India's ambition to formalize its massive workforce is faltering, with the majority of nonfarm labor employed in unincorporated firms. Employers are keeping employees beneath the radar for reasons other than tax fraud. As a result, putting more transactions under the government's surveillance - through the digital trail of a goods and services levy - may not be the panacea it appears to be.
According to the most current Periodic Labour Force Survey, 74% of nonfarm workers engage in sole proprietorships or partnerships, which are legally categorized as informal-sector companies. When India was fighting multiple waves of Covid-19 between July 2020 and June 2021, the number was three percentage points lower. A reopened economy may have restored livelihoods, but it does not appear to have made a difference in the peracity.
Some aspects of self-employment are undoubtedly well compensated and voluntary. It is carried out by professionals with professional experience, such as those in legal, consulting, or creative professions. Nonetheless, in a country with a working-age population of about 1 billion people, this upper rung of informality is unlikely to be a substantial factor.
The poll does reveal some progress in that more persons now have employment contracts than two years ago among regular wage earners. The proportion of individuals on paid leave has also increased marginally. However, social-security benefits, which are critical to making workers feel economically secure, are still available to only 54% of a small number of people who are fortunate enough to work for a living.
This has to change. By 2050, India will still be younger than today's advanced economies. Nonetheless, the country's old population will more than treble to 350 million. While there is still time, this generation must break free from low-productivity job that provides no opportunity to save for retirement or medical needs. Otherwise, it will be a drain on the tax resources of a smaller set of future workers.
Japan faced major aging when it was already wealthy. China appears to have peaked a little sooner. What kind of future the world's most populous country will have before its demographic edge disappears may depend on how rapidly it can replace informal and low-quality labour.
The problem is that authorities are counting on a 2017 goods and services tax to accomplish the trick. Higher revenue collections, to them, indicate a more formal economy. And the other way around. In order to optimise their profit, they have made the GST excessively difficult.
Smaller businesses have suffered as a result of the regulatory load. The GST's original promise of integrating the country into a single market has gone almost solely to huge firms and digital startups — and thus to a small fraction of the workforce. And, because the GST has replaced many of the indirect taxes imposed by state governments, several of them have become disillusioned, particularly since the pandemic. "The states gave up considerable autonomy to agree to a GST that now appears moth-eaten and unworkable," Rathin Roy, an economist at the ODI think tank in London, recently wrote.
Industrial policy is the Modi government's other plan for formalizing the economy. Those who build factories will receive a substantial five-year package of $24 billion in production-related incentives. According to the government's own statistics, the programme had created fewer than 200,000 employment by September of last year. This is the year that 40 million Indians will be enrolled in higher education.
Because of the instability caused by a significant degree of economic informality, some PhDs and engineers are competing to become general factotums at a government office somewhere. At the very least, they will have job security and retirement benefits. Modi's political opponents have capitalized on people' anxiety by vowing to reinstate a fiscally catastrophic defined-benefit pension system. Squandering two decades of progress in requiring workers to contribute to their superannuation and reverting to guaranteeing half of their last-drawn income will place a burden on future taxpayers. It will also reduce welfare assistance for the poorest people at the bottom of the economic pyramid.