RSTV: THE BIG PICTURE- FORMALISING INFORMAL SECTOR

Print Friendly, PDF & Email

RSTV: THE BIG PICTURE- FORMALISING INFORMAL SECTOR


Introduction:

            A vast majority of India’s workforce is informally employed – those who work outside of formal establishments, in un-incorporated private enterprises and mostly without any social security benefit. A new research now finds that Modi 1.0’s reforms and policies have managed to push ahead with the greater formalisation of the country’s workforce. More than seven million jobs have been formalised between 2015 and 2018, a study commissioned by the Indian Staffing Federation stated. The policies that contributed to formalisation include the introduction of the Goods and Services Tax, demonetisation, EPF reforms, Skill India initiatives, Fixed Term Contract Reform, as well as the Maternity Benefit reform. These reforms could contribute to even more of India’s workforce transitioning to the formal, going ahead. The study, projects, that about 11 million more jobs will move to the formal sector between 2018 and 2021. Of the seven million jobs that shifted to formal sector in 2015-18, EPF reforms contributed 18.16 per cent, ESIC 17.68 per cent, GST 15.32 per cent, Skill India initiatives 13.10 per cent, demonitisation 12.35 per cent, maternity reforms 11.83 per cent, and Fixed Term Contract 11.56 per cent.

Informal Sector:

  • NSSO defines the informal sector enterprises as all unincorporated proprietary and partnership enterprises.
  • National Accounts Statistics (NAS) defines the unorganised sector in addition to the unincorporated proprieties or partnership enterprises, includes enterprises run by cooperative societies, trust, private and limited companies. The informal sector can, therefore, be considered as a subset of the unorganised sector.

Job formalisation Data:

  • 16% of estimated 500M workplace is in the formal sector.
  • 06M jobs formalised between 2015 and 2018.
  • 08M jobs formalised with introduction of GST.
  • Demonetisation contributed around 0.87M into formalisation of jobs.
  • EPF, ESIC reforms contributed the most of 1.28mn and 1.25mn respectively.
  • Informal sector now account for 83.8% of the total workplace in 2018: ISF report
  • 03M more jobs will be formalised between 2018 and 2021.

Government push for formalisation:

  • Informal operations pose many challenges to the government, like the inability to raise tax revenue, collect data, and regulate firms.
  • India’s informality is one reason why its tax-to-GDP ratio has been stuck, impacting education and health care.
  • Formalization will help individuals and firms grow and achieve scale and productivity.
  • Due to more revenues to the government the tax to GDP ratio will increase which might lead to more investment in social sector.
  • Transitioning economy towards formality could bring benefits by establishing the rule of law and the equality of rights between citizens, entrepreneurs and workers.
  • Formalisation will spur growth.
  • More direct tax payments by individuals as well as enterprises will not only create fiscal space for lower GST rates but also provide incentives for citizens to demand better governance.
  • It becomes tough to involve in money laundering and illegal activities as transparency will increase.

What are the steps taken in this respect?

  • Threshold limit to EPF has been lowered from Rs 21,000 to Rs 15,000.
  • ESIC have been reduced from 4% to 3.3%.
  • Startup Framework momentum is the reason.
  • Earning upto 5 lakh (60%-65% workforce fall into it) are now exempt from income tax.
  • Government has been focusing extensively on water which is the key component in reducing the burden of water borne diseases.
  • GST and Demonetisation had different intention but have nudged the particular behavior and resulted into formalisation.
  • Now, technology is forcing a change. It is enabling the entry into the formal economy.

Challenges:

  • In manufacturing sectors, temporary employees continue to exist who get affected when there is a downturn.
  • Startups who get funded are mainly in technology disciple, they donot generate the kind of jobs country needs, white collared jobs are generated by them that too replacement jobs.
  • Need to make distinction between capital investment and job creation because that linkage is broken now.
  • Incentive should be given on the value of one’s investment.

Way Forward:

  • Government needs to focus on agriculture which has large percentage of informal workforce.
  • Improvement in skill levels of the workforce needs to move beyond age group, it should cater both service jobs and not just blue collar workers.
  • Credit support to help small scale industries stand on their own is crucial step in bringing them to the organized sector.
  • Need for Labour law reforms to reduce the regulatory cost of employment.
  • Capacity building and helping business to strengthen so that they are able to formalize.
  • Tax Incentives should be given to the groups who have contributed for formalisation of laborers.
  • Complying with law must become easier and in parallel law enforcement should become more effective.
  • For example in Chile and Peru inspectorates provide training for micro and small enterprises (MSEs) to comply with the law.