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:
- Contract workers
- Trade services
- Bullion markets
- Cinema production workers
- Retail shops
- Self employed professionals & skilled workers
- Street vendors
- Small industrial workers
- Domestic helps, drivers etc
- Garment workers working from their homes
- Informally employed personnel of formal enterprises
- ... and many more
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.
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.