India’s informal economy has not shrunk: Daily Current Affairs

GS-3:Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Key words: Formal Economy, informal Economy, PLFS, Tax evasion, unemployment, Atmanirbhar Bharat

Why in News:

An SBI Research study’s claim that there is greater formalisation of the economy is unfounded.

What is informal economy?

The informal economy is the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. The concept originally applied to self-employment in small unregistered enterprises. It has been expanded to include wage employment in unprotected jobs.

How big is the informal economy in India?

According to the Periodic Labour Force Survey, over 90 per cent of workers in India are informal workers. Out of these, those engaged in rural areas workers are significantly more than urban areas workers.
Based on the latest survey, India has 6.36 crore enterprises, informal and formal taken together. As many as 99.7 per cent of the enterprises are in the unorganised sector and this share was constant between 2011-12 and 2015-16. The registered or formal sector firms are only 0.3 per cent or 1.7 lakh in numbers. A large fraction of these unorganised firms belong to the “micro” category of the MSME sector.

Formal Vs Informal Economy:

Formal economy

They are registered with government.
There are pre-defined work conditions and job responsibilities.
Workers are entitled to social security and can form trade unions.
Workers get an assured and decent fixed salary with perks and incentives

Informal economy

They are not registered with government.
There are no systematic work conditions and job responsibilities.
Workers are not entitled to social security, nor can they form trade unions.
Workers get payment irregularly and are unevenly paid

Periodic Labour Force Survey (PLFS)

The PLFS is an annual survey conducted by the National Statistical Office (NSO). It was started in 2017, and it essentially maps the state of employment.

Objective:

To estimate the key employment and unemployment indicators (viz. Worker Population Ratio, Labour Force Participation Rate, Unemployment Rate) in the short time interval of three months for the urban areas only in the ‘Current Weekly Status’ (CWS).
To estimate employment and unemployment indicators in both ‘Usual Status’ and CWS in both rural and urban areas annually.

Why there is vast informal economy in India?

Uneven economic development
Incapability of the government to generate jobs.
Tax Evasion: India has numerous small and medium enterprises but most of them are not registered as such become part of the informal sector. One reason for not registering is to evade tax and other government regulations or requirements.
Means of survival: Most people have been forced to engage in informal activities as a means of survival, providing sources of livelihoods.
Unemployment and Internal migration: Economic development failed to keep pace with high population growth rates reinforced by massive migration and employment opportunities were inadequate to absorb new entrants into the labour force. This gave pressure to employment opportunities, hence a rise in unemployment. With the rising unemployment, survival fuelled the informal sector activities.
They do not want to comply with the laws and regulations of the government.
Weak or ineffective implementation of laws.

Drawbacks of informal economy

Loss in state revenue: As a result of not being registered informal traders do not pay tax to the government and do not have license from the respective authorities as such the state loses revenue.
Unfair competition: Informal sector participants have very low overheads. They also do not contribute to taxes, social security and at times, do not even pay ren
Technological gap: Informal sector usually uses simple and cheaper technology that does not use complicated equipment owing to low skills level of the workers and lack of funds to acquire high cost technology.
Poor working conditions: Working conditions in the informal sector are comparatively poor. They normally work over time which is not usually paid and if paid they get less.
Excluded from any social benefit and security.
Incorrect information: As pointed out earlier on, informal sector statistics are not officially recorded, such that information is distorted and policy makers are misled. Incorrect and incomplete information undermine the effective management of the economy.
Corruption

Benefits of informal economy:

Employment: The informal sector creates employment opportunities for its citizens.
Social: From the social side it has often been overlooked that the informal sector keeps citizens busy such that there would be less free time to commit crime thus reducing the crime rate of a country.Political backing can also be gained from the informal sector activities as such they are even encouraged.
Lower prices of commodities: As alluded earlier, informal activities take place in the backyard where rent is cheaper and cheap labour is used which usually result in lower costs such that lower prices are charged for their commodities. Generally, informal sector players have significantly low overheads, compared against the formal sector players. This is a benefit to the consumers since higher price charged in the formal sector reduces the consumer surplus.
Low labour costs: The low costs of labour emanate from the fact that most informal sector employees are relatives of the business owners and are usually paid low wages or not paid at all in some circumstances.
Government initiatives toward formalization of economy:
e-Shram Portal: It is the first-ever national database of unorganised workers including migrant workers, construction workers, gig and platform workers, etc. The Portal will prove to be a huge boost towards the last-mile delivery of the welfare schemes for crores of unorganized workers.
Udyam Portal: This new portal assists the government in aggregating the data on the number of MSMEs in the country.
Pradhan Mantri Rojgar Protsahan Yojana (PMRPY): Government is implementing PMRPY since 2016 with the objective to incentivise employers for creation of new employment and also aimed to bring informal workers to the formal workforce.
Aatmanirbhar Bharat RozgarYojana (ABRY): It has been launched to incentivize employers for creation of new employment along with social security benefits and restoration of loss of employment during COVID-19 pandemic

Way forward:

Informal businesses are a problem because the government can’t keep track of them. And therefore, it is willing to give up growth for formality. Greater formalisation will see a shift from the low-paying, labour-intensive jobs in the informal sector to more productive, formal-sector jobs. This could lead to disruption in the short term as formal jobs are relatively more capital-intensive than those in the informal sector. So, as the transition to greater formalisation propels the move towards more productive and capital-intensive jobs, unemployment is bound to increase.

Source: The Hindu BL

Q. Consider the following statements with reference to the Periodic Labour Force Survey (PLFS):