Misleading dichotomy

In its Economic Survey of 2015/16, the Government of India spelled out a major issue in rather simple terms: “The challenge of creating ‘good jobs’ in India could be seen as the challenge of creating more formal sector jobs, which also guarantees worker protection.” Indeed, India’s masses need decent work.

The formal sector consists of licensed organisations that pay taxes and must obey labour laws. It is also called the “organised” sector.  It provides the employment that is good in the sense of being well paid and linked to benefits such as vacations, sick leave as well as social protection such as health insurance and pension schemes.

The bitter truth, however, is that India’s formal sector is doing a bad job of providing such jobs. It employs only about 10 % of the nation’s workforce. Merely 48 million of India’s 472 million economically active people were working in the formal sector in the financial year 2011/12. The vast majority was slaving away in the informal sector in harsh conditions (see box). These data are from the 68^th National Sample Survey, which also showed that the share of formal-sector jobs had increased in comparison with seven years earlier. In absolute numbers, however, the growth of the informal-sector still exceeded the growth of the formal one.  

Reliable and updated statistics are hard to get in India. This is especially true of the informal sector, which is not closely scrutinised by government agencies. Farming is mostly informal, for example, and though women and children do a lot of agricultural work, their efforts are hardly counted. The number of economically active persons on farms is therefore probably larger than indicated.

Making matters even more confusing, the data for the formal sector are not entirely reliable either. Some people are only employed part-time, and others are only paid a fraction of what they should be paid for various reasons. Many persons are underemployed in the sense of working in lowly positions that do not allow them to  make full use of their skills. This is true of many university graduates, for example.  

Deteriorating formal sector

Indeed, the formal sector is gradually becoming more informal. This trend reflects  a global erosion of labour relations. It is evident in the USA and EU countries, for example. According to the ILO’s India Labour Market Report 2016, “most of the new jobs being created in the formal sector are actually informal because the workers do not have access to employment benefits or social security”. It also warned that “notable disparities in the labour force participation rates of men and women persist”.

The truth is that India’s complex labour legislation tends to be violated with impunity. It matters, of course, that policymakers are interested in curbing the reach of labour legislation, which they consider to be stifling free enterprise and thus limiting economic growth. Low labour costs are a comparative advantage internationally. As the Global Times, a newspaper published by the Chinese government, has noted: “A majority of Indian states still have an absolute labour cost advantage over China.”

The Indian outlook is gloomy, however. In 2020, people’s average age will be 29 years in India, compared with 37 years in China and the USA, 45 years in the EU and 48 years in Japan. An important implication is that the share of young people entering the labour market is particularly great in India. Most likely, many of them will be dangerously disappointed. India is not offering an aspirational, upwardly-mobile young generation the opportunities it deserves – and demands. Compounding the problems, India has meagre success in providing young people with skills so far.

The government is aware of the challenges, but has so far proven unable to rise to them. Prime Minister Narendra Modi promised to improve the employment situation in his election campaign, but he has not achieved much progress since taking office in May 2014. His grand scheme “Make in India” was supposed to attract foreign investors to manufacturing in India and result in decent jobs. However, it has not generated employment as hoped (see my essay in D+C/E+Z e-Paper 2016/09, p. 28, and print edition 2016/9-10, p. 32), and most of the new jobs are actually very harsh.  

An earlier initiative, which was launched by the previous government of Manmohan Singh in 2005, was designed to improve the employment situation with a rights-based approach. Called the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), it was a promise that one adult member of every rural household would get at least an annual 100 days of work at the minimum wage in infrastructure-related areas. In 2015/16, however, MGNREGA generated only 49 days of work per recipient on average.

Under pressure from the Supreme Court, the current government must now improve the scheme. It has various loopholes and weaknesses. While rural employment at the minimum wage is helpful, it will never solve India’s huge labour-market challenges.

Comfort cushion

The dichotomy of formal and informal employment still reflects a huge divergence in job quality, but it is a bit misleading nonetheless. The reason is not the above-mentioned gradual informalisation of formal employment, but the way the formal and informal sectors interact. Informal businesses are the cheap links in the formal companies’ supply chains, and provide them with something like a comfort cushion.  Ultimately, the international competitiveness of the formal-sector companies depends on the informal ones.  

No doubt, the informal sector is the backbone of India’s economy. According to Credit Suisse, it accounts for about half of GNP. The livelihoods of more than 400 million workers and their families depend on it.

The politically prudent thing to do is thus to upgrade it. Step by step, life in the informal sector can be made easier. Relevant goals include improving infrastructure, boosting skills and know-how, providing access to financial services and creating a social security architecture.

In 2009, the National Commission for Enterprises in the Unorganised Sector made sensible proposals on these matters. Unfortunately, the report was largely ignored. It still deserves attention.

Aditi Roy Ghatak is freelance journalist and lives in Kolkata.
aroyghatak1956@gmail.com

Link
National Commission for Enterprises in the Unorganised Sector, 2009: The challenge of employment in India – An informal economy perspective.
http://nceuis.nic.in/The_Challenge_of_Employment_in_India.pdf