Ashraf Engineer
November 16, 2024
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
In July, there was official confirmation of what we’ve all known for a while – India’s informal economy is in dire straits. Over the past seven years, many units in the sector have shut and 16.45 lakh jobs have been lost, according to data from the Annual Survey of Unincorporated Enterprises. Outcomes of the 2021-22 and 2022-23 surveys, released by the National Sample Survey Office, seemed to underscore the impact of three major shocks to the economy: demonetisation in November 2016, the Goods and Services Tax rollout in July 2017 and the COVID-19 pandemic that began in March 2020.
However, economists and analysts have consistently said that government numbers underplay the jobs crisis in the informal sector. Sure enough, in the same month, credit markets rating agency India Ratings released a report saying that 63 lakh informal sector enterprises shut down between 2015-16 and 2022-23, resulting in the loss of 1.6 crore jobs. The report blamed it on the same reasons I listed earlier.
Economists say that the struggles of the informal sector have likely pushed millions towards forced self-employment, the gig sector or a return to agriculture. This equals a deterioration in terms of job quality and wages.
SIGNATURE TUNE
First of all, let’s understand what exactly the informal economy is. The informal sector — small and medium enterprises, household proprietary and partnerships, etc — accounts for more than half of India’s GDP and more than three-fourths of jobs.
It is described by the International Monetary Fund, or IMF, as comprising activities that have market value and would add to tax revenue and GDP if they were recorded. According to the International Labour Organization, about 2 billion workers, or 60% of the world’s employed population aged 15 and above, spend at least part of their time in the informal sector. As economies develop, the size of the informal sector decreases but that doesn’t happen uniformly everywhere. A lot depends on the country’s unique economic and social characteristics.
In low- and middle-income countries, the informal sector accounts for a third of economic activity and only 15% in advanced economies.
The abundantly available informal labour, particularly in emerging markets, is viewed as an obstacle to sustainable development. There are many reasons for this. Informal firms do not pay taxes, tend to remain small, have low productivity and limited access to finance. This constricts the economic potential of countries. Informal workers are also likely to be poorer than workers in the formal sector because they lack formal contracts and social safety nets and because they tend to be less educated.
Most importantly, the prevalence of informal work is associated with high inequality. Workers with similar skills earn less in the informal sector than in the formal sector, and the wage gap between formal and informal workers is higher at lower skill levels. Where such inequality has been reduced, such as Latin America, it has come on the back of a reduction in informality.
Informal work has a gender impact too. In two-thirds of low- and lower-middle-income countries, women are more likely than men to not only be in informal employment, but also to be in the most uncertain and low-paying categories of it.
So, addressing informality is essential for inclusive development and reducing poverty. The COVID-19 pandemic made this crystal clear. It crushed informal activities and showed why governments must create social protection programmes for this large population. However, formulating workable policies to reduce informality is complicated. As I said, informality is a response to country-specific characteristics, so there is no one-size-fits-all solution.
Let’s return now to the Annual Survey of Unincorporated Enterprises, or ASUE, and India Ratings reports. Why do they differ so widely?
The answer lies in the way the data was crunched. ASUE compares the findings for 2021-22 to data from 2022-23. This does not paint an accurate picture because it compares a time when the distress due to COVID-19 was at its worst to a time when the economy had begun to recover.
The India Ratings report, meanwhile, compares the 2022-23 findings to that of 2015-16 when the previous government survey was conducted. It calculates the decline in jobs in the seven-year period and then estimates the actual scale of job losses by layering on previous trends. This makes sense because you’re then comparing a period prior to shocks such as the GST rollout and COVID-19 and thus understanding what their impact was.
So, the way the government has presented the ASUE findings is flawed and masks the scale of job losses in the informal sector.
Take for instance, this piece of data. A fact sheet on the ASUE survey shows that the number of informal enterprises rose from 5.97 crore in 2021-22 to 6.5 crore in 2022-23 at a compounded annual growth rate of 5.88%. Meanwhile, the number of workers in these enterprises rose from 9.78 crore to 10.96 crore at a rate of 7.84%.
