Shocks in the informal sector – Opinion News

Among a number of factors, India’s growth story also depends on the health of the large number of unincorporated non-agricultural enterprises — which are not legally registered as companies — that belong to the informal sector. These small companies, which are beyond the reach of institutional protection, contribute 28 to 30% of the national production of goods and services or GDP and 40% of employment. These companies are not only autonomous entities, but also support the incorporated or formal sector, acting as suppliers and service providers, thus forming an integral part of the national value chain. According to the latest fact sheet from the National Institute of Statistics, the number of unincorporated businesses increased to 65 million in 2022-23, up from pandemic lows of 59.7 million in 2021-22, while also adding 11 .7 million workers to 109.6 million. At first glance, it indeed appears that this sector is showing resilience after the shock of the Covid pandemic and exhibiting a significant capacity to generate employment.

However, the informal sector has been hit by shocks other than the national lockdown to combat the Covid pandemic. The sector was hit by demonetization that took high-value banknotes out of circulation in November 2016 and by the implementation of the offer of goods and services tax in July 2017. As cash accounts for the majority of transactions in India, demonetization dealt a severe blow to unincorporated businesses, impacting daily wage earners in urban areas as well as villages. There was no money pay salaries to about 46% of unorganized, casual or contractual workers. Around 65% of daily wage earners were left without work in urban areas as informal businesses closed their doors and returned to their villages. Pronab Sen, then country director of the International Growth Center’s India program, argued that the severe liquidity crisis may have permanently damaged the informal sector.

The result is that the informal sector has not fully recovered from these shocks. While employment generated by unincorporated non-agricultural enterprises in 2022-23 is impressive, it still remains below pre-demonetization levels. As against 109.6 million in 2022-23, there were 111.3 million workers employed in this sector, according to the survey carried out on these companies between July 2015 and June 2016. Sen told FE that if this sector had not faced After these disruptions, the number of companies — which typically increases by 2 million annually — would have been around 75 million. In effect, 10 million businesses were lost. As a typical unincorporated company employs between 2.5 and 3 people, close to 25 to 30 million jobs were lost in the process. Employment in unincorporated industrial companies suffered the most, falling to 30.6 million in 2022-23, compared to 36 million in 2015-16.

While the health of unincorporated companies is, therefore, far from resilient, what can policy do to improve the situation? The government can certainly help by ensuring they have access to more formal credit for their working capital needs, as well as guaranteeing term loans so they can grow organically and become more formalized over time. If the majority of their credit needs are not met by banks because they do not have the necessary documentation, they have no alternative but to access informal credit markets and pay usurious interest rates. The global need is to restore the vitality of this sector so that it continues to contribute to the country’s rapid economic expansion process.

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