Written evidence submitted by Professor
Barbara Harriss-White, Queen Elizabeth House, Oxford
DEVELOPMENTS IN INDIA'S INFORMAL ECONOMY
1. India has been successfully branded and
twinned with China as the emergent knowledge-services and manufacturing
hubs respectively of the 21st century world. But, although growing
rapidly, knowledge services are a very small fraction of India's
economy and an even smaller fraction of world trade in software
services. An estimated two thirds of India's GDP is in the informal
economy and out of the direct control of the State. I have been
studying it through primary field research since 1969.
2. The informal economy includes agriculture.
India's agricultural sector has well performed the necessary role
of providing food, basic wage-goods (such as cotton textiles),
labour and financial resources for the development of the non-agricultural
economy. While more than doubling its foodgrains production, it
has fallen from being about 70% of GDP at Independence to about
25% now. It has done this however in very unusual circumstances:
despite the fact that the Green Revolution technologies were capital-biased,
it has not shed labour. The proportion of the Indian workforce
in agriculture was approximately 70% at Independence and is at
about two thirds now. The paradox is explained both by the persistence
of underemployment in agriculture and by the net effect of labour
intensive versus labour displacing agricultural change (the key
labour-generating factor being the increase in land cultivated
in more than one season rather than the increase in the real land
area cultivated). Now, while the technologies of the green revolution
are facing diminishing marginal returns, rising input prices and
declining real product prices, the production of many crops is
gripped in a cost-price scissor. Over the last 15 years agricultural
growth rates have been mediocre; increasing returns to scale rather
than the long-celebrated inverse returns put small producers at
a disadvantage. In the recent past, the labour elasticities of
agriculture with respect to growth have been declining everywhere
and have now turned negative in two kinds of region—the
most agriculturally advanced and the most agriculturally backwards.
Clearly quite different economic processes are involved but we
known too little about both of them. What this means is that further
agricultural growth will shed jobs. Livelihoods will have to be
sought in the non-agricultural, informal sector because, since
liberalisation in 1991, the formal (registered, tax paying) third
of the economy has been growing in a jobless way.
3. The "service sector" is highly
differentiated between—crudely—high-end IT and very
low-end domestic and sanitary work. It is likely that demand for
low end work from the high end of the service sector fuels its
statistical growth. But because the data for services is not disaggregated
we cannot be certain. Jobs in the informal economy are the most
important key to poverty reduction in India. They will also contribute
importantly to growth.
4. Yet there is no vision or "plan"
for India's informal economy. This is an extremely challenging
state of affairs confirmed not only by a long reading of the literature
and by discussion with many scholars but also very recently and
in public in the UK by two people in crucial positions: Dr Y Thorat,
the Chairman of India's National Bank for Agriculture and Rural
Development (NABARD, at a conference in Reading University in
September 2006) and Dr Montek Singh Ahluwalia (the Deputy Chairman
of India's Planning Commission—in questions after his public
lecture in Oxford University in October 2006). My submission will
therefore be concerned with India's informal economy and the committee
may deliberate about how "Britain" might engage with
it. I will describe some of its important features using the literature
based upon field research. I have deliberately decided not to
use statistics because, although India is blessed with a relatively
compendious statistical base, those referring to the informal
economy are well accepted as being approximate and are continually
being questioned. For the themes developed here there is no systematic
data.
5. In India's informal economy, a range
of different technologies, forms of finance and ways of organising
economic activity co-exist. Diversity is at its heart. The condition
of being "informal" is not at all clear-cut. Commonly
a firm may be locally registered, possibly have a series of local
licences, reimburse a state electricity board for its power, draw
credit from a registered bank but it may have its own water supply,
lend money "onwards" on unregulated terms and conditions,
subcontract all but the finishing processes of production, fail
to pay tax or to apply the factories act regulations to its labour
force. A registered factory may exist in name and building alone
while most of the production it controls is carried out in workshops
in the alleys nearby. Thriving industrial clusters producing significant
proportions of India's exports operate under these conditions.
