Inclusive Growth of India: a Study of the Informal Sector in India Essay

India’s post 1990’s economic growth has made it one of the world’s fastest growing economies in the world. Its GDP growth rates of about 9% in the last few years are historically unparalleled except by the neighbo ring China. With the rapid growth rates, however, come new challenges and new questions. One such challenging question concerns the spread of the benefits of growth across different segments of society. To ensure that growth has been well distributed, India’s Planning Commission has made Inclusive Growth their explicit goal in the eleventh five-year plan. The concept of Inclusive Growth has dominated discussions across India. Its popularity has sparked intense discussions among politicians, economists, policymakers and the general public. In addition, Inclusive Growth has been the focus of studies by bilateral and multilateral aid agencies such as the UN, World Bank, Asian Development Bank, Foundations such as the ICICI Foundation, NGOs, and Civil Society Organizations alike. However, Inclusive Growth should not be confused with Poverty Reduction Strategy Papers (PRSP). Despite all the attention that Inclusive Growth has received in the last few years, there lacks a precise and agreed upon definition of the te rm. Overall, the literature is divided between two concepts; whether the benefits reach the poor and whether the benefits reach the poor proportionately more than it reaches the non-poor. By the first definition, India may have performed quite remarkably i n the last two decades, although the magnitude is hotly debated. By the second definition, India’s performance against inclusive growth seems more lackluster. Gini coefficient indicates that income inequality in India has increased from 0. 209 in 1980-81 to about 0. 257 in 2005-06 both at an overall level as well in almost all f the states both for urban and rural areas . There are evidences suggesting that growth in the lower income states is relatively lesser than the growth in high income states. Not only this, but studies have shown that the rising disparity is also present at an intra-state level too. To address these challenges going forward, evidence suggests that there are a number of macro and micro level interventions that are poverty reducing and th us conducive to Inclusive Growth. At macro level, there is little doubt about the usefulness of the augmented Washington Consensus (Rodrik, 2006). At micro level, evidence suggests that improving the following factors will help accelerate poverty reduction : reduction of inequality, not limited to income inequality, access to public infrastructure and services especially health and education, access to markets, accountability and voice, good governance, and the role of civil society organizations, women empowerment. Inclusive growth can also be studied as a clash between the informal as the formal sector. Various literatures are available in the following context by noted economists and policy makers. A firm stand to improve the condition of the economy is subsided in the entrepreneurship sector of the country, which holds huge potential. The Indian economy today boasts of many magnificent opportunities but sadly enough, not many of them are fully utilized. The entrepreneurship front of the country epitomizes such a condition. Liberalization of economy started by the PV Narasimha Rao government in 1991 and the Information Technology boom of the mid and late 90? s have ushered in tremendous changes and set the stage for a wave of entrepreneurship taking India by storm. The capacity of Indians for entrepreneurship is substantial. However, the society and government have not been very encouraging towards entrepreneurship in India. The rankings of India have also been deteriorating in the recent years. From a rank of 2 in the field of Total Entrepreneurship Activity (TEA) according to the Global Entrepreneurship Monitoring Reports, India’s position has been slipping ever since and has reached a level rather close to the world average. In spite of the shortcomings, it ranked ninth in the survey of entrepreneurial countries by Global Entrepreneurship Monitor (GEM). India ranks the highest among a group of countries in n ecessitybased entrepreneurship, which is associated with developing countries. Conversely, it ranks fifth from the bottom in opportunity -based entrepreneurship. Indians have entrepreneurial capacity. However the society and government are not very encoura ging towards entrepreneurship. To a large extent, the Indian society is risk averse. People usually seek secure and long -term employment, such as government jobs. The physical infrastructure needs to be improved. Social Attitudes, lack of capital, inadequa te physical infrastructure and lack of government upport are major factors of hindrance. While the growth trends of India and China are similar, both had initiated different policies in their approaches. While China was mostly growing on FDIs, India was b uilding a rather self-sustaining model for growth as it concentrated on the institutions that supported private enterprise by building a stronger infrastructure for its development. The Government has encouraged entrepreneurship by providing training and also the facilities to succeed, particularly in the rural areas. One style of innovation that really works in a country as large and diverse as India, is grassroots innovation: this includes inventions for a milieu that is quintessentially Indian. The middle-class Indian has been growing rapidly in context to the global economy. In an era of globalization, a middle class of 250million and rising can be considered a â€Å"veritable gold mine†. The G7 economies account for almost 67% of the global GDP at a market exchange rate and this has been the scenario since 1965. Underpinning the performance of the G7, and indeed driving the global economy, is a large middle class. The midd le class is an ambiguous social classification, broadly reflecting the ability to lead a comfortable life. The middle class has played a special role in economic thought for centuries. It emerged out of the bourgeoisie in the late fourteenth century, a group that while derided by some for their economic materialism provided the impetus for an expansion of a capitalist market economy and trade between nation states. Ever since, the middle class has been thought of as the source of entrepreneurship and innovation—the small businesses that make a modern economy thrive. Middle class values also emphasize education, hard work and thrift. Thus, the middle class is the source of all the needed inputs