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Domination of Informal Sector Accelerate the Unbalanced Growth : a comparative study on last 10 years aspect

Abstract : The objective of this paper is to search the various dimension of informal sector and that domination in regional economy, apart from traditional approach. Focuses on some relevant issues with New aspect precedent by issues and data. Through this paper try to describe how to this sector interpret the unbalanced growth.

 

Introduction :

 

The informal sector constitutes a very large portion of employment in many economies, often greater than 90% of workers. Moreover many new enterprise that are formed are in the informal sector creating persistence. But we can’t conclude that informal sector not continued as informal forever and layered with certain level of production. Every economy had experienced that blank area are very frequently occupied. The trade or nature of trade may changed but not to be abolished. This is a by default part of any developing economy. To realize sustained development, many policy makers and business leaders wants to encourage the informal – to – formal sector transition of workforce. The number of studies focused on issues like property rights, business registration procedures and financial access that are important for this transition, often with specific application to whether entrepreneurs choose to enter the formal economy or not. These studies have been very influential in the design of policies to aid regional economic growth and development. Addressing these issues at the local level is one of the most pressing challenges for regional planners in many developing economies.

 

The Fact :

 

Over the years, informal sector contributed significantly and expanded rapidly in the Indian economy. High labour intensity of production is the main reason for huge employment generation in the informal sector. In comparison about 48 per cent of non-agricultural employment in North Africa, 51 per cent in Latin America, 65 per cent in Asia and 73% in Sub-Saharan Africa are of informal nature [ILO (2015)]. In case of India, out of the total workforce, 86.36% of the workers in 1999-00 and 86.32% of the workers in 2004-05 were absorbed in informal sector, & after that,  about 91.17% of the total work force in 1999- 00 and 92.38% of the total work force in 2014-15 were informal in nature [NSSO]. In addition, informal sector is contributory for national output in primary, secondary and tertiary sectors, and exports. For instance, contribution of informal sector is 40 percent of the total industrial output and 35 percent of total exports.

Informal employment 85% (of total nonagricultural employment) at India.

NCEUS (2008) makes the distinction between formal and informal employment, on the one hand, and organized/unorganized enterprises on the other. Casual or ad hoc employment in organised enterprises would amount to informal employment in the organized sector. In fact, NCEUS estimates indicated that 37.8 per cent of the total organized sector employment was informal in 1999-2000, which increased to 46.6 per cent by 2004-05. The corresponding figure for 2009-10, as reported by Mehrotra, et al. (2012) stood at 57.8 per cent. This indicates rising in formalisation of organized sector employment in the Indian economy, this discussion totally based on view of employment generation in economy at macro level.

 

Theoretical Analysis :

 

In the conventional growth theory

the relationship between output and employment growth is quite clear. If we assume fixed coefficients which change over time through technological progress, and no deficiency of aggregate demand, then the rate of growth of employment is determined as the difference between the rate of growth of output, which depends upon the savings and capital-output ratios, and the rate of growth of labour productivity, which depends upon the pace of technical progress. In other words, conventional growth theory assumes that a rise in the rate of growth, unless accompanied by a still greater rise in the rate of growth of labour productivity, would necessarily raise the rate of growth of employment.

 

Now we come to point and practically elaborate the domination of informal sector is going on in service as well as by-production chain as India concern and that not maintained balanced growth theory. Sometimes growth of informal sector became catalyst of inflation in India and like Third world economies. Many “trade” belongs that could not be categorize, I used “trade” not in sense of pure business, more often a service or some bunch of services which rendered as ancillary unit to corporate sector, usually those are out of taxation and categorization.

