India's Unorganized Sector Is Being Engulfed

The disjuncture between the growth of the corporate sector and declining businesses in the unorganized sector presents the stark reality which is engulfing India’s unorganized sector.

Difference Between Organized and unorganized Sector:

Some statistics

• Reserve Bank of India Data:
  • Sales of companies surged 41% and net profits increased by 24% over the last year.
  • The corporate sector surge far exceeds the growth of the economy.
  • If one component of the economy is rising so rapidly, the other part, the non-corporate sector in the industry, must be shrinking.
• Unorganized/Informal sector in India
  • Around 80% of India’s labor force is employed in the informal sector and the remaining 20% is in the formal sector.
  • Of the 80% informal sector workforce, half work in agriculture and the remaining in non-agricultural sectors.

Government Argument:

• Tax revenue has grown 52.3%: The tax collection has been robust, so the economy is doing well.
  • But we must understand that this does not reflect the unorganized sector where most incomes are below the taxable limits and which is exempt from the Goods and Services Tax.

The shift in demand to the organized sector:

• The growth of large companies is surging because the smaller units aren’t doing well. It is visible in sectors such as luggage manufacturing and the pressure cooker industry.
• The rapid expansion of e-commerce at the expense of neighborhood retail stores is one of the possibilities for this surge.

Does the entire unorganized sector is declining?

• The answer is no. But there are numerous issues:
• Some units are suppliers to the small and medium sector units which in turn are suppliers to the corporate sector.
• The growth of the corporate sector has benefited these units.
• But many times, these payments are delayed by the larger units.

What are the issues?

• Bearing the cost: The unorganized sector cannot cope with changes that increase its costs. On the contrary, the organized sector is already largely digitized and formalized.
  • It has gradually shifted the demand from unorganized and small units to larger ones, spurring their rapid growth.
• Colonization of the unorganized sector: Although the GST was designed to formalize the economy, in many cases, the market of the unorganized sector is being captured by the organized sector.
• Digitization and formalization: The government argues that Digitization and formalization can improve businesses.
  • curb tax evasion and more taxes will be collected
  • better services can be provided to the marginalized.
• Growing Divide: A Survey of incomes by PRICE released at the start of this year shows the growing divide between the top 20% and the bottom 60% in the income ladder.

• The unorganized sector isn’t prepared: The GST, digitization, and formalization are setting the rules of the gains in favor of the organized sector at the expense of the unorganized sector.
• Capturing the Markets: As the production of the unorganized sector declines, the produce of the organized sector finds new markets for its expansion.
• Data Availability: Unorganized sector is ignored in data; policies also ignore it even though it employs 94% of the workers and produces 45% of the output.

Need to be done:

• More inclusive Approach: Schemes like MUDRA loans and Start-up India are helping the youth carve a niche in the organized sector.
• Simpler regulatory framework: The transition of the informal sector to the formal sector can only occur when the informal sector is given relief from the burden of regulatory compliance and is given enough time to adjust to the modern, digitized formal system.
• Financial Support for Formalization: Giving financial support to help small-scale industries stand on their own is a crucial step in bringing them to the organized sector.