‘Around half the GDP comes from the informal sector’

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: KP Kannan, a member of the National Commission for Enterprises in the Unorganised Sector, is one of the country’s foremost experts on the informal sector and labour markets. He has served in various capacities on national and international bodies, including those of the ILO and UN. A fellow (and former director) of Centre for Development Studies, Thiruvananthapuram, Kannan is conference president-elect of the Indian Society of Labour Economics for its golden jubilee conference in December. He was also recently awarded the first VVGiri Memorial Award in Labour & Development. In an interview with FE’s P Raghavan, Kannan elaborates on the role and prospects of the informal sector. Excerpts:

You have been a leading expert on labour markets, especially in the unorganised sector. What is the most striking aspect of this sector in India, compared with other emerging economies?

The most striking aspect of the informal sector in India is its massive size. Some 86% of the workforce is in the informal sector. To this one must add another 6% that are informal workers in the formal sector. That makes 92%. For China, the comparative figure is 68%. If you exclude agriculture, which is generally the case in many countries while speaking about informal sector, India has 72% of its workforce in the informal, non-agricultural sector, while that figure is around 45% in China, 60% in Brazil, and 55% in Mexico.

One should also keep in mind that India has one of the lowest shares of regular wage employment, at around 16%, while in China it is exactly double at 32%. In this sense, employment security in China is much higher than what India has been able to provide for its working people.

Q: How has the unorganised sector fared in relation to output and employment?

What I have told you relates to the most recent period for which data is available, ie, 2004-05. The National Commission for Enterprises in the Unorganised Sector (NCEUS) has defined the unorganised sector as the informal sector consisting of enterprises that are private and unincorporated employing less than ten workers. In this sense, employment in the informal sector is around 393 million of the total workforce of 457 million. By deploying this definition, the NCEUS has also calculated that the GDP originating from the informal sector comes to 50%. You can see that per worker output in the informal sector is only one-sixth of that in the formal sector

Q: Will the informal sector continue to grow? Which areas in the informal sector have the best and the worst prospects for employment and earnings?

Going by past experience, my estimate is that it would grow at 4-5%, while the formal, or organised, sector will grow at 12-13%. This would mean acceleration in the pace of economic inequality in the country unless concerted action is taken to level-up the informal sector to enhance its productivity and reduce the gap with the formal sector. The best prospects are in construction, garment and apparel making, food processing, gems & jewellery, transport and retail trade.

The worst prospects await those self-employed at the lower end (called ‘own-account’ enterprises) engaged in street vending, rickshaw-pulling and similar activities. Of course, agricultural labourers are at the bottom of this pyramid, with wages that are hardly adequate even to cross the abysmally low poverty line that we now have.

Q: What would you say are the main achievements of the NCEUS over the last four years?

The main achievement, in my view, is sensitising policymakers, as well as the public in general, to the plight of the poor and vulnerable working in the informal sector. A concrete achievement is in sizing up this vast informal sector and measuring it in terms of employment, conditions of work, enterprises, and contribution to GDP. Further, we have also highlighted the strong link of the informal sector not only to the poor and vulnerable but also to their socially underprivileged status and gender. It is for the first time that such a comprehensive, countrywide exercise has been undertaken.

Q: What is the NCEUS agenda for improving productivity in the unorganised sector?

The NCEUS adopted an unconventional approach by first pushing a human security agenda. We recommended a three-point, security-centred agenda. The first element is is what we call a national minimum social security by providing insurance cover for sickness, maternity, death or accident of a worker. To this, we added an old-age pension. Our argument was that this should be viewed as a floor level to which state governments could add higher or additional social security cover.

The second element is the recommendation to enforce a statutorily backed national minimum wage below which no state-specific or trade-specific minimum wage should be set. This would also be a floor level to which state governments may add.

The third element is the urgent need to introduce national legislation providing for minimum conditions of work that would address the appalling work conditions that are often unsafe, hazardous and compromise human dignity. We then presented to the government a 13-point action plan, including these three elements.

Some of the other recommendations are critical to the enhancement of productivity and earnings in the informal sector, which is otherwise so resilient. These are: a special package for small & marginal farmers; access to finance; facilities for skill upgrade and development; access to technology; and creation of ‘growth poles’ based on existing industry clusters. A report on skill development is nearing completion. Finally, we intend to give an overall report weaving together all these issues in the form of an employment & development strategy focusing on the informal sector.

Q: What should be the focus of government policy on the unorganised sector?