Moving towards a larger formal economy

  Mar 31, 2107

Moving towards a larger formal economy

The currency swap initiative was seen as a “move towards formal economy” with the need “to bring workers and activity into the formal sector”. This is an economic and social imperative. Providing employment for India’s youth bulge is the state’s greatest challenge, and will remain so for the next few decades.

Unorganized sector jobs are a suboptimal solution, much less productive than formal jobs; apparel firms in the latter are 15 times more productive than those in the former, as an example. There are numerous other concerns as well, from a lack of security for the worker to lopsided growth and inefficient capital allocation.

Economic logic dictates that as a country climbs the development ladder, its economy will shift towards the formal. However, this has not been the case with India.

National Sample Survey Office (NSSO) statistics show that in the 1989 to 2010 period, informal firms have accounted for the maximum number of jobs created and the vast majority of new establishments. Little wonder that 80-91%—depending on the criteria used—of the non-agricultural workforce is in the unorganized sector.
But a granular look makes it clear that this is no silver bullet. NSSO and Annual Survey of Industries statistics throws up some interesting facts about the informal sector.
Addressing the problem
Addressing this necessitates a much broader approach on multiple fronts. Improving transport infrastructure and connectivity is one of them.
One-time initiatives like currency swap might signal intent, but increasing the size of India’s formal economy will take a sustained effort that works on the systems that underlie the Indian economy and society. The interlinked nature of these systems where improvement on one front will necessitate working on another—as access to credit and property rights show—makes it that much more difficult. So does the fact that in multiple areas such as labour and land reforms, state governments will have as much of a role to play as the centre.