The Problem Associated with the Indian Informal Sector

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  • Underemployment: We believe that the cause and consequence of the widespread informal sector is commonly estimated to account for 90% of employment, but generate only a third of the value added in the economy.
  • Low-productivity trap: It is huge with limited efficiency because of its many constraints and is a low-productivity trap that chokes off the formation of a genuine middle class in India.
  • Small scale: Typically, informal workers either work as individual casual labour or in micro-enterprises with very small operations, having fewer than 10 employees under conditions of instability in both employment and income.
    • There is a large contingent of what we call solo service providers even among higher-skilled occupations like carpenters, tailors, and auto mechanics — and even when they are a part of digital aggregator platforms, are still largely on their own.
    • The International Labour Organization (ILO) has estimated that in 2017, a full one-third of Indian workers in the informal sector were the so-called “own account workers”. The result is persistently low productivity.
  • Lack of Security: The nature of temporary or contract workers in the informal economy disincentivises the employer from investing in productivity-enhancing tools and training workers to use them, since the payoff time horizon is longer term than the workers’ tenure; Besides, informal employers themselves do not have the wherewithal to invest in worker productivity.
  • Lack of stable teamwork: However, in the informal sector, because of the transient nature of the workforce, even if a person is part of a work crew of thousands (for example in delivery services or large construction projects), working with others as a stable team does not happen.
  • Poor access to financing: The problems of access to financing for informal workers and micro-enterprises which are not a part of any formal supply chain is well known, and we will not reiterate it.
    • The ratio of domestic credit to GDP, which measures how much credit has been extended to people and businesses benchmarked against the size of the economy, is far lower in India than in, say, China or the United States, and has also been stagnant for the entire decade ending in 2022, while it expanded in all the key economies in the world.

Mains Practice question

“The informal sector is the backbone of the Indian economy but it is struggling with many challenges” analyse the statement. (250 words, 15 marks)

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