for growth in a neoclassical economy — new ideas, physical capital accumulation and human capital accumulation. The role of Asia, who accounts for just les s than 1/4th of the middle class population of the world, could boast of doubled figures of the same by 2020, accounting for around 40% of the global middle class GDP. With the exception of Japan and Oceania, Asia’s rapid growth has not been driven by a la rge domestic middle class. The expansion of factors of production driving potential output has happened without a significant middle class. Saving and education have been willingly undertaken even by poor households, in the face of large returns to such ac tivities in a globalized world, as well as by governments. Technology has been imported from abroad by corporations through FDI, imported machinery and participation in global supply chains. Thus with the American consumers retreating back after facing fears of a double dip recession now, it suits well for the emerging Asian economies like China and India to step up and fill the consumption voids. Within Asia there is significant talk of rebalancing towards domestic demand (more specifically domestic consumption) as a way of sustaining growth in the face of potentially sluggish exports. But the policy prescriptions to achieve such a rebalancing are not easy. They involve creation of a social safety net, medical insurance schemes, and better public education services. In short, Asian consumption is tied in the minds of many analysts to long -term institutional changes. Given the difficulties of implementing such changes, it is hard to be very confident that this rebalancing will happen in the medium term. The lack of inclusivity is again clearly shown in the Indian scenario. The middle class consumption levels are far below the average global levels. There exist such disparities on the expenditure side due to the fact that the middle class is largely inactive in this process. Moving back to the production side of the economy, the retail industry in India has been showing tremendous potential amidst the bullish growth trends of the economy as a whole. To prove this point, we see that the penetration of the organized retail sector in the US is about 85% while that in India is just about 8% (Velagapudi, 2011). The retail industry can be divided into registered as well as unregistered sectors. The unregistered sector, which usually includes all the small grocery shops, street vendors etc, accounts for over 93% labor force. Although as seen earlier, the value added to the SDP and consequently the GDP isn’t even comparable to that by the organized sector. The initial target is to bring the contribution of the organized sector to 9-10%. Retail industry is also the 2 nd largest employment provider in India after agriculture. The penetration of organized retail will happen much faster in the coming decade, even in tier and tier 3 cities, because of the changing demographic s of our population and a healthy rate of economic growth. With good underlying economic growth, increase in disposable income, increased awareness due to penetration of broadband and mobile devices with internet accessibility, the demand for consumer goods will rise. With better systems and processes in place, all this is bound to assist in increasing the penetration of the organized retail sector in India. The organized retail market in India is expected to grow to 14-18% by 2015 of the total retail market in India from 8% in 2008. Its value is estimated to be around US$450 billion by 2015 (Mckinsey Reports). The BMI India Retail Report for the first quarter of 2011 forecasts that the total retail sales will grow to US$ 674. 37 billion by 2014, from US$ 392. 63 billion in 2011. The growing wealth with the middle-class in India, the population size and the big percentage of population being in 30s, makes immense possibilities for entrepreneurial growth in the retail sector. Some of the fastest growing segments of this industry are food & beverages, electronics and apparels. The consumer electronics segment is expected to grow at about 55% between 2011-2014, with most of the growth driven by demand for TVs, mobile devices and laptops and desktops. With changing lifestyles and habits, food segment is also expected to double to US$ 150 billion by 2025. Inclusive Growth: A Review of Literature This section is a review section of the disproportionality between the registered and the unregistered manufacturing secto rs. The causes that have been suggested by various authors through their studies have been put forward with an aim to assemble and study the registered as well as the unregistered sector thoroughly. The section starts off with the causes of differentiatio n between the registered as well as the unregistered sector and their differences in productivity , followed by how a thrust can propel the unregistered sector into the registered sector. This is followed by literature about the employment scenario in India for both the sectors and how there exists a large disproportionality. Finally the section ends with a study of the registered manufacturing sector and a study on the role of infrastructure in the economic developments. The growing divergence between the i nformal and the formal sectors, especially in the manufacturing sector can be seen as one of the major causes for lack of inclusive growth in the country. The paper by Goldar, Mitra and Kumari shows us useful evidences regarding the same. The paper claims that the economic reforms of 1991 had a negative impact on the informal sector since import restrictions had been removed and the informal manufacturing sector started facing even more stringent competition from producers whose products were of a better qu ality. It shows evidences that the value added by the informal nonagricultural sector kept on falling even though the employment rate increased from 76% in 1983 to 83% in 1999-2000, thus exhibiting a downward trend in productivity. Empirical data study suggests that the growth of employment in the informal manufacturing sector has always been higher than the employment growth rate of the total manufacturing sector (3. 3% over 3. 1% in 1961-87) which includes the period of â€Å"Jobless Growth† in the 1980s where the employment rate of the organized manufacturing sector was -0. %per anum. But when it comes to value added, the informal sector lags behind, which is the chief cause of serious concern of the Indian economy. Data trends show us that post liberalization, the value added by the informal manufacturing sector fell from 6. 1% (1980 -90) to 4. 