By Kartik Narayan
Skill, labour, talent for MSMEs: In its November 2022, report titled “India’s Impending Economic Boom”, Morgan Stanley heralds India as being on the path to becoming the third-largest economy of the world by 2027. It further goes on to say that India will be home to the third-largest stock market by the end of the decade. These endearing statistics are enough to warm the heart of any proud Indian but we must be wary of becoming complacent. The report indicates that we are in the midst of an exciting phase of India’s growth story, however, we must be careful not to rest on past laurels and continue to march forward in improving the world of work as herein lies the key to our future success.
The ubiquitous informal sector, which envelopes close to 90 per cent of the working population in India is itself severely handicapped and thus tends to cripple the participants rather than uplift them. Formalisation is important because it will help to correct several development challenges faced by the nation such as the people issues perpetuated by the informal sector such as gender disparity, lack of taxation, and total failure to pull people out of the quagmire of abject poverty. A lot of initiatives are underway toward increasing the formalisation of the economy but there is a lot more that needs to be done as the stakes are high. Formalisation is necessary for India to remain steady on its growth trajectory, achieve scale and productivity, and thus carve a path of greater prosperity for all its citizens.
Also read: Budget 2023: Experts suggest strengthening existing schemes to boost MSME credit access
Gender disparity and poor working conditions
Women’s workforce participation in the country has been puzzling. An overall women workforce participation rate of 25 per cent encompasses less than a third of women thus placing India among Nations with the lowest female labour force participation rates in the world. The covid-19 pandemic worsened the situation as more women quit or lost their jobs during that time. It was recorded that 47 per cent of women lost their jobs as opposed to 7 per cent of men. The data points become far bleaker when it comes to women participating in the informal sector. Surprisingly, out of the total registration of unorganized workers on the eShram Portal, 52.84 per cent are women. Women employees across sectors are subjected to low pay, income volatility, lack of a secure social safety net, and no childcare services. Informal employment exacerbates economic exploitation as there is no written contract, paid leave, or even a framework of minimum wages or benchmarks to monitor the conditions of work.
Escaping the tax net
Developing economies recognize the high incidence and persistence of the informal workforce as obstacles to sustainable development. Since businesses in the informal economy are not directly regulated, they do not contribute to the tax base and tend to remain small with low productivity and limited access to finance. As a result, economic growth in countries with a large informal sector remains unpromising. Due to the lack of formal recognition a huge chunk of the economy stays out of the tax net. This is detrimental to the economic and social growth of the nation on multiple levels. It impairs the state’s visibility on true economic metrics and curtails its ability to undertake socio-economic measures to implement developmental activities. Further, the government loses out on a significantly large amount of taxable income which can be utilized for infrastructure development and social upliftment.
Quagmire of poverty
The lack of formalisation of the workforce leads to a vicious circle where workers in the unorganized sector suffer severe poverty which leads to low nutrition intake. These health difficulties in turn lead to poor quality of life. These workers are worst hit in times of natural calamities such as floods, drought, famine, and earthquakes as there is no safety net or fallback mechanism for them. Employment statistics indicate that only 10 per cent or 47.5 million of the workforce had formal employment with access to social security. The remainder of the workforce to the tune of 347.4 million belongs to the unorganized sector comprising gig, platform, and casual workers.
Also read: Economic Survey: MSMEs’ Covid recovery evident in GST paid crossing pre-pandemic level
Current initiatives by government
The government has been engaged in drafting and implementing new policies to increase formalisation by leveraging technology and digitization, in keeping with the needs of the modern work environment. These policies seek to give companies more freedom in shaping their workforces in response to changing needs for skills/technology levels and workflow practices.
- e-Shram Portal: It is the first-ever national database of unorganized workers including migrant workers, construction workers, gig and platform workers, etc. Workers registering with the e-shram portal will get an insurance benefit of up to Rs 2 lakh. This is under the Pradhan Mantri Suraksha Bima Yojana.
- Udyam Portal: The Ministry of Micro, Small Medium Enterprises maintains this portal for registering MSMEs, and is a step towards ease of doing business for MSMEs. Registration on this portal provides access to several subsidies, benefits, and government schemes that are periodically announced and updated.
- Pradhan Mantri Shram Yogi Maandhan Yojana: This is the implementation of the voluntary and contributory pension scheme for unorganized Workers in the age range of 18 to 40 years with a monthly income of Rs 15,000 or less. A central sector scheme administered by the Ministry of Labour and Employment, it is implemented through the Life Insurance Corporation of India and Community Service Centres.
- PM SVANidhi: The PM Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi) was launched by the Ministry of Housing and Urban Affairs on June 01, 2020, for providing affordable working capital loan to street vendors to resume their livelihoods that have been adversely affected due to Covid-19 lockdown.
- Labour Reforms: The parliament passed four labour codes on wages, industrial relations, social security, and occupational safety, health, and working conditions proposing to simplify archaic labour laws and give impetus to economic activity without compromising the workers’ benefits. New labour codes have taken notice of the informal urban segment of the informal economy, that is, the gig economy, workers who are among the worst affected in a pandemic-like situation.
- GST and Digital Payment Systems: The implementation of Goods and Services Tax (GST) and digital payment systems will be instrumental in shrinking India’s informal economy which constitutes about half of the Gross Domestic Product (GDP).
Recommendations for Increasing Formalisation
Formalising the workforce will help resolve many issues with respect to regulating working conditions, maintaining gender equality, and facilitating infrastructural developments by improving infrastructure and reigning in tax evasion. Although efforts are underway to remove legal and regulatory bottlenecks to formalisation, below is a list of some of the key aspects that must be kept in mind to streamline the process.
- Implementation of structural changes in policies that will increase incentives and lower the cost of formalisation.
- The taxation guidelines should safeguard against inadvertently increasing incentives for individuals and firms operating in the informal sector.
- Adoption of policies to enhance financial inclusion by expanding access to bank-based financial services. The promotion of digital payment models is a step in the right direction but needs to be bolstered further.
- Improving access to good education and skill development is perhaps the most significant and sure-shot way to reduce informality and ensure economic growth.
- Integrating MSMEs into the global supply chain will be a significant milestone for the MSME sector in India. This will help to enhance their global competitiveness which will strengthen the sector and will be instrumental in boosting the economy and enhancing employment opportunities.
India’s economic growth story pivots on its young and dynamic workforce. We must work towards increasing formalisation exponentially so that unorganized employees can be brought into the fold of formal protection and support channels. Interventions in policy, fiscal support, education, and up-skilling all will play a significant part in the formalisation of the economy. Businesses must invest in skill development and empowerment of the workforce which will help them become more productive and at the same time unlock a sea of benefits intrinsic to formalisation.
Kartik Narayan is the Chief Executive Officer – Staffing at TeamLease Services Ltd. Views expressed are the author’s own.
The 2nd edition of FE Aspire’s SMExports Summit is here. Register now to book your seats!