 

From Different Aspect with Contemporary Issue :

 

Somehow in early days we understand the meaning of informal sector was street hawker or unauthorized men doing business and seasonal employee, but now paradigm shifted, our growth process unable to account all the aspects. This debate became more practical issue after the emerge of ‘neo-middle class’ of semi-urban area and making of thousands satellite townships and expanding cities. Specially income from “brokerage” is more often issue indeed, this monetary interference actually precedent the ‘cost – push inflation’ in economy and this certain boom can clearly notice at semi-urban area, this phenomena can also true in metro cities. This extraordinary wave can easily absorbed in metro cities but in semi-urban areas can’t so easily accumulate it, hence due to CP inflation social unrest phenomena can occurred, at the same time this is also true across India, may the frequency of disparity not same. Now we enter the significant discussion of points on which a democratic developing state never support the informal sector for a indefinite period.

 

We consider these informal to formal sector transitions within India, as we define in greater perspective, may consider unorganized and organized sectors of the Indian economy for manufacturing & services. Establishments in the unorganized sector in India are unregistered, mainly outside the valuation of state, so this division closely parallels common discussions and definitions of informal to formal sectors.

Low percentage of population under poverty and high informal employment, this theory is partially  proven wrong within last 5-10  years of experience.

 

In order to avoid confusion about the definitions of formal/informal activities as provided by China’s National Bureau of Statistics and used by Economist Ghose @ 2005 the employment categories are also associated with distinct types of enterprises. Formal sector, as understood in this paper, comprises of workers employed by both formal and informal enterprises as defined in the official statistics. Informal employment, on the other hand, includes only irregular employment. For example in the urban areas formal enterprises are made up of the traditional state-owned and collective-owned formal enterprises and the emerging private and foreign owned formal enterprises. In the rural areas formal employment is predominantly supplied by township and villages enterprises. In addition, regular employment (or formal in the terminology used here) includes those in informal enterprises in both urban and rural areas that are part of the registered small private enterprises  and registered self-employment . Employment under the rural responsibility system covers most of the rural employment assumed here to fall into the category of informal employment. Finally, there is irregular employment in both rural and urban areas. For our purposes formal employment includes formal workers as just defined plus those who are registered self-employed or employed in registered small private enterprises. The informal employment gathers the rest meaning the irregular employment and employment in connection with the rural responsibility system.

The existence of a significant informal sector in many developing countries is in fact one of the main culprits for the lack of economy – wide statistics. In recent years statistical offices as well as international organizations such as ILO and ADB have spent considerable effort to account for the informal sector in their published statistics. These efforts have been promoted as a result of an expanding informal sector in many economies, despite sometimes good record of economic growth. The informal sector has proved to be an important contributor to job creation especially in the over populated urban areas of developed countries.

 

Statistical Interpretation :

ILO’s 2013 report on World Employment and the 2012 ADB’s key Indicators for Asian economics showed that “out of total labour force of 2.5 billion in the DMC’s, around 459 million are underutilized in terms of being either unemployed or underemployed, during the 2000s, own-account and family workers represented nearly two-third of the total non-agri. labour force in Africa, half in South Asia, one-third in Middle East. In Latin America the urban informal economy was the primary job generator during the 2000s, urban informal employment in Africa was estimated to absorb about 60% of the urban labour force & generate more than 93% of all new jobs in the region in the 2000.

The two reports shows that there is an inverse relationship between the size of formal sectors employment and poverty rates. The creation of better paid jobs is instrumental in achieving a decline in poverty rates around the world which remain high despite the recent period of global economic growth.

India’s agriculture sector also considered as an informal sector but we are not conclude that area of productivity can create the unbalance growth, moreover that section facing unfair competition & threats from large firms owner of landlords (basically where land reform not completed), this days threats came from agri. mktg. chains also.

Stylized facts underline not only the abundance of labor in the informal sector but, as pointed out, its upward trend during the last decades in most of the developing countries even when growth has accelerated. The concern with jobless growth in developing countries is legitimate because long-run development is difficult to achieve without employment expansion in high productivity sectors. Evidence in support of a positive relationship between output and formal sector employment growth can be found in some fast growing Asian countries such as Korea or Taiwan (China), while others, such as India and Vietnam have failed to narrow the share of

informal sector in total employment despite experiencing substantial growth (according to ADB Key Indicators Report, 2013). The ILO report recommends that “in order to harness the development potential of structural changes, however, developing countries, in particular, must

focus on a two-pronged strategy of improving the productivity of workers in dynamic niche industries and, at the same time, focusing on those sectors of the economy where the majority of labour is concentrated. This focus would give them the tools to move from low to high-productivity activities” . The present paper makes a step in this direction by accounting for the informal sectors in India and how they relate to the rest of the economy.