89%(1990-2005). In this context, a paper by Sreepriya S. lays emphasis on the development of the informal sector and how government policy measures should be taken to increa se the productivity of the sector. The paper points out that in an economy which is labor abundant and is developing, the significance of the small -scale sector which is less capital intensive and generates employment for over 86% of the workforce of the country is of utmost importance. The informal sector constitutes a major component of the small sector industries in the manufacturing sector. The problem lies in the fact that 86% of the workforce only adds on 25% value to the economy, 20. 5% of the fixed capital and 16. 9% of the total output produced. A particular significant result in this context can be seen in the agricultural sector. A study by the NSSO shows us that even in 2009-10 around 67% of the rural population as well as 6. 7% of the urban populat ion is dependent on the agricultural sector even though it contributes to only 14% of the GDP. This further enhances the stand on the widening disparity amongst the distribution of income amongst the population. In a paper by Maiti & Mitra ( January 2011), the proposition is put forward that since the informal sector only caters to the local and regional demands and with ubstantial exposure to education and technical skills, the producers in the informal sector will be elevated to the formal level. With this perspective, the paper looks into the supply push component of the informal sector across Indian states. But a paper by Chowdhury (EPW August 2011) on the employment structure of India suggests that that there has been a decline in the labor force participation rate (LFPR) for both rural and urban women in the NSSO surveys of 2004-05. This, he concluded, was due to the increased interest in attaining education for the women were the cause of the fall in LFPR. Similar is the explanation for the slow gro wth in LFPR for women through 2004-05 and 200910. But this explanation does not adequately explain the employment scenario of the country. This is because the gap created by the fall in employment of the age group 15-24 due to the desire of attainment of education should have been filled up by the other age divisions. This brings forth the point that in order to attain inclusive growth the employment structure needs to be structured on stronger grounds so as to accommodate the growth as well as the metamor phosis of the informal sector. Another interesting paper by Rana Hasan shows how the Indian employment scenario is condensed in either small or large enterprises where the medium enterprises lose out completely. He suggests that the formal sector with la rge enterprises offers better perks and incentives but the layoff risks are much higher resulting in lesser job security. While in the case of the unregistered sector, it accounts for most of the total manufacturing employment. This contradiction, he explained, is due to the labor regulations which are in place within the country. A strong urge here is made to liberalize the labor market finally. Hasan used empirical and statistical data to show that 85% of the workforce of India is working in firms with a total workforce of less than 50. This suggests a strong implication that large enterprises are more productive and pay more to their workforce (as per statistics). Thus the dominance of the work force in smaller informal sectors suggests that most of the workforce has to settle for a low wages as per comparisons. Rana uses the concept of economies of scale to explain the problem of the â€Å"missing middle†. He shows as to how the highly productive large sectors are usually more capital intensive, maintaining a very low labor to capital ratio while the other traditional industries like textiles is more labor intensive. Hence since the textile industry employment rate is 12times more than that of the automobile industry; it has a significant claim on the total emp loyment structure of the economy. As our economy is more dominated by industries like the textile industry rather than capital intensive automobile industry, we can see why the middle economy is still undeveloped. A study by Das &Kalita shows empirical evidences regarding the context of inclusivity of growth in the registered sector. The paper addresses the issue of declining labor intensity in India’s organized manufacturing in order to understand the constraints on employment generation in the labor intensive sectors. Using primary survey data covering 252 labor intensive manufacturingexporting firms across five sectors—apparel, leather, gems and jewelry, sports goods, and bicycles for 2005-06, they attempted to find out the factors which constrain employment generation in labor intensive firms. Their study shows several constraints in the path of employment generation in labo r intensive sectors—non-availability of trained skilled workers, infrastructure bottlenecks, low levels of investment, labor rules and regulations, and a noncompetitive export orientation. They also shed light on the decade of â€Å"jobless growth† where the economy was witnessing an increase in output and value added in the manufacturing sector but there was no increase in the employment scenario of the sector. As per statistics, only 484,000 jobs were created in the registered factory sector between 1980-90. There are many a reasons cited amongst which it can be considered that maybe the difficulty in labor retrenchment post the job security regulations in 1970 which forced employers to shift to a more capital intensive mode of production. They also cited another reason as the capital deepening technique adopted by firms which increased the real cost of labor in the 1980s. Their study also points out towards the inefficiency of the economic reforms in migrating the majority of the workforce from the unregistered sector to the registered sector. A mere 13% employment generation of the registered manufacturing sector after a decade of liberalization highlights the inefficiencies. This was not however the case throughout the decade. As per Nagraj, the initial years of the reforms showed us a growth in the employment of the registered sector but this boom soon turned bust as the momentum could not be sustained in the latter half of the decade. As per statistics, around 1. 1 million people of around 15% of the workforce of the registered sector lost their jobs during 1995 2000. The problem of inclusive growth is again witnessed as we face a quest ion as to why the labor intensive section of the organized sector failed to generate employment potential despite good performances by some of these sectors individually.