Two faces of an Economy in predicament

Two faces of an Economy in predicament

By Achla Savyasaachi

A significantly large population in developing economies across the globe are part of the informal economy. In India, almost 90 per cent of the country’s workforce earn their livelihood as informal workers as per the Economic Survey 2019-20. An IMF policy paper (February 2021) estimated their contribution to the country’s Gross Value Added (GDP+ subsidies on products-taxes on products) at 53.9% in 2011-12. However, it pointed out that it has “improved” only marginally to 52.4% in 2017-18.  

This underlines the systemic importance of the informal economy and yet hesitant to consider it more than just a less desired partner of the Indian economy. 

The profile of the ’informal’

India’s informal-unorganised sector is one of the largest, if not the largest, in the post-industrial economy. This sector is constituted of self-employed informal enterprises- small and unregistered, and wage-based employment without transparent employment terms and conditions in both informal and formal enterprises.

According to the “the Unorganised Sector Report on Conditions of Work and Promotion of Livelihoods 2007”, most of them are ‘own account enterprises (OAEs)’, more so in the rural areas, where they account for nearly 94 %. Nearly 37 % of the OAEs have assets worth less than Rs.5 thousand. Barely 8 % of all OAEs and about 17 % of the urban OAEs had an investment of more than rupees one lakh. Most of these enterprises are engaged in survival operations to meet household expenses rather than carrying on with a business activity in the proper sense of the term. 

The NSSO January 2012 report titled “Informal Sector and Conditions of Employment in India” (NSSO 66th round) brought to the fore conditions under which informal workers toil. It pointed out that nearly 81 % in the rural areas and 74 % in urban areas work under uncertainty with no security of income and no written job contracts.

Kannan, a development economist and a member in the erstwhile National Commission for Enterprises in the Unorganised Sector, has described the profile of the informal economy:  “…. [from] the millions of agricultural labourers and poor peasants producing food grains and processed foods, hewers of wood and drawers of water, workers who load and unload goods at scattered points of trade and commerce across our vast nation, [to] rickshaw pullers, barbers, and washer(wo)men, manual scavengers and garbage pickers, street vendors and domestic servants, auto-rickshaw and taxi drivers, brick kiln workers and construction workers.”

This list can be expanded to include skilled, semi-skilled and unskilled hands employed in value chains of numerous industries. Several get absorbed in the informal labour market and others build their artisanship.

These numbers are likely to increase rapidly in the years to come. Somini Sengupta, a New York Times journalist in her book on India’s youth ‘bulge’ pointed out that at nowhere can the pressures of the youth bulge be felt as much as in India. It said that every month for the next several years, one million Indians would turn 18. This scenario stands to reason that most of these hands will look for livelihood in the informal economy. The so-called demographic dividend can become a serious problem for society and the economy if their expectations and aspirations are negated. 

For these reasons India, therefore, cannot consider that the informal economy is a temporary phenomenon anymore.   Their abundance and availability have put them in a disadvantageous position- they do not get a fair share (wage) commensurate to their contribution. They remain unprivileged, informal, and unattended.  

In March 2020, when the country completely shut down its social-economic life after the breakout of the Coronavirus, “formal” India watched nationwide the life frame of their “informal” fellow citizens unfold. Millions walked back home hundreds of kilometres, penniless, full of fear and uncertainty. The impoverished conditions of a dynamic economic force of the millions of these informal citizens were starkly visible to the entire nation. 

The hiatus between “the informal” and “the formal” became even more conspicuous.

Agency of informal players

Informal economic players are the custodians of a variety of skills acquired while earning their livelihood or when taking family work forward. These are passed down for generations. They hone these skills to create a niche with agility, yearning to remain relevant to the market. Over the decades, they have acquired an invaluable capacity to undertake the foundational work in manufacturing units and keep the service industry’s pulse alive. 

All this happens without any formal education, and under conditions of poverty.  Studies show the resilience of India’s informal economy in the face of inequalities in incomes and asset distribution. The agency of these informal economic actors contributes significantly to making the formal economy competitive in the national and international markets. Informal economic outfits function with their intangible capital (skills, diversity regarding products, agility to adapt to timelines and working conditions, orientation to work on trust, and ability to move their base). This distinct feature of the informal workers serves the formal economy’s best interest.  

However, they fail to get a fair return on their work. 

In relation to the formal economy the informal economic players are poor and resource-less. If they are skilled, the loss is much more significant as they lose their entrepreneurial status and become low paid labourers on account of of limited or no access to ‘tangible capital’. Capital the most crucial element for formal economy does not recognise intangibles. The intangible asset base cannot fit into the existing definitions of capital. They thus get excluded. 

At the same time, by their sheer numbers, they are perhaps the most significant consumer segment of services and goods produced by the formal economy.

Formal incredulity

Neoliberal economists have laboured to deploy one size fit all solutions to all developing economies in aid of transnational capital and put the informal economy as a fuzzy concept with multiple interpretations and meanings (e. g. small/primitive activity; unlicensed/unregistered; untaxed; work without rights). 

