CHAPTER 2

Dominance of the Unorganized Sector

In the previous chapter there was a brief mention of the unorganized sector; this chapter offers concept, dimension, importance, along with an array of linkages between formal and informal economic activity that needs to be better appreciated. Most people in India earn a livelihood by working for an income. They work for one employer or many or as self-employed or own account workers (those who work on their own account) or as contract workers, home-based workers, and so on in every sector of the economy. The economy of India is not marginal. Roughly, around 92.5 percent of livelihoods, producing up to 50 percent of the country’s GDP, are not registered. Both of these aspects play an integral role in the economy, particularly in employment, poverty alleviation and its contribution to the national domestic product, savings, and capital formation. All these components affect a substantial share of national income, services, savings, investment, taxes, manufacturing activities, foreign exchange, and so on. The informal sector comprises economic activity that is neither taxed nor monitored by the government, and is not included in the government’s gross national product (GNP) as opposed to a formal economy. The unorganized sector is a result of the following:

1. Improper training or poor skills of the workforce
2. Poor formal education (basic)
3. Low wages and low productivity

The concept: The Indian economy is characterized by the existence of a vast informal or unorganized sector. Varying definitions and nomenclatures being followed by different agencies make it difficult to have a uniform concept. According to the National Commission on Enterprises in the Unorganized Sector (NCEUS 2008), “The informal sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than ten total workers,” whereas “informal workers consist of those working in the informal sector or in households and the workers in the formal sector without any employment and social security benefits provided by the employers.” The NCEUS recommends the use of “informal sector” and “informal employment” instead of “unorganized sector” and “unorganized employment” (NCEUS 2008).

The NCEUS (2008) has brought much needed clarity to discussions of the unorganized (or informal) workers by defining them as those who lack employment security, work security, and social security. It has highlighted the low wages (or earnings) and bargaining power of informal workers that makes them not only poor but also vulnerable. All unincorporated enterprises and household industries that are not regulated by any acts and that do not maintain any annual reports presenting profit and loss and balance sheets are classified as unorganized [National Accounts Statistics (NAS) 1980]. Broadly speaking, the unorganized sector is characterized by the following features:

1. Local ownership, small scale of business operations
2. Uncertain legal status, usage of poor technology
3. Largely unregistered
4. Flexible turnover
5. Absence of brand value
6. Poor packaging, unavailability of good storage facility
7. Poor distribution network
8. High migrations with lower rate of compensation
9. Low-skilled employment and job insecurity or lower protection for employees

The unorganized sector is predominantly cash based, which contributes majorly to tax evasion and black money. The “Economic Survey” (the flagship annual document published by the Ministry of Finance, Government of India) of 2018–2019 says, “Almost 93 percent” of the total workforce is “informal.” But the NITI Aayog’s Strategy for New India @ 75 (released in November 2018) said, "By some estimates, India’s informal sector employs approximately 85 percent of all workers.” The overall picture in the informal sector is far gloomier. Although the informal economy is often associated with developing countries, all economic systems contain an informal economy in some proportion. India’s unorganized sector exhibits four key features (Ghani et al. 2013):

1. It’s very large. According to the NITI Aayog (2018), India’s informal sector employs approximately 85 percent of all workers in the country.
2. It’s extremely persistent. Although the Indian economy has undergone amazing changes during the past 20 years, the share of the unorganized sector has remained stubbornly persistent. While the organized sector has grown over the past two decades, the unorganized sector has kept pace.
3. This persistence is not due to particular subsets of states or industries. The persistence is not due to diverging trends, with some states or industries becoming much more organized and others becoming less so. The persistence is more systematic.
4. Greater concentrations of localized business activity are associated with weaker production functions for manufacturing firms.

Categories of the unorganized labor: The predominance of informal employment has been one of the central features of the labor market scenario in India. The Ministry of Labour, Government of India, has categorized the unorganized labor force under four groups in terms of occupation, nature of employment, especially distressed categories, and service categories (Annual Report, Ministry of Labour and Employment 2018–2019).

1. Occupation: Small and marginal farmers; landless agricultural laborers; sharecroppers; fishermen; those engaged in animal husbandry, beedi rolling (a beedi is a thin South Asian cigarette made of 0.2–0.3 gram of tobacco flake wrapped in a tendu [diospyros melanoxylon] leaf and secured with colored thread at both ends), labelling and packing; building and construction workers; leather workers; weavers; artisans; salt workers; workers in brick kilns and stone quarries; workers in saw mills, oil mills, and so on come under this category.
2. Nature of employment: Attached agricultural laborers (these workers work as per the wishes of their masters and are not free to work at any other place. They work both in the homes and farms of their masters), bonded laborers, migrant workers, contract and casual laborers come under this category.
3. Specially distressed category: Toddy tappers, scavengers, carriers of headloads, drivers of animal-driven vehicles, loaders and unloaders come under this category.
4. Service category: Midwives, domestic workers, fishermen and women, barbers, vegetable and fruit vendors, newspaper vendors, and so on belong to this category.