This paper have ultimate goal to explore all the key factors about India’s unorganized sector under comparative statistical explanation.

 

Last Data as collected on 2009-10 period

Sector Total Employment Emp. In Non-Agri.
Un-Organized 387.3 million (84.2%) 145.3 million (67.4%)
Organized 72.9 million (15.8%) 70.1 million (32.6%)
Total 460.2 million 215.4 million

Source : NSSO 66th Report on this issue.

 

The unorganised sector in India continues to occupy a substantial place in the country’s economy. Its share in the country’s Net Domestic Product (NDP) was 56.7% in 2002-03. The importance of the unorganised sector differs substantially across farm and non-farm activities.

The Indian data & information

exhibit some key facts about the informal sector;

This sector is very large, this fact is fairly well known but worth repeating. For the manufacturing sector in 2005, 99% of establishments and 81% of employment are in the unorganized sector. The estimated size of the unorganized sector for services depends upon definitions, as discussed below, and ranges from 74% to 90% of services employment in 2006, but in 2010 showed 94% of employment generated from this sector.

Statistical Graph to justify the inter-relation between informal sector & poverty –

 Note : ‘I’ stand as India.

According to OCED 2010 World Dev. Indicators & ADB 2012 Key Indicators Reports are found that conclusion which high informal sector concentration result high poverty rates. Through this graphical

Interception we can easily understand the interrelation of informal sector domination and poverty rate of state (specially ref. as India)

 

1.1              The unorganized sector is extremely persistent India’s economy has undergone amazing changes during the past 25 years, but the share of the unorganized sector has remained stubbornly persistent. The employment share in the unorganized sector for manufacturing in 2010 is almost exactly the same as it was in 1995 at 81%. While the organized sector has grown over the past two decades, the unorganized sector has kept pace.

1.2              This persistence is not due to particular subsets of states or industries – India’s states vary substantially in their unorganized sector shares, from less than 50% to above 90%. Indian industries also range from less than 10% to above 98% in unorganized sector shares, while disparities are important, particular groups of states or industries do not explain the persistence, which is instead ubiquitous. Thus, the persistence is not due to diverging trends, with some states or industries becoming much more organized, and others becoming less so. The persistence is more systematic and requires state industry level analysis to understand how the transitions that have occurred came about.

1.3              Greater concentrations of localized business activity in the unorganized sector are associated with weaker production functions for manufacturing firms-estimations of augmented production functions for Indian manufacturing firms find both standard urbanization & agglomeration premiums, with higher local business density promoting greater output for set of inputs. We show, however, that the share of this local business density that is concentrated in the unorganized sector is associated with weaker production functions. This unorganized sector activity is important, and its transition will help India’s further economic progress.

 

  1. Three important themes emerge from this empirical analysis:

 

2.1  . In both manufacturing and services, the most important factor for reducing the unorganized sector share is growing the overall size of the organized sector – Our primary estimations separate the overall growth of the organized sector from its establishment size distribution and entrepreneurship rates. Growth in the sector size, versus the particulars of where in the establishment size distribution growth occurs, is central to reducing the share of state-industry workers in the unorganized sector. Demonstrating the strong persistence of the unorganized economy, however, this overall organized sector growth has limited effect on the absolute levels of unorganized sector employment. Its effect comes through increase in the overall state-industry size, and thereby reducing the unorganized sector’s share.