However, the data is more sobering when the 2022-23 numbers are compared to those of 2015-16. In this period, the number of enterprises went up by 2.68% from 6.33 crore to 6.5 crore, and the number of workers dropped by 1.5% from 11.13 crore to 10.96 crore.
The picture is far worse if previous trends are taken into account.
There was an addition of 57 lakh informal enterprises between 2010-11 and 2015-16. This translates to about 11 lakh per annum. Had this trend continued, the total number of enterprises would have reached 7.14 crore by 2022-23. And the number of workers employed by them would have been more than 12.5 crore.
It is these estimates that the India Ratings report uses to calculate that India has lost 63 lakh informal sector businesses and 1.6 crore jobs between 2015-16 and 2022-23.
Meanwhile, the Labour Department released figures claiming 20 million new employment opportunities generated each year since 2017-18, countering a Citibank report that said only 8.8 million jobs were added each year since 2012. This too is a flawed claim. Economists have repeatedly pointed out that growing employment numbers are not indicative of jobs but from people being forced to turn to self-employment, and also unpaid workers and temporary farm hires whose jobs are not equivalent to formal positions with regularised wages.
A large increase is coming from agriculture and self-employment, which includes work done for yourself and unpaid family work. So, the labour Department’s claim of a jump in employment is not the same as creation of formal jobs.
Let’s turn now to a Reserve Bank of India statement that in 2023-24, employment rose by 46.7 million for a total of 643.3 million. Also, its database showed that agricultural work opportunities contributed 48 million of the 100 million jobs generated between 2017-18 and 2022-23. Again, economists have hesitated to call them real jobs. These are mainly people working on farms or in non-farm self-employment because of lack of jobs elsewhere.
In other words, the India story is that of joblessness. Increase in good-quality jobs is not keeping pace with economic growth. Perhaps that is why the ‘India Employment Report 2024: Youth Employment, Education, and Skills’, published by the Institute for Human Development and the International Labour Organization, says 82% of the workforce is engaged in the informal sector, with nearly 90% being informally employed.
To make things worse, the ASUE report states that 62% of unskilled casual agricultural workers and 70% of similar workers in the construction sector did not receive the prescribed daily minimum wages in 2022. Not only are these workers on very shaky financial ground, they have no access to benefits such as healthcare, insurance and provident funds.
Economists have pointed out that the main reason for the scarcity of good jobs is insufficient creation of opportunities by modern manufacturing and service industries. So, those moving out of agriculture and seeking jobs elsewhere are forced to take up odd jobs in small retail outlets, street vending or construction. In other words, a higher prevalence of casual labour and self-employment.
In the case of the self-employed, many are part of a family enterprise such as a small shop and may not be paid at all. This is particularly true of women who might attend to their husbands’ stalls. They get paid nothing but get counted as self-employed too.
The transition towards self-employment is concerning not just because it’s often a desperate exercise because of the lack of jobs. Periodical Labour Force Survey data shows that, historically, wages in self-employment are much lower than in salaried jobs.
For the informal sector to get going again, government intervention is urgently required. Here are a few steps recommended by the IMF that India could take to heart:
- Improve access to and quality of education. Education reforms that enhance equality of access and ensure that students remain in school until the end of the secondary cycle, alongside technical and vocational training opportunities, are important.
- Tax systems should avoid inadvertently increasing incentives for individuals and firms to remain in the informal sector. Simpler value-added and corporate tax systems with lower rates, as well as low payroll taxes, reduce informality. Supportive social protections, including progressive income taxes and protection for the poorest, address distributional aspects.
- Enhance inclusion by promoting access to formal financial services. Lack of access to finance is a huge constraint for informal firms. Countries where access to finance is greater tend to grow faster and have lower income inequality.
- Structure policies to increase incentives and lower the cost of formalisation. Labour market regulations can be simplified to ensure greater flexibility and facilitate informal workers’ entry into formal employment. Competition policy can boost entry of small firms in some sectors by eliminating monopolies. Digital platforms, including government-to-person mobile transfers, can bring financial accounts to the unbanked, empowering women financially and helping small enterprises grow.
If India is to transition millions from the informal sector to the formal, these steps will form the foundation of the effort. But so far the trends aren’t encouraging. The data from the ASUE and India Ratings reports is speaking loudly. But, is anyone listening?
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.
