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Atmanirbhar Bharat & the informal sector


From UPSC perspective, the following things are important :

Prelims level: GVA

Mains level: Paper 3- Role informal sector can play in Atmanirbhar Bharat

The article highlights the important role the informal sector can play in the vision of Atmanirbhar Bharat.

Economic development through Atmanirbhar Bharat

  • The vision of the Atmanirbhar Bharat is rooted in the classical paradigm of economic development, based on demand injection in the economy via two sources, domestic and external.
  • ‘Vocal for local’ exhorts a distinct and decisive shift in consumer preferences towards locally-produced goods and services.
  • ‘Make for the world’ is more ambitious and resembles the export-led growth strategy adopted in East Asia.
  • Thus, the Atmanirbhar Bharat categorically bestows the Indian economy with twin engines of growth.

Important role informal sector can play

  • The strategy is based on an assumption of lack of adequate demand.
  • So a prognosis of supply side with respect to the ability of domestic producers of goods and services to seize the opportunity at the requisite scale and scope is pertinent.
  • The nature, character, structure and contributions of the informal sector require retrospection.
  • The size of India’s informal sector is massive, it accounts for about 50% of GVA and a major share in the export basket.
  • This position proffers it with growth opportunities emanating from domestic as well as external sources.

Constraints faced by informal sector

  • Most firms are micro in size and deploy little capital.
  • They have a small scale of production, substandard/unbranded quality of products, and localised scope of procuring raw material and marketing their products.
  • They are vulnerable to business downturns and other market uncertainties, as reflected in high mortality.
  • Their access to cheap, reliable and long-term credit sources is highly restricted.
  • The sector also endures a lack of official identity and recognition of its existence and contribution.

Three transformations informal sector need to adopt

  • Atmanirbhar Bharat promises enhanced demand for domestically-produced goods and services, but the exposure to stiff global competition, especially for informal sector units, is imminent.
  • In such a scenario, the informal sector must embrace for three tectonic shifts with respect to internal transformation, strategic positioning and labour-market dynamics.

1)  Internal transformation

  • Enterprises must undergo drastic internal transformation, progressively converging at incremental formalisation through spontaneous and self-propelled transition into economically-viable units.
  • It requires infusion of capital to ensure enhanced labour productivity and higher wages.
  • A systemic disruption, fostering natural growth must be ushered in, which would also curb the birth of new informal enterprises.
  • Moreover, internal consolidation in the sector via merger and acquisitions of units would bring benefits accruing from scale economies.

2) Strategic positioning

  • 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.
  • They must pick their products and markets with utmost care, and engrain two mantras of success at the global stage in the DNA of their business strategies.
  • Global mega-supply chains demand ultra-flexibility in production cycle in addition to heightened resilience to withstand headwinds emanating from not just domestic factors but also global.

3) Labour market dynamics

  • The informal sector employs more than 80% of India’s workforce.
  • The changes in the first two spheres i.e. 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.
  • To alleviate these concerns, the first assumption is that the proportionate increase in expected demand must be more than the enhanced labour productivity to at least retain the currently employed workers.
  • To generate good quality jobs, diversification (both horizontal and vertical) must be encouraged.
  • Vertical diversification entails products not just be partly produced or assembled in India, they must be the end-products of fully indigenised and integrated production and supply chains, from design to made in India.
  • Horizontal diversification involves expansion into newer products and markets, smartly aligning with India’s comparative advantage of surplus labour.

Consider the question ” India’s vast informal sector is poised to play an instrumental, decisive and intriguing role in the vision of the Atmanirbhar Bharat.  But the sector, in its current form, appears severely constrained to harness the opportunities. In lights of this, examine the constraints faced by the sector and suggest the measures needed to transform the sector.” 


The vision of the Atmanirbhar Bharat is an inflexion point for India’s informal sector, which stipulates adroit manoeuvring between contrasting forces of continuity and change.

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