 2.2 Within manufacturing, the most consistent force for reducing the unorganized sector share is growth in employment in large establishments in the organized sector. High rates of initial entrepreneurship in the organized sector are also important since 2000 – Our manufacturing data allow us to observe three time periods: 1989-1994, 1994-2000, and 2000-2005, but just after 2005-10 period, a great ‘Lack of entrepreneurial ability’ are found, the boom of IT & Real Estate may caused of that and moreover a remarkable percentage concentrated from those area of Industry to informal sector. Across these three periods, state-industries with their strongest relative employment growth in large establishments with more than 100 workers have the greatest declines in unorganized sector shares. Moreover, these state-industries experience absolute reductions in unorganized sector employment levels. In 2000-2005, high initial entrepreneurship rates in the organized sector also closely links with declines in the unorganized sector’s employment share and level. This role is exclusive to entrepreneurs and is not evident in small manufacturing establishments generally.

2.3  By contrast, employment growth in small establishments is the essential factor for services, and this role of small establishments is less linked to entry –the unique role of the services sector in India’s development, in part allowing India to overcome its underdevelopment in manufacturing. Given the importance of services to current South Asian growth, we quantify its unorganized sector transition for 2001-2006 in an estimating framework similar to that of manufacturing. Throughout our services study, the development of small establishments is the most important factor for reducing the share of employment in the unorganized sector.

 

In summary, understanding the evolution of the unorganized sector in developing and emerging economies is a very important task for regional scientists, development economists, and policy makers. Our inquiry provides some initial steps towards understanding its evolution for India. One strong conclusion emerges from the Indian experience—single, grand theories about India’s unorganized sector and its transitions are likely to be inadequate. The persistence of the unorganized sector across so many different states and industries is too great to afford a single, unifying explanation. Taking somewhat smaller steps, our work highlights that growth of the organized sector does reduce the unorganized sector share. There are also some key establishment size distribution properties for India in how the transition occurs.

The Common thing about informal sector that connection of underdeveloped economy and unskilled youth population, I think this is not necessary to further go through on both points.

 

  1. Some conclusions as research aspects are found;

When a large portion of human resource and vast part of economy involved with informal sector then normally unbalanced growth to be seen.  As we know the theory of balanced growth, in Hirschman’s opinion, the real bottleneck is not the shortage of capital, but lack of entrepreneurial abilities, exactly this bottleneck can coined by unbalanced growth, if the entrepreneurial potentiality demoralized in any economy the imbalance in development is to be seen.

A relevant practical example can properly explain in conclusion;

suppose, any area concentrated with a special manufacturing industry and somehow that industry going under depression but some men of same area associated with informal force and working at any developmental real estate project, hence those people considered as catalyst of a abnormal un-balanced growth with interpretation of cost push inflation in that particular market. According to Hirschman’s theory, not a balanced growth should be aimed at, but rather existing imbalances – whose symptoms are profit & losses must be maintained.

Moreover a very embarrassed or disappointing situation came for a state or economy when Purchasing Power Priority (PPP) showed remarkably but GDP and PCI growth not focused accordingly. Simply a conclusion can bought that if a large portion of economy occupied by informal sector and a huge amount income laying out of taxation.

Manufacturing industry is grown but not in a proper manner, business cycle work but not in a well being fashion. Like India, stand at globally 4 th position in PPP but our GDP growth not to be compared with China and Japan.

After all only highlighting of negative points is not the ultimate target of this paper, as work with developmental or welfare economics those are unavoidable points while we focused on informal or unorganized sector.

 

References :

The World Bank Policy Research working Paper on the exceptional persistence of Indian unorganized sector.

ILO – Dept. of Statistics : Statistical update on employment in the informal economy & Interim Reports.

University of Utah : Working Paper – Formal & Informal Sectors in India.

An accounting based approach, IMAR 2012 Planning commission occasional paper/6.

Yoon Je Chao : Indian Capital Market – Recent Development & Policy issue.

London School of Economics ; Discussion Paper – Industry & Urge to cluster – A study of the economics : SERC- Informal Sector in India.

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