Informal Sector Challenge: Beholden to Misconceptions

Informal Sector Challenge: Beholden to Misconceptions By Ranu, Economist.

“Mind is not a problem. Mindset is.” – Narendra Modi.

We received many interesting and constructive comments on the article titled ‘Unmasking the Realities of India’s Vast Informal Sector’ ( https://www.bharatamrising.com/economy-2/latest-2/unmasking-the-realities-of-india-s-vast-informal-sector ). These comments and questions helped us to think more deeply about the informal sector, for which we are thankful to the readers.

However, it is urged to not analyze the economic, security and social challenges faced by India from a political prism.The analysis of the informal sector is grounded in India’s official data (released by the National Statistical Organization under Ministry of Statistics and Program Implementation) and not in any political ideology.

The aim is to objectively examine the challenges being faced by the Indian economy and my article did not aim to malign one political party at the expense of other but to challenge the shallow analysis carried out by a few analysts who are ultimately damaging India’s economy and society by perpetuating falsehoods and spreading misinformation. It was never said that everything was hunky dory before 2014. While the Indian economy grew exceptionally fast between 2000 and 2008 on the fuel of 1991 liberalization reforms and a resurgent globalization, post-2008, growth faltered – swinging between highs and lows – due to a lack of major economic reforms, deep policy paralysis between 2010 and 2014, a few policy missteps (demonetization and hasty implementation of a clunky GST regime) and the mismanaged lockdowns during the COVID-19 pandemic (remember hundreds of informal workers who died while travelling from cities on foot, in heat, back to their villages). These factors have also kept the informal sector large as investment activity has weakened (https://www.bharatamrising.com/economy-2/latest-2/beyond-the-hype-the-real-story-of-investment-in-india) leading to less than sufficient number of quality jobs and, the education system has steadily deteriorated over the last twenty years.Now, let’s dig into the many constructive comments received so far:

Comment 1: “My gardener earns more than Rs 6,000 a month and his household income is supplemented by his wife who is a maid. They are not in dire straits as made out to be.”

Response: Firstly, India is a large country, with varying prices and incomes across cities, towns and villages. For instance, workers in the southern states generally earn more compared to workers in the northern states of Uttar Pradesh, Bihar, Jharkhand, Rajasthan and Madhya Pradesh. So, it is possible for some gardeners to earn Rs 600 a month and some to earn Rs 1500 a month.

Secondly, let’s assume our gardener Rammohan from the article ‘Unmasking the Realities of India’s Vast Informal Sector’, earns Rs 1,500 a month per house and tends to 10 houses. This translates into an income of Rs 15,000 a month. Further, he also cleans cars; most informal workers hold multiple jobs to supplement their incomes. If our gardener cleans 10 cars and earns on an average Rs 600 per car, this adds Rs 6,000 to his overall income. Let’s also assume that Rammohan’s wife works as a maid and earns Rs 2,000 per house. If she is cleaning 5 houses in a day then her income comes out to be Rs 10,000 per month. Therefore, Rammohan and his wife bring in a gross income of Rs 31,000 per month.

Next, let’s assume that Rammohan and his wife have two children and their parents live in a village. Most urban families like Rammohan’s typically enroll their children in a small private English-medium school rather than in a government school, seeking a better life for their children. Clearly, they cannot afford to send their children to top schools in the city, and they lack the social standing to aim that high – we all know the hoops these top private schools make parents jump for admissions. But this low-ranked private English-medium school is not known for quality education. Even the average urban schools have deteriorated in terms of teaching quality and curriculum, so students have to rely on private tuitions. But Rammohan’s children cannot afford to attend private tuitions, thus, deepening their disadvantage in moving up the social and economic ladder in the future.

In addition to these education-related expenses, there are monthly expenses on food (which has become more expensive as food prices have surged over the last two years), transportation, cooking gas, electricity, healthcare, family and house rent. The table at the end of this article breaks down these hypothetical household expenses for Rammohan and his wife (roughly based on my interactions with my gardener and maid).

