Macroscan . Is ‘formalisation’ of the non-farm economy possible?

In recent times, the clamour for formalising economic activity, or shrinking its unorganised component and expanding the organised, has been heard from diverse sources. There are those who want formalisation to occur because the unorganised sector is seen as being largely outside the direct and indirect tax net, depriving the government of much-needed resources.

Hence, for example, one feature seen as favouring the Goods and Services Tax regime is that it is likely to force formalisation by requiring transactions to be recorded whenever those transactions are between the organised and unorganised units.

Others see formalisation as the process through which workers realise workplace benefits such as written contracts, legal minimum wages, paid leave and social security. Framing and implementing legislation that ensures workers one or more of these benefits is seen as transforming the nature of the workplace as well. This, however, ignores the fact that a substantial part of the workforce even in the organised sector is “informal”.

Yet others see in formalisation a process of transferring workers from low productivity units to higher productivity units. So anything facilitating formalisation also contributes to a rise in average productivity and growth.

Favourable for women?

Finally, there is a perception that since women obtain the residual jobs in the labour market, they are the ones more likely to be involved in informal work. So formalisation is often seen as particularly favourable for women, improving the conditions of their work and the remuneration received.

However, there has been a sharp fall in women’s labour force participation rates, from 42.7 per cent in 2004-05 to 31.2 per cent in 2011-12. In addition, women do not feature predominantly in a sector that accounts for the largest increases in employment in the non-agricultural sector. Construction accounts for a substantial share of non-agricultural employment, with the figure having risen from 14.4 per cent in 1999-00 to 30.1 per cent in 2011-12. There were 51 million construction workers in 2011–12, 93 per cent of whom were in the unorganised sector. However, men constituted 82 per cent of the construction workforce, with women contributing just 11 per cent and children (aged 18 years or less) 7 per cent.

Implicit in all of these perspectives on the unorganised sector is the idea that it is a site for units that reflect an early, backward stage in a process of linear development. In this view, economic development is an inexorable process of formalisation and the aim of policy should be to accelerate that process.

Growth drivers

However, the evidence increasingly shows that the factors stimulating growth and determining the institutional features of the organised and unorganised sectors are quite separate. The drivers of growth do not necessarily ensure the displacement of the unorganised by the organised.

Of course there are strong linkages between the organised and unorganised sectors, which influence the profitability and/or survival of both. But these linkages are not the means through which the organised pulls the unorganised into its own fold. Instead, most often, organised-unorganised sector linkages reproduce and perpetuate the backward unorganised sector. These features of the dualism characterising economic activity in a country like India are partly reflected in the size and nature of the unorganised sector.

NSSO survey

A recent survey that provides information on the unorganised sector is the National Sample Survey Organisation’s 73rd Round survey of Unincorporated Non-Agricultural Enterprises (excluding Construction) in India. The survey, relating to 2015-16, covered unorganised enterprises except those in construction as well as units registered under the Factories Act, Beedi and Cigar workers (Conditions of Employment) Act, and the Central Electricity Authority.

Going by the survey, there were 111 million workers (including part-time workers) working in unincorporated non-agricultural enterprises excluding construction, or about a quarter of the workforce of 459 million workers employed in that year. This implies that unorganised sector employment in construction even in 2011-12 accounted for more than 40 per cent of workers in the rest of the non-agricultural unorganised sector in 2015-16.

A noteworthy feature is that those employed in the unorganised non-agricultural sector were rather evenly distributed across rural and urban areas with urban workers accounting for 55 per cent of the total. To the extent that it could be argued that units located in semi-urban and rural areas rather than in urban areas would be less advanced and unlikely to be precursors of more productive non-agricultural activities, this distribution suggests that these activities persist and proliferate because of the absence of more ‘decent’ jobs in the organised sector.

Interestingly, these non-construction jobs in the unorganised sector were more or less equally distributed across manufacturing (32.4 per cent), trade (34.8 per cent) and ‘other services (32.8 per cent). This would imply that there were 36 million workers engaged in unorganised manufacturing in 2015-16, as compared with just 14.2 million employees (of which 11.1 million were workers) in the registered manufacturing sector.

If there is one sector in which formalisation possibilities are like to be the highest, it is manufacturing. So the fact that those employed in unorganised manufacturing are two-and-a-half to three times the number engaged in organised manufacturing indicates starkly the limited degree to which the transition to ‘formality’ has occurred.

There are two other features of non-construction, non-agricultural unorganised employment that are striking. One is that the share of female workers was the highest in manufacturing (52.67 per cent) followed by ‘other services’ (25.91 per cent) and trading (21.42 per cent). To the extent that residual jobs accrue to women because of the gender bias in labour markets, this indicates the kind of manufacturing jobs that are being generated in the unorganised sector. The second is the high share of trade and services in unorganised sector employment outside of manufacturing.

Overall, the persistence and spread of informal work suggests that current official attempts at formalisation are simply not working.

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