From UPSC perspective, the following things are important :
Prelims level : MGNREGA
Mains level : Paper 3- Issues of informal sector
Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.
Significance of informal sector
- India’s large informal sector, which employs around 80 per cent of the labour force and produces about 50 per cent of GDP.
- Of the 384 million employed in the informal sector, half work in agriculture, living mostly in rural India, and the other half are in non-agricultural sectors.
- Of those, about half live in rural India and the remaining in urban areas.
- Ignoring problems in the informal sector can be costly as it can lead to job and wage losses, higher inflation and even risk the livelihood of migrant workers.
Impact of pandemic on informal sector workers
- Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.
- Such disruptions can be inflationary too.
- India was one of the few countries with high inflation throughout pandemic-stricken 2020.
- The 40 per cent in the informal non-agricultural sector is the most affected by the pandemic.
- These workers are most vulnerable as they have borne the brunt of the economic disruption that the pandemic has unleashed.
Impact on the informal sector
- Nominal GDP growth has been a good indicator of the formal sector corporate sales.
- But during the pandemic and also during events like demonetisation, formal corporate sales have exceeded nominal GDP growth.
- This means that some demand, which was previously supplied by the informal sector, began to be supplied by the formal sector.
- Several surveys over this time also show a rise in urban unemployment and self-employment, with the latter category seeing the highest earnings loss.
- Formalisation on the back of policy changes: While traditionally associated with efficiency gains, if it comes at the cost of putting small informal firms out of business.
- Formalisation that comes only on the back of external pressure or leads to deep distress in the informal sector, may not be sustainable.
- By contrast, formalisation that happens on the back of policy changes that help small and informal firms grow over time into medium or larger formal sector firms is more sustainable.
- Social welfare scheme: We need protection for informal sector workers via social welfare schemes so that the disruption they are facing does not lead to a permanent fall in demand.
- There is a case for remaining generous with programmes such as the rural MGNREGA scheme for longer.
- India doesn’t have an MGNREGA equivalent urban social welfare scheme.
- Reforms: Steps to promote reforms that are needed to help small businesses grow are critical.
- For example, lowering the regulatory burden associated with growing firms.
Bringing the informal sector to the forefront of policy decisions can lead to a significant payoff for the entire economy for years to come.