In addition to these four categories, there exists a large section of unorganized labor force such as cobblers, hamals (porters) artisans, handloom weavers, lady tailors, physically handicapped self-employed persons, rickshaw pullers, auto drivers, sericulture workers, carpenters, tannery workers, power loom workers, and the urban poor.

Significance of the informal sector: The unorganized or informal sector constitutes a pivotal part of the Indian economy. A high proportion of the socially and economically underprivileged sections of society is engaged in the informal economic activities. The noncorporate or unincorporated sector constitutes the largest portion of the economy in terms of value addition, savings, investment, and so on. The share of the corporate sector is around 12 to 14 percent in the national income while that of the unincorporated (noncorporate) or bhagidari sector is around half of the national product. Even in manufacturing activity, the share of the noncorporate sector is nearly 40 percent if one considers the unregistered manufacturing group (fully noncorporate sector) plus the partnership and proprietorship groups in the registered manufacturing group. The noncorporate forms of organizations are major players in such activities as manufacturing, construction, transport, trade, hotels and restaurants, and business and personal services. The informal sector, thus, plays a significant role in the economy in terms of employment opportunities and poverty alleviation.

It is increasingly realized that the lack of reliable statistics on the size, distribution, and economic contribution of the sector has been a major constraint in providing a realistic understanding of its significance in the Indian economy, leading to its neglect in development planning (NCEUS 2008). The National Statistical Commission (NSC 2012) has highlighted that there has been a new dynamism of the informal economy in terms of output, employment, and earnings. Faster and inclusive growth needs special attention toward the informal economy. Sustaining high levels of growth is also intertwined with improving the domestic demand of those engaged in the informal economy, and addressing the needs of the sector in terms of credit, skills, technology, marketing, and infrastructure.

The unorganized activity is important, and its transition will help further India’s economic progress. Given its contribution to the overall economic growth, from the nation’s perspective, the efficiency of informal sector enterprises may be linked to the efficiency of the economy as a whole. From policymakers’ perspective, knowledge of the relative performance of enterprises in the informal sector is important for current policy intervention. Almost 400 million people of the working population in India work in the unorganized sector. Of these, at least 120 million are women. The NCEUS (2008) report is a stark reminder of the huge size of, and poor conditions, in this sector. A high proportion of the socially and economically underprivileged sections of society is engaged in the informal economic activities. The high levels of growth of the Indian economy during the past two decades (1991 to 2011) are accompanied by increasing informalization.

Linkages between the organized and unorganized sectors: There are indications of growing interlinkages between informal and formal economic activities. In India, the complementary linkage between the formal and informal sectors takes place through subcontracting. Indeed, the informal sector is not a separate and closed circuit of work and labor. There is an interaction between the formal and informal sectors and dependence of the latter on the former and even its subordination to it. Now with the liberal economic policies there is the widespread informalization of the formal sector through downsizing, casualization, and contractualization. One need not assume that informal labor is unskilled; only need to recognize that its skills are acquired outside the formal education system, and all the more in the context of the liberal economic policies of hire and fire where the organized sector itself is getting informalized through contractualization, casualization, and outsourcing of labor.1

Changes in the unorganized sector since the 1990s: To a great extent, changes in this sector could be related to the ongoing globalization process and the resultant efforts on the part of employers to minimize the cost of production to the lowest levels. It is also evident that most of these outcomes are highly correlated and mutually reinforcing. What is important is that workers in this sector are the most disadvantaged group. “In spite of their vast numbers, and their substantial contribution to the national economy, they are amongst the poorest sections of the population.” (Moghe 2007)

Policy implications: The trajectory of development meant an inevitable preeminence of services over industry and agriculture. The structural shift the economy has witnessed is the emergence of the services sector as an alternative employment opportunity to farming, for informal employment. And, equally, an informal employment keeps cost down because of low wages due to a large number of unskilled workers. It is a reality in which land acquires new meanings, not for agriculture but as a piece of real estate generating renter profits. The persistence of the unorganized sector across so many different states and industries is too great to afford a single, unifying explanation.

The transformation of India’s unorganized sector is important to its modernization, growth, and attainment of regional economic equality.

The unorganized sector’s extreme size does appear to hold back the efficiency of the Indian economy (Ghani et al. 2013). The principal–agent problem exists in the informal sector. To solve this problem and make hired labor more productive, institutional intervention is required in terms of the implementation of certain rules and regulations regarding the incentives of the hired laborer. Policymakers must keep in mind that growth must not only be rapid, it must be inclusive and sustainable. The benefits of growth must reach the disadvantaged groups of the unorganized sector. All these groups must get a fair share of the benefits of growth and must have a stake in the process of development.

