While Formalising the informal sector,  do the poor matter?

In a country like India where farmers double as daily wage labourers to feed their families, where white collar employees double as cab drivers on weekends to earn a little bit of extra income to be able to pay the trying school fees of their wards, where small shopkeepers personally home deliver to their neighbourhood customers even for a small order size of ₹100 in order to keep their shops floating, where graduating students work as servers at McDonald’s, where a huge 93,000 candidates including PhD holders and post-graduates apply for 62 posts of messengers in UP Police, where an Indian’s average personal wealth is a modest $7000, the only thing that should matter most to the conscientious policy makers should be people’s livelihood and jobs.

India’s unemployment rate jumped to a two-year high to 6.9 per cent in October 2018, according to a report by the Centre for Monitoring Indian Economy (CMIE), showing a worrisome trend in the labour market. India’s high unemployment rate is in contrast to the low or stable unemployment rate of other fast growing major economies. US unemployment rate dropped to 3.7 per cent, lowest in nearly 50 years. The unemployment rate for China has been fairly stable at about 4 per cent. For our policy makers, formalisation of economy has been the priority than job creation.

The informal sector plays a significant role in the economy in terms of employment opportunities and poverty alleviation in India. India’s formal sector employs only about 10 per cent of the nation’s workforce. The vast majority of 90 per cent of workforce are employed in informal sectors. Informal sectors are not state-regulated and they may not be contributing much to the national exchequer in terms of taxes. Gradual and painless formalisation of informal economy is always welcome. Bulldozing the “formalisation of economy”, at the cost of jobs and livelihoods of impoverished people, lacks sensitivity.

Big bang disruptions like demonetisation have been unleashed to flush out domestic black money. One of the main objectives of demonetisation was to fight against black money as originally articulated by the government. However, 99.3 Per cent of banned high-value currency notes returned to banks and no black money got extinguished outside the banking system. Subsequent scrutiny of large cash depositors has yielded just a few thousand crores of tax revenues to the government, not commensurate with the costs of demonetisation in terms of loss of lives, loss of jobs and loss of man hours in the queues and the administrative costs of printing new currency, re-calibrating ATM’s and banks losing on other business activities during those 50 days. Demonetisation was an adventurous attack against the ‘stock’ of domestic black money, though without much success, but no bold attempts have been made to clamp down on the ‘flow’ or generation of black money. Concrete steps in the direction of transparency in political funding, reduction in discretionary powers of government, accountability in bureaucracy, eradication of corruption and simplification of tax system are needed to reduce the ‘flow’ of black money.

Black Money and Tax Havens, a book written by retired IIM(B) Professor R Vaidyanathan, estimates the figure of domestic black money at Rs 15 lakh crore and black money stashed abroad at around Rs 65 lakh crore. The top priority of any fight against black money has to be bringing back those large hoards of money hidden in tax havens abroad. This would have truly stimulated investments, growth and macros of our country. But there are no visible results on this front. “The US is concerned about them (‘about them’ means about black money stashed in tax havens), Germany is furious about them and France wants to regulate them, but leaders of one of the most affected countries, namely India, are not saying or doing much about them,” the author says in the book.

India’s ease of doing business rank jumped 23 points to 77 out of 190 countries indexed by the World Bank. Out of the 10 parameters considered, improvement in just 2 parameters - ‘getting construction permits’ and ‘border trade’ have contributed to the jump in the overall rank. After the NDA government came to power in 2014, India’s ease of doing business rank has steadily improved from 142 in 2014 to 77 in 2018 during the last four years. But the improvement in ease of doing business rank in an uneasy country has not revived the investment cycle, nor has the ‘Make in India’ programme shown any great results.

Indian economy has been flying on one or two engines - consumer spending and probably government spending. The other two engines of economy - investment spending and exports - have been stuttering. India’s exports-to-gross-domestic-product (GDP) ratio at 11.44 per cent in 2017 was the lowest since 2005, according to an IMF report. India’s highest yearly exports of $ 314 billion recorded in 2013-14 under the UPA rule has not yet been crossed. As per a latest report of RBI, investment cycle has just started showing signs of revival. The NDA government would do well to nurture these green shoots in the investment cycle, by quickly resolving the mountains of bad loans and adequately capitalising the PSU banks. Revival of investments and growing exports can only create the badly needed jobs.

Demonetisation was an adventurous attack against the ‘stock’ of domestic black money, though without much success, but no bold attempts have been made to clamp down on the ‘flow’ or generation of black money. Concrete steps in the direction of transparency in political funding, reduction in discretionary powers of government, accountability in bureaucracy, eradication of corruption and simplification of tax system are needed to reduce the ‘flow’ of black money.

Big bang disruptions like demonetisation have been unleashed to flush out domestic black money. One of the main objectives of demonetisation was to fight against black money as originally articulated by the government. However, 99.3 Per cent of banned high-value currency notes returned to banks and no black money got extinguished outside the banking system. Subsequent scrutiny of large cash depositors has yielded just a few thousand crores of tax revenues to the government, not commensurate with the costs of demonetisation in terms of loss of lives, loss of jobs and loss of man hours in the queues and the administrative costs of printing new currency, re-calibrating ATM’s and banks losing on other business activities during those 50 days. Demonetisation was an adventurous attack against the ‘stock’ of domestic black money, though without much success, but no bold attempts have been made to clamp down on the ‘flow’ or generation of black money. Concrete steps in the direction of transparency in political funding, reduction in discretionary powers of government, accountability in bureaucracy, eradication of corruption and simplification of tax system are needed to reduce the ‘flow’ of black money.

Black Money and Tax Havens, a book written by retired IIM(B) Professor R Vaidyanathan, estimates the figure of domestic black money at Rs 15 lakh crore and black money stashed abroad at around Rs 65 lakh crore. The top priority of any fight against black money has to be bringing back those large hoards of money hidden in tax havens abroad. This would have truly stimulated investments, growth and macros of our country. But there are no visible results on this front. “The US is concerned about them (‘about them’ means about black money stashed in tax havens), Germany is furious about them and France wants to regulate them, but leaders of one of the most affected countries, namely India, are not saying or doing much about them,” the author says in the book.

India’s ease of doing business rank jumped 23 points to 77 out of 190 countries indexed by the World Bank. Out of the 10 parameters considered, improvement in just 2 parameters - ‘getting construction permits’ and ‘border trade’ have contributed to the jump in the overall rank. After the NDA government came to power in 2014, India’s ease of doing business rank has steadily improved from 142 in 2014 to 77 in 2018 during the last four years. But the improvement in ease of doing business rank in an uneasy country has not revived the investment cycle, nor has the ‘Make in India’ programme shown any great results.

Indian economy has been flying on one or two engines - consumer spending and probably government spending. The other two engines of economy - investment spending and exports - have been stuttering. India’s exports-to-gross-domestic-product (GDP) ratio at 11.44 per cent in 2017 was the lowest since 2005, according to an IMF report. India’s highest yearly exports of $ 314 billion recorded in 2013-14 under the UPA rule has not yet been crossed. As per a latest report of RBI, investment cycle has just started showing signs of revival. The NDA government would do well to nurture these green shoots in the investment cycle, by quickly resolving the mountains of bad loans and adequately capitalising the PSU banks. Revival of investments and growing exports can only create the badly needed jobs.

(V Venkateswara Rao is a retired corporate professional and a freelance writer)