How to create a larger, formal economy in India?


Even today, the lion's share of employment in India is generated in the informal sector. Time for some big decisions.

How to create a larger, formal economy in India?

India suffers from a very skewed structure : most of our economic is informal. The demonetization move by Modi was considered a political suicide. The assembly election results demonstrated the reverse. The public at large has welcomed it, assuming it will weed out black money and corruption. But everyone will realize that one-time big-bang events like DeMo cannot fundamentally alter the structure of India’s economy for the better. We need to move away from being primarily an informal economy, to being a formal economy. [ What exactly will that mean? ] In a formal structure, our 1.2 million new job seekers each month will have more job opportunities, government will have more tax revenues, and economy will have a stronger direction. This is an economic and social necessity. Read various Bodhi on Indian Economy NITI Aayog’s Chairman Arvind Panagariya says : “DeMo was a move towards formal economy needed to bring workers and activity into the formal sector”. 

India has defied the global economic logic – as economies prosper, the percentage of formal structures grow consistently. We have seen the reverse! The NSSO (National Samples Survey Office) statistics show that in the period between 1989 and 2010, informal firms created most jobs. However, such jobs are suboptimal, and their low productivity cannot create an economic miracle. Almost 80 to 90 per cent of the non-agricultural workforce is in the unorganized sector. The present government has shown the political will, and has now created for itself the space to initiate policy measures required to formalize the economy. But a lot is yet to be done. We now need : reforms in labour, land and tax laws. Currently there are 200 labour laws, which are distortionary on multiple levels. Companies do not want to grow beyond a scale, to stay away from labour hassles. In India, haphazard urbanization has made the problem worse through spatial mismatches between enterprises and workers. Relatively costlier urban living makes labour-intensive firms uncompetitive in cities, whereas, poor connectivity aggravates the problem. Solutions? Improving transport infrastructure, setting up enterprises in smaller towns with low costs. Banking inclusion (Jan-Dhan Yojana) is being tried, but this would require reforms in the property rights system to allow assets to be used as collateral. Improving the quality of human capital by boosting education and skill levels is another crucial factor. So India has its task cut out, and if we do not do it now, our demographic dividend will simply run out sub-optimally.

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Bodhi Saar: How to create a larger, formal economy in India?
How to create a larger, formal economy in India?
Even today, the lion's share of employment in India is generated in the informal sector. Time for some big decisions.
Bodhi Saar
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