Little or no data about India’s vast informal and micro industries is creating a blind spot for policymakers and is increasingly becoming an area of concern. The country has over 50 million small and medium enterprises (SMEs) and an undocumented number of micro enterprises that exist outside any formal system. In the absence of credible information, policy decisions often amount to shooting in the dark. The goods and services tax (GST) does have some positive impact. It brings efficiency and also brings something that was not a part of the GDP earlier—the informal and black economy into the legitimate part.2 While reforming it should be kept in mind that informal sectors should feel the minimum heat, and ultimately, they should get the maximum strength.3

Challenges and the way forward: The challenges are many. The informal sector in India suffers from a low-productivity syndrome, compared with the formal sector. The sector is characterized by excessive seasonality of employment (especially in the farm sector), preponderance of casual and contractual employment, atypical production organizations and work relations, absence of social security measures and welfare legislations, negation of social standards and worker rights, denial of minimum wages, and so on. Poor human capital base (in terms of education, skill, and training) as well as lower mobilization status of the workforce further add to the vulnerability and weaken the bargaining strength of workers in the informal sector. The sector has, thus, become a competitive and low-cost device to absorb labor that cannot be absorbed elsewhere, and any attempt to regulate and bring it into a more effective legal and institutional framework is perceived to be impairing the labor-absorbing capacity of the sector. The foremost initiative through the government is the enactment of the Unorganized Workers’ Social Security Act, 2008, but it proved to be inadequate. A detailed analysis by Dutta and Pal (2012) makes it clear that the government is not at all willing to guarantee any social security benefits to the unorganized workers. In the absence of any timeline, compulsion or penalty, little progress has been made since the enactment of the law.

Current schemes included in the Act’s ambit focus only on below poverty line (BPL) workers, in the process leaving out a large swathe of this vulnerable workforce.

There should be one centralized database for all social security schemes, and access to social security benefits should be made available against one single identity number.

The vital role of the unorganized sector in softening the economic slowdown being faced since 2018: Extraordinary conditions call for extraordinary measures. Expansionary fiscal policies are the need of the hour to provide an impetus to both consumption and investment, particularly in the rural sector. It is important to design and target policy interventions differentially to make them effective, and not simply go with the more convenient option of a one-size-fits-all strategy. The idea of a “rural-led strategy is predicated on the notion that, at this juncture in time, it might be easier to revive demand in rural India than in urban India” (Kotwal and Sen 2019). “Only an ambitious public investment program can pull the economy out of the rut” (Nagaraj 2019). “Rural India seems to be the step-child of the development model being followed” (Mann 2019) postindependence.

There is a crisis in agriculture that runs deep. Employment creation is negligible. The outcome is rural distress. The economic downturn cannot be reversed without generating more purchasing power for the vast majority of the population, both urban and rural. A better way out for the government is to create MSMEs around rural clusters, which could give employment to rural labor. The government should ensure that the people who are into farming get a respectable minimum monthly income. The government has to ensure that every farmer gets a fair share of the price being paid by the consumers for his produce. To ensure this, the number of agri-markets in the country needs to increase. The government should prioritize its spending in rural areas because it is the most stressed sector in current times. Once the rural economy starts growing, the purchasing power of people will also increase. The focus must be on reviving the agriculture sector and the rural economy.

To conclude, the growing informalization of the labor market has been central to understanding the growth of the unorganized sector in India and its implications. The unorganized labor is overwhelming in terms of its number and range and is omnipresent throughout India. For one, no one even knows the actual size of the informal workforce, least of all the government. While addressing chief ministers of the states at the fifth meeting of the Governing Council of NITI Aayog on 15th June, 2019, Prime Minister declared that he wanted India to be a “$5 trillion economy” by 2024 which hinges a lot on catalyzing the unorganized sector.

The unorganized sector and the workers of the unorganized sector both can be termed as intangible or invisible because their recognition is very limited in comparison with the organized sector.. The government of India has made certain rules and acts, schemes for the welfare and development of workers of the unorganized sector, but the workers are not able to reap the benefits of the government schemes initiated for them. Protection and support for the unorganized sector workers are very necessary for both economic and social development. India has a vast potential for growth, and it must succeed in raising the income level of the poor and the lower middle class—that is the only way to usher growth. Efficient markets and effective governments, together, adapting to each other as time and circumstances change, provide the way forward in the development of the unorganized sector.

Endnotes

1. 1. Shodhganga. n.d. “Entrepreneurship.” https://shodhganga.inflibnet.ac.in/bitstream/10603/130983/7/07_chapter%201.pdf, (accessed September 27, 2019).
2. 2. The Economic Times. November 24, 2017. “Data Deficiency on Informal Economy a Matter of Concern: NITI Aayog’s Bibek Debroy.” https://economictimes.indiatimes.com/small-biz/policy-trends/data-deficiency-on-informal-economy-a-matter-of-concern-niti-aayogs-bibek-debroy/articleshow/61779298.cms, (accessed ­September 27, 2019).
3. 3. Hindustan Times. October 1, 2017. “Bhagwat Criticises Niti Aayog, Says Need to Protect Informal Sector, Farmers.” https://www.hindustantimes.com/india-news/rss-chief-bhagwat-criticises-niti-aayog-says-need-to-protect-informal-sector-farmers/story-LK66FRQhOeKRndIu4e3xCN.html, (accessed September 27, 2019).
4. 4. Fifth meeting of Governing Council of NITI Aayog. 15 June 2019. https://niti.gov.in/content/niti-governing-­council-meetings, (accessed March 2, 2020)