Wednesday, 8 February 2017

Informal economy in India, is going to stay

The informal economy is in opposition to formal economy, meaning it included all income earning activities beyond legally regulated enterprises. This sector produces and distributes legal goods and services. The informal sector does not include the criminal economy that produces illegal goods and services. People of all societies regularly adjust their activity within economic systems in attempt to evade regulations.

In India, for historical reasons, informal economy is most prevalent where most transactions are CASH based, has GDP share of 55% and provides livelihood to over 90% of people who are less educated and less skilled and are not employable in formal sector. They are perfectly legitmate but are neither regulated, nor monitored and most doesn't pay income tax with most people's earnings at below free limits of income tax slabs. Most women workers work in informal sector.

Although the informal sector makes up a significant portion of the economies in developing countries it is often stigmatized as troublesome and unmanageable. However the informal sector provides critical economic opportunities for the poor and has been expanding rapidly since the 1960s. As such, integrating the informal economy into the formal sector is an important policy challenge.

The components of informal economy are:
  1. Agriculture
  2. Construction
  3. Contract workers
  4. Trade services
  5. Bullion markets
  6. Cinema production workers
  7. Retail shops
  8. Self employed professionals & skilled workers
  9. Street vendors
  10. Small industrial workers
  11. Domestic helps, drivers etc
  12. Garment workers working from their homes
  13. Informally employed personnel of formal enterprises
  14.   ... and many more
Workers in the informal sector typically earn less income, have unstable income, and do not have access to basic protections and services. Informal businesses lack the potential for growth, trapping employees in menial jobs indefinitely. On the other hand, the informal sector can allow a large proportion of the population to escape extreme poverty and earn an income that is satisfactory for survival. Some people would earn more money through their informal sector work than at a job in the formal economy. Even if workers made less money, working in the informal sector offered them more independence, the chance to select their own hours, the opportunity to work outside and near friends, etc. While jobs in the formal economy might bring more security and regularity, or even pay better, the combination of monetary and psychological rewards from working in the informal sector is appealing for many workers. Some people who are formally employed also choose to perform part of their work in the informal economy to make some extra money for their family well being.

Governments feel that their inability to collect taxes from the informal sector is hindering in financing public services is devoid of any merit. Collecting small amounts of taxes from very large numbers employed in informal economy comes with huge expenses and doesn't make much sense or profitable. Informal economy doesn't pay direct taxes bwhich anyway is only a fraction of the indirect taxes they pay on goods they consume. On the contrary informal economy mitigates unemployment issues by providing casual work to unemployed laborers. Government needs to recognize that the informal economy produce significant goods and services, create jobs, and contribute to imports and exports which is critical for governments.

Poverty, illiteracy and lack of skills are the prime reasons for booming informal economy and their reluctance to regulation & taxes at all costs. As country becomes more educated and more prosperous, over time, automatically informal sector will migrate to formal economy for protection and benefits it provides.

In capitalism man exploits man; in communism it is the other way round. 
No good man has ever made fortune in this world.

 In general, amassing of wealth is associated with exploitation of people or 
looting governments or destruction of ecological assets.

My View:
Modi having thoroughly mismanaged and messed up economy during first half of his tenure, despite favorable GDP growth and low oil prices, brought the country to near junk status and public sector banks to the brink of collapse. Desperate he was, saw an opportunity to rob off the wealth from 'cash hoarders' running into several lakhs of crores of rupees with a stroke of pen, secretly planned without consulting any one and without even pretense of process of law, demonetized Rs.500 and Rs.1000 notes, plundered and laded the nation into instant disaster. Of course, he was more eyeing on publicity it could generate as a lone crusader against the evils of corruption & black money, to win UP & Punjab elections. Even though several countries considered demonetization as a weapon to fight corruption and black money menace but didn't dare to venture due to its complexity, size, uncertainty, collateral & pernicious damages and unintended consequences. Which ever country did demonetization in the past had bitter experience and faced disastrous consequences. While Modi could generate much publicity for himself but the problems faced by poor, vulnerable and rural masses put him in dilemma of converting publicity into winning much needed in UP & Punjab elections votes. His leadership ability is in a big question now.

Migration of informal economy into formal sector is a matter of policy challenges for the governments and for a populous, poor, illiterate and underdeveloped country like India it is long road, which will happen steadily overtime with development, prosperity & education. What Modi has done is carpet bombing and destroying the existing informal economy and all its working capital now with banks attempting to expand formal economy ignoring its adverse impact on livelihoods of poor & vulnerable people destroying their stable livelihoods, will not work anyway. He will go down in the history as a worst leader India ever had.

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