Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

[op-ed snap] The formal-informal divide


Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level:Not much

Mains level: Investment slowdown, specific sectors affected by the slowdown, the divide and what should be done, etc.


What is the issue?

  1. It is now well recognised that there is an investment slowdown in India, which is delaying a thorough recovery in the economy
  2. The slowdown started five years ago, and is, as Economic Survey 2018 notes, the most severe in India’s history

The Investment slowdown in various sector
(1) Informal Sector

  1. The private investments slowdown is statistically visible chiefly in the informal segment of the economy

(2) Corporate Sector

  1. The corporate sector is not the source of the decline
  2. Corporate investments have been on the upswing, rising through the five-year slowdown

(3) Public and Private finance companies

  1. There is negligible change in the investment behaviour of public and private finance corporations
  2. Public non-financial corporations reduced investments marginally. The government stepped up its investments, but its share the benefit is small

(4) Household Sector

  1. The sharpest pullback has been by the household sector, its investments are down 6.6 percentage points since the start of the slowdown
  2. Economy-wide investments are down 5.8 percentage points
  3. The slowdown is mainly because of the household sector’s troubles

What is the household sector?

  1. Households can be producing or non-producing, in which case they are consuming households
  2. The 73rd round of the survey by the National Sample Survey Office had found about 6.34 crore unincorporated non-agricultural enterprises in the country
  3. A chunk of private investments is undertaken by these firms that often operate out of homes, with, typically, less than 10 workers

The formal and informal divide

  1. The investments estimates (Gross Fixed Capital Formation) cover physical investments in plants, machinery and equipment, and dwellings and buildings, but not land
  2. The two largest investing segments in the economy, households and private non-financial corporations, correspond roughly to the informal and formal economies
  3. The formal-informal divide shows up also in savings
  4. Corporate savings are rising consistently, while those of the household sector are slowing.

What has made the informal sector more vulnerable than the rest of the economy?

  1. Corporates can access capital in difficult times, but the unincorporated are left without recourse
  2. Corporates can borrow overseas and raised funds from the capital markets
  3. But he informal sector has not had the sophistication or resources required

The way forward

  1. Given the anatomy of the private investments slowdown, a macroeconomic stimulus may not be the best policy choice
  2. Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments
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