on massive job losses in the organized information technology (IT) sector of more than 50,000 this year have only contributed to the gloom. Industry analysts suggest the situation may worsen in the coming years. That leaves the informal sector as the only saviour in the employment creation crisis.

But can the informal sector absorb the labour force which is entering the labour market every year ? The challenge is not just to provide employment to the new entrants in the labour force, but also to the millions who leave the agricultural sector in search of employment in the non-farm sector. Between 2004-05 and 2011-12, net addition to jobs in the economy was 14 million, the bulk of which was in the informal sector. These jobs, which were largely casual in nature, were created in sectors such as construction, retail trade and transportation. In most of these sectors, the majority of employment is informal.

More than 90% of the workforce in India is working as informal labour. These workers, who are without any written contract, social security benefit and security of tenure, have seen their numbers swell in not just the unorganized sector, which is almost entirely informal, but also in the organized sector. According to the 2011-12 employment and unemployment survey of the National Sample Survey Office (NSSO ), nearly 50% of workers are employed as informal workers. The share of workers in the private organized sector is as high as two-thirds of all employment. Increasing recourse to contractual workers by the organized sector is a trend that has gained momentum in the last decade, swelling the ranks of informal workers.

But the informal sector, which contributes to almost half of national income and employs more than 90% of all workers, remains neglected in most policy initiatives. It was also the biggest sufferer in the demonetization drive last year but has bounced back since then. Despite its overwhelming contribution to the economy and employment, it is generally seen as parasitic with no contribution to tax income of the government and also because it is unregulated.

Despite employing the majority of the workers in the economy, the informal sector continues to show low productivity. In most non-farm informal sectors, productivity levels are not very different from the agricultural sector, which remains the sector with the lowest productivity.

With all its limitations, the informal sector continues to remain large and hasn’t shown signs of disappearing. The real question that needs to be answered is whether it can deliver on the promise of employment creation without any state support.

There are strong arguments within the government as well as policy debates which look at a strong and large informal sector as a drag on growth. The sector encourages low productivity and does not contribute to tax resources but it also remains a source of refuge for low skilled workers. The fact that it is outside regulation and enjoys low costs due to low productivity is also responsible for the low rate of innovation and productivity improvement.

Most government policies attempt to regulate the informal sector and bring it into the mainstream, with the overall objective of reducing its share in the economy. However, any attempt to regulate it to bring it into the tax net, without adequate support, may kill the sector which has so far managed to absorb labour which is unskilled and uneducated.

Majority of the workers moving out of agriculture are unskilled and have low levels of education. These workers are unlikely to be absorbed in the formal sector.

Secondly, even though the informal sector is unregulated, it is not competing with the formal sector and is therefore unlikely to affect it. The cost of adhering to regulation and taxes will not only add to the cost of production but will also render the informal sector unviable.

So, how should one deal with the large informal sector without killing the golden goose? The best way is to recognize that the informal sector is the new normal. Despite its problems, it will continue to remain important for the economy. It may not contribute much to the national income but its dominance in employment is likely to continue for some more time. This is not only true for the informal manufacturing sector but also for the services sector which is likely to be the driver for employment creation. It is not just cab hailing services like Uber that are creating a large workforce of self-employed workers including in small and medium towns. A large majority of workers in these sectors are not in employer-employee relationships but are either self-employed or casual/contractual employees.

What is needed is to upgrade the skills of those who are already in the informal sector with government support through easier access to credit, technology and availability of markets.

Unfortunately, existing labour laws have failed to help informal sector workers. What is needed is a social security architecture to be provided by the government for informal sector workers.

Such a proposal was part of the recommendations of the National Commission for Enterprises in the Unorganized Sector (NCEUS). However, there has not been any progress in implementing these.

What the informal sector needs is less of regulation and more of support as against the government policy of more regulation and no support. Any attempt to regulate and bring the informal sector into the tax network will only add to costs without increasing productivity. The formal and informal sectors are complementary to each other and any attempt to use one against the other will harm both. It is time to use the opportunity that the informal sector provides to strengthen and support it. This is not only essential for economic growth but the only way for growth with jobs.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.