Informal Economy:- Challenges & Opportunities | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Introduction:

The informal economy is a global and pervasive phenomenon. According to Internal Labour Organisation approximately 60 percent of the world’s population participates in the informal sector. Although this is mostly prevalent in emerging and developing economies, it is also an important part of advanced economies. In developing countries like India, large share of the population typically depends upon the informal economy. The economic growth and development in general and livelihood and wages in particular of the vast majority of workers in India crucially depend on the economic viability of the informal sectors. According to Periodic Labour Force Survey over 90 percent of workers in India are informal workers. Out of these those engaged in rural areas is significantly more than urban areas. This is primarily because a large number of informal workers are engaged in farm or agricultural activites. Those in urban areas are involved primarily in manufacturing, trade, hotel and restaurant; construction; transport; storage and communications; and finance, business and real estate. There are various challenges and opportunities vis a vis informal economy and several steps have been taken to tackle those challenges.

Government push for formalisation:

• Informal operations pose many challenges to the government, like the inability to raise tax revenue, collect data, and regulate firms.
• India’s informality is one reason why its tax-to-GDP ratio has been stuck, impacting education and health care.
• Formalization will help individuals and firms grow and achieve scale and productivity.
• Due to more revenues to the government the tax to GDP ratio will increase which might lead to more investment in social sector.
• Transitioning economy towards formality could bring benefits by establishing the rule of law and the equality of rights between citizens, entrepreneurs and workers.
• Formalisation will spur growth.
• More direct tax payments by individuals as well as enterprises will not only create fiscal space for lower GST rates but also provide incentives for citizens to demand better governance.
• It becomes tough to involve in money laundering and illegal activities as transparency will increase.

Opportunities:

• A young population—65% of India is less than 35 years of age—of which a greater proportion are more literate.
• Growing Indian economy.
• Adoption of mobile-based apps.
• A push towards a cashless economy.

Why firms want to remain informal:

• Most businesses hide from the regulatory system, which imposes too high a burden.
• If firms actually comply with all the regulation, their costs are too high to offer competitive prices to the customers.
• Customers look elsewhere (usually imports or the informal economy) and the firms go out of business.
• The worst affected are the micro, small and medium enterprises (MSME).
• They require licences, construction permits, property registration requirements and comply with labour laws.
• The problem is of costs imposed by regulatory compliance.
• On average, firms spent 243 hours a year filing and paying taxes and the total tax payment is 61.7% of profit. GST has not reduced these compliance costs.
• GST imposes a new system of compliance that requires frequent filing and a dysfunctional receipt matching mechanism under the GST network.
• Slow judicial system, which takes more time to settle disputes.

Atmanirbhar and informal sector growth:

• One, enterprises must undergo drastic internal transformation, progressively converging at incremental formalisation through spontaneous and self-propelled transition into economically-viable units.
• Two, because the vision of the Atmanirbhar Bharat exposes the informal sector to global competition, entrepreneurs must embrace the subtle art of strategic positioning in global mega-supply chains.
• Three, India is a labour-surplus economy. The informal sector employs more than 80% of India’s workforce. The changes in the first two spheres (higher capital intensity-led enhanced labour productivity and ultra-flexibility in production cycles) may have severe repercussions on the availability and quality of jobs in India.

Challenges:

• In manufacturing sectors, temporary employees continue to exist who get affected when there is a downturn.
• Startups who get funded are mainly in technology disciple, they donot generate the kind of jobs country needs, white collared jobs are generated by them that too replacement jobs.
• Need to make distinction between capital investment and job creation because that linkage is broken now.
• Incentive should be given on the value of one’s investment.

Way Forward:

• Government needs to focus on agriculture which has large percentage of informal workforce.
• Improvement in skill levels of the workforce needs to move beyond age group, it should cater both service jobs and not just blue collar workers.
• Credit support to help small scale industries stand on their own is crucial step in bringing them to the organized sector.
• Need for Labour law reforms to reduce the regulatory cost of employment.
• Capacity building and helping business to strengthen so that they are able to formalize.
• Tax Incentives should be given to the groups who have contributed for formalisation of laborers.
• Complying with law must become easier and in parallel law enforcement should become more effective.
• For example in Chile and Peru inspectorates provide training for micro and small enterprises (MSEs) to comply with the law.