After paying for all the necessities, we find that Rammohan and his wife are left with a small amount of Rs 1,765 at the end of a month (on an average) to save or to spend on any emergencies. We should think carefully about how this low salary, and an overall lack of wealth or savings, no access to social security benefits as well as limited prospects of moving up the social and income ladder will help workers like Rammohan prosper!

Comment 2: “Informal workers can get skilled at training centers opened under PMKVY and compete for better jobs.”

Response: The Pradhan Mantri Kaushal Vikas Yojana (PMKVY) was launched in 2015-16 to help the Indian youth to acquire industry-relevant training and hence, quality formal jobs. While a commendable initiative, it has failed to make any substantive contributions in generating quality employment or training workers to bridge the skill gap. A small share of workers has availed of this facility due to a limited industrial demand for these trained workers in their immediate vicinity (most of the workers want jobs near their homes), absence of sufficient number of formal jobs, poor training at the centers etc¹. It is hardly surprising then that as of June 2024, only 0.5% of informal workers were enrolled in these training centers and till date only about 3% of total employed workers in India have been trained in these centers.

Comment 3: “Patience is the key here. The PLI and Make in India schemes will soon generate jobs for the workers in the informal sector.”

Response: The Make in India scheme was launched in 2014 to encourage foreign and domestic companies to set up businesses in India. There are several initiatives and sub-schemes under the umbrella program of Make in India that targets 27 sectors in the country (https://www.makeinindia.com/sectors). But barring tourism services and, leather and textile manufacturing, none of the 24 remaining sectors are labor-intensive or capable of generating a high number of jobs for India’s large army of informal workers. This is also a challenge with the Production Linked Incentive (PLI) Scheme, which was launched in 2020, to boost India’ manufacturing capacity.

India needs large investments in textiles, leather and food processing industries. Such labor-intensive manufacturing units can generate enough jobs for the relatively less educated and unskilled informal workers. Manufacturing also has an added benefit of ‘learning-by-doing’, offering opportunities for workers to gain experience and expertise in a particular kind of work, which help them to leverage their skills for higher incomes. Whereas, informal work does not offer these opportunities. After all, a gardener or a car washing worker can hope to gain only a little in experience and expertise even after 10 years of work, which keeps their future prospects of increased incomes quite bleak.

But financial incentives like the PLI are not enough to motivate the private companies to invest in these labor-intensive industries. Firstly, India needs to overhaul its land and labor laws. The government needs to make it easier to estimate the value and ascertain the ownership rights of the land, create a liquid market for land (similar to the liquidity in India’s stock markets which makes it easier for us to trade in stocks) and, simplify land administration procedures. On labor laws, the government of India did take steps to streamline and reduce the multiple labor laws accumulated since the British came to India but the progress on implementation has stalled in the face of political challenges. Secondly, India’s central government needs to improve policy certainty. Going back and forth on policies (like the laptop ban last year) as well as favoring a few private companies while cracking down on others that do not tow the political line (ordering IT raids and ED seizures) has damaged the business environment in the country. Why would a private company invest in a large labor-intensive factory if it is not sure of the future returns – what if the current government changes its mind about the land or labor laws or worse, favors another rival company? One should have a look as to how certain groups have acquired companies recently.

These are some of the most urgent reforms that can generate good jobs for informal workers and also, secure India’s future growth.    

Conclusion

It is reiterated here that addressing the challenge of the informal sector is of paramount importance for India’s future growth. No developing country has grown to become a high-income economy where more than half of its workers are earning barely enough to survive (including education, which is a necessity in a civilized society). 

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Table. Hypothetical household expenses for Rammohan

Note: *The estimation of 32Kg of cereal consumption for a household of 4 persons is based on the preliminary results of the recent official Consumption Expenditure Survey. The Survey showed that in 2022-23 the per capita cereal consumption was 8 Kg in urban areas.

Footnotes

¹ https://www.deccanherald.com/india/skill-training-an-incomplete-solution-to-india-s-unemployment-crisis-1212085.html

https://www.thehindu.com/news/national/karnataka/skill-training-centres-poorly-designed-and-dysfunctional-shows-study/article30795717.ece

https://theprint.in/ground-reports/centres-shut-funds-misused-no-placements-skill-india-needs-a-refresher-course/2054438/