Atmanirbhar Bharat & the informal sector

It requires infusion of capital to ensure enhanced labour productivity and higher wages. (Representative image)

By DPS Negi & Sumit Kumar

The overarching vision of the Atmanirbhar Bharat envisages self-reliant economic development via ‘vocal for local’ and ‘make for the world’ approaches. India’s vast informal sector is poised to play an instrumental, decisive and an intriguing role in this vision. But the sector, in its current form, appears severely constrained to harness the opportunities under this vision. In addition to being unleashed from growth-stifling constraints, it is bound to undergo three major transformations in and for atmanirbharta.

The vision of the Atmanirbhar Bharat is rooted in classical paradigm of economic development, based on demand injection in the economy via two sources, domestic and external. ‘Vocal for local’ exhorts a distinct and decisive shift in consumer preferences towards locally-produced goods and services. ‘Make for the world’ is more ambitious and resembles the export-led growth strategy adopted in East Asia. Thus, the Atmanirbhar Bharat categorically bestows the Indian economy with twin engines of growth.

The strategy is based on an assumption of lack of adequate demand, so a prognosis of supply side with respect to the ability of domestic producers of goods and services to seize the opportunity at the requisite scale and scope is pertinent. The nature, character, structure and contributions of the informal sector require retrospection.

The size of India’s informal sector is massive and so is the extent of diversity therein. It accounts for about 50% of GVA and a major share in the export basket. This position proffers it with growth opportunities emanating from domestic as well as external sources. As a corollary, a large portion of prospective demand injection from the Atmanirbhar Bharat is bound to trickle down to the informal sector, directly or indirectly.

However, the informal sector is plagued by various constraints. Most firms are micro in size and deploy little capital. They have a small scale of production, substandard/unbranded quality of products, and localised scope of procuring raw material and marketing their products. They are vulnerable to business downturns and other market uncertainties, as reflected in high mortality. Their access to cheap, reliable and long-term credit sources is highly restricted. The sector also endures a lack of official identity and recognition of its existence and contribution.

Atmanirbhar Bharat promises enhanced demand for domestically-produced goods and services, but the exposure to stiff global competition, especially for informal sector units, is imminent. Goods and services produced in the informal sector must conform to global standards, if not exceed them, and at a competitive pricing. Reconciling the hand-to-mouth existence of units in the informal sector with their stipulated globally competitive role in Atmanirbhar Bharat is a Herculean task. In such a scenario, the informal sector must embrace for three tectonic shifts with respect to internal transformation, strategic positioning and labour-market dynamics.

One, enterprises must undergo drastic internal transformation, progressively converging at incremental formalisation through spontaneous and self-propelled transition into economically-viable units. It requires infusion of capital to ensure enhanced labour productivity and higher wages.

The entrepreneurial energy in this sector must be unleashed from growth-stifling constraints, mentioned previously. A systemic disruption, fostering natural growth must be ushered in, which would also curb the birth of new informal enterprises. Moreover, internal consolidation in the sector via merger and acquisitions of units would bring benefits accruing from scale economies.

Two, because the vision of the Atmanirbhar Bharat exposes the informal sector to global competition, entrepreneurs must embrace the subtle art of strategic positioning in global mega-supply chains. They must pick their products and markets with utmost care, and engrain two mantras of success at the global stage in the DNA of their business strategies. Global mega-supply chains demand ultra-flexibility in production cycle in addition to heightened resilience to withstand headwinds emanating from not just domestic factors but also global.

Three, India is a labour-surplus economy. The informal sector employs more than 80% of India’s workforce. The changes in the first two spheres (higher capital intensity-led enhanced labour productivity and ultra-flexibility in production cycles) may have severe repercussions on the availability and quality of jobs in India.

To alleviate these concerns, the first assumption is that the proportionate increase in expected demand must be more than the enhanced labour productivity to at least retain the currently employed workers. But we also must be mindful of getting trapped in catch-22 spiral. To continuously employ current workforce, we need to incrementally corner an extra chunk in product market, which necessitates increased competitiveness, being led mainly but not solely by enhanced labour productivity which tends to make a part of the workforce redundant cyclically.

To generate good quality jobs, diversification (both horizontal and vertical) must be encouraged. Vertical diversification entails products not just be partly produced or assembled in India, they must be the end-products of fully indigenised and integrated production and supply chains, from design to made in India. Horizontal diversification involves expansion into newer products and markets, smartly aligning with India’s comparative advantage of surplus labour.

Thus, the vision of the Atmanirbhar Bharat is an inflexion point for India’s informal sector, which stipulates adroit manoeuvring between contrasting forces of continuity (persistent and pervasive informality) and change (incremental formalisation). Atmanirbharta must embrace informality via factoring in these three transformations and nudge it towards incremental and spontaneous formalisation.

Negi is chief labour commissioner and DG, Labour Bureau; Kumar is a subject matter expert with the Labour Bureau. Views are personal