The neo-liberal theory considers the informal economy a marginal and deviant force. It is viewed with suspicion and scorn. It remains on the periphery of political debate. It is considered to be a hindrance to formal growth, prosperity, and innovation. It pays no heed to the work done by active-anonymous hands driving and navigating the formal economy.  

A report from the McKinsey Global Institute describes informal firms as parasites competing unfairly with law-abiding formal firms (Farrell 2004). It adds that informal entrepreneurs add little value. It concluded development of formal firms will bring an end to informal economy.

Levy (2008) stressed that the advantages enjoyed by informal firms and workers come from “avoiding taxes and regulations”. 

For example, on the one hand, the mainstream financial sector doubts the repaying capacity of “informal economic players”, thus excluding them from the formal financial resource structures. On the other hand, the formal economy in India owes 9.5 lakh crores as non-performing assets (NPAs) or bad loans to the banking industry (in several cases a wilful default – a criminal act under law) before COVID and Rs 8.34 lakh crore at the end of March 31, 2021.

Economists Rafael La Porta and Andrei Shleifer have questioned the role of informal firms in economic development while recognising their importance for providing a livelihood for billions of people.  

In ‘A Classical Theory of the Informal Sector’, Bill Gibson and Bruce Kelley concluded that as per the existing literature, the informal sector arises from the capital-limited nature of the economy. Where capital is not in short supply, all activity would be formal. 

There is a perception that people outside the formal economy are only fit for welfare interventions. However, the welfarist approach can only extends intermittent benevolence. It fails to meet the dire need for a systematic integration of their economic activities, financial support and capital advancement when designing policies. 

It is of significance that in October 2017, there was a ‘liquidity infusion’ of Rs 2.1 lakh crore into banks to bail out bad formal financial sector decisions by good public money. 

What makes someone’s ‘informality’ worthy of investment is the trust and knowledge of his/ her agency. The mainstream formal economy lacks the cognitive apparatus to see agency in informality. In her article in “Social Policy and Society”, Ruth Lister commented that the mainstream sees the informal sector worker as passive welfare ‘dependant’ rather than considering them as economic agents with a difference.  

Stuart Rutherford, the originator of the ‘financial diaries’ research methodology, underlined in ‘The Poor and Their Money’ that the only way the poor can source tangible capital to meet social and economic needs is through ‘saving down’. For this, they must first be provided with a loan and then savings be used to repay the loan over time. These loans are to be considered as advances against future savings. 

The question is, who would provide for the informal economy with known and unknown limitations? 

John F. Tomer in ‘Intangible Capital’ argues that when we understand that intangible capital is an essential aspect of productive capital, it will be possible to include millions of critical productive units that do not fit the mainstream definition of productive capital. He points out that intangible capital has two aspects. First is the high cognitive value acquired with formal education and training to enhance the productivity of formal tangible capital. Second is the non-cognitive qualities of intangible informal social capital, which these “peerless citizens” have. It helped ‘them’ be more motivated, persistent, empathetic, patient, and focused on performing goals.  

Further, he argues that the conventional understanding of tangible capital can be owned and traded and is productive wealth.

Here, capital and labour as factors of production are considered two distinct and opposite concepts. However, when capital is extended to include intangible human factors and merges labour into capital, sociolinguistic and politico linguistic considerations disturb the conventional patterns and distinctions. 

Some thoughts to ponder

JPS. Uberoi alerts us to the struggle of language (sociolinguistic) to new ideas when challenging the established norms in his work in ‘Mind and Society’. He says that in a system where ‘caste’ and ‘varnas’ lay the foundation for social structures that heavily determine access to resources and capabilities, it follows [that] any situational analysis to understand the limitations and inaccessibility will be conditioned by the accepted norms and will only build on the existing structures. Any disturbance to the established traditional patterns and distinctions will face sociolinguistic and politico linguistic barriers. 

The cognitive values of the macroeconomy frame the poor with these limitations. As informal participants in the economy, they by far remain outside the macro economy’s worldview and epistemologies, leaving them in the status quo in permanence. Their intelligence is spent on keeping their survival instinct alive.

These life situations strongly create a sense of great urgency to sort out issues concerning the informal sector in India. 

In order to integrate them into the nation’s economy, their socio-economic role needs to be acknowledged and redefined to respect them and their agency. It is vital to define both tangible and intangible resources economically active poor have and theorise them into economics. That is the only way to recognise the ocean of informal units as necessary economic units and value this vast segment’s role in building a resilient society and nation-state. Any effort to make the desired inputs (tangible and intangible) available to the informal economy would require complete clarity on the policy front to recognise them as a systemically important segment for the mainstream. 

(The author is the Head of State Initiatives at MFIN (Microfinance Institutions Network). For the last two decades, she has worked for the financial inclusion of the unbanked population working in India’s informal economy. She has extensively engaged with stakeholders across the spectrum in rural, urban, and tribal pockets encompassing the country. The views expressed in the article are of the author and do not reflect the official position or policy of Financial Express Online. She can be reached at

Check the source here –Source, Financial Express.