Formalizing the Informal – the only economic reform that matters

Two incidents last week: a friend’s enthusiastically launched ‘start-up’ is downsizing in less than a  year and will probably become ‘stop-down’ soon; and another friend’s 16 year old but spacious flat has been attracting great interest from the local small businessmen, even before she has put it on the market. In other words, the money in India is inexorably moving from the formal to the informal sector. With the advent of a hefty Goods and Services Tax, the situation will only get worse. And there is little the Government can do, or is willing to do, to stop this leaching away of its legitimate tax revenue.

Given that its traditional support base has always been the urban business class, the ruling party is unlikely to take stringent action against this class which is the biggest beneficiary of that twilight zone of the informal sector that now covers over 68% of the economy of India’s commercial capital – Mumbai.

By promising greater ease of business to attract domestic and foreign investors, the business-friendly and business-financed central government has weakened the regulatory framework to such an extent that it has opened the floodgates for environmentally irresponsible infrastructure projects, and the exploitation of child labour – now legitimized by allowing children to work in family businesses or ‘learn’ traditional crafts. (Though there is hardly any skill or craft to be learnt, at the cost of regular schooling, to serve tea in your uncle’s roadside cafe, is there?)

Not quite familiar with consumer preferences in the West and the growing importance of ethical supply chains (especially among EU importers), both the Indian Government and the Indian business community are at a loss to understand why foreign direct investment in the country continues to remain sluggish.

But domestic consumption continues to grow and this demand is increasingly being met by informal and semi-informal enterprise, both in services and light manufacturing. As a result, quality and safety standards are readily sacrificed to cut costs. Ever wondered why a plumber or carpenter brings along a drill with bare leads which he pushes into the nearest electric socket? Because there is no standardization in the electric fittings produced cheaply in some back alley, and no two plugs/sockets in India will ever be compatible… This haphazard style of ‘making do’ with whatever is available then gets eulogized in management books as the inherent Indian genius of ‘jugaad’ while its corollary of ‘Chalta hai’ or ‘anything goes’ is blamed for every social evil from corruption to traffic snarls… God save us from management gurus.

But what of the workers in the informal sector? Most of them are likely to be poor male migrants from the North, with little education and only the skill of their specialization – which means they are exclusively employed in the construction, interior design or garment sectors. They also tend to belong to the lower castes and religious and ethnic minorities who have few opportunities for education and development on their home soil. They are ready to live and work in abysmal conditions so long as they make good money, to look after their families back home. In essence, as the informal sectors of the economy expand, so do the slums and informal settlements in a city – with all the concomitant consequences of anomie, alienation, violence and crime.

And as the formal sector keeps shrinking under the onslaught of the informal, the job market shrinks, and those lucky enough to be born into a higher caste/class and able to afford the qualifications to work in the formal sector, are so grateful to find a job – any job – that Indian workers report the greatest sense of well-being in their jobs, while paradoxically also being the hardest working, as these two Statista infographics indicate:

Percentage expressing well-being at work:

Working hours of Millennials (20-34 age group):

The point is that no amount of policy tweaking can swing a country’s economy this way or that because the way the economy works is inexorably tied to the way that society is organised. And all economic reform must necessarily be underpinned by social reform – greater equality of opportunity, inclusion, universal education, equitable regulation … and so on…