6. Undeclared rents, profits and factor
payments constitute the black economy. Using the most recent official
data derived from the mid 80s, it was estimated to be on an upward
trend at 35% and most scholars believe there is no reason to assume
it has not continued to rise. India's black economy is thought
to be concentrated in the retail sector, inventory, the film industry,
real estate and unregistered money export (and import). (The black
economy is implicated in the electoral process.)
7. The informal sector is clearly larger
than the black economy and consists legitimately of agriculture
and firms operating below a size threshold for commercial tax
eligibility (until recently Rs 3 lakhs—now Rs 10 lakhsi).
The informal sector also consists of socially legitimate activities
which make complex private and public organisations work smoothly;
together with socially illegitimate and illegal rent seeking and
fraudulent activity. The Indian economy is regulated not only
by the state but also by a significant informal "shadow state"
of more or less party-politicised brokers, rent seekers, fixers
and protectors of private property which exists entirely because
of the way the state regulates the economy.
8. Of the workforce of nearly 400 million,
over half its livelihoods consist of family businesses run without
wage labour, engaged in production or trade and usually depending
for their survival on loans from commercial-cum-moneylending firms
which derive their own credit from banks or from ethnicised financial
networks. Job working, subcontracting and outsourcing are common
ways in which registered or unregistered firms ensure operational
flexibility and scale. 93% of the workforce has no rights to work,
at work or to social security; 7% has social security rights and
about half of this latter proportion are members of trades unions.
There is no evidence that this rightless proportion of the workforce
is contracting. India's labour laws, considered an impediment
to investment, are simply irrelevant to the vast bulk of the workforce.
The Indian state regulates the lives of labouring families outside
their work through their (lack of) water supply, drainage, electricity,
housing, education and their use of space and leisure— arguably
more thoroughly than it regulates their work.
9. Between and quarter and a third of India's
population (the precise fraction is deeply debated) remains below
an exiguous poverty line (an income sufficient to buy 2,200 calories
per person per day). All of India's poor operate in the informal
economy but the reverse is not true. Concepts of poverty have
expanded from inadequacy of income to include wellbeing (and deprivation
in health, education, nutrition, shelter, water and sanitation).
These non-income forms of deprivation remain more widespread than
income poverty and they do not map congruently across society:
their alleviation is a necessary development objective both in
itself and as an instrument to improvements in the terms of economic
participation. But there is a fundamental idiosyncracy in the
anti-poverty policy mixes at the levels of states: to take Southern
examples, significant budgetary outlays on subsidised staple food
(AP), subsidised school meals (TN), employment guarantees (Maharashtra,
going national in late 2005), ubiquitous subsidised health and
education (Kerala). The Indian state has implemented national
enabling law for a social security system for those under the
poverty line but few states have made more than a token attempt
to implement it.
10. The informal economy is far from being
chaotic; it is well ordered and "socially regulated".
Business associations (operating by product sector and by town,
some federated at higher levels) and chambers of commerce are
of growing importance not only as representatives of occupational
sectors but also as regulators of the economy.
11. Forms of social identity regarded as
antiquated—and long predicted to disappear—are reworking
their roles and strengthening their regulative activity in the
market economy. The following paragraphs will give examples and
the development problems that arise from them.
11.1 Gender screens half the population
from all but wage work. There tends to be a non-linear relationship
between wealth and income and women's economic participation in
which women are progressively secluded from work outside the domestic
arena to a kink point above which they participate in the economy.
By and large the female workforce is in agriculture, in casual
labour and at poverty wages. Relatively few women possess productive
assets. Dowry is unlawful but widely required. A scholarly literature
has revealed the consequences of women being non-earners and economically
burdensome. The child sex ratio reveals deteriorating life chances
in the post-liberalisation period. Although the relationship with
poverty is complex, one of India's development scandals is that
the child sex ratio is most adverse to girls among the upper deciles
of the income distribution and in the most developed regions of
the NW.
11.2 The phenomenon of caste remains of
foundational importance in the economy. Approximately mapped onto
class, it structures the socialisation to work and still operates
to screen occupations the more rigorously the lower down the collapsed
(or fictitious) "system". It is especially fierce a
regulator at its base, where 25-30% of the population that is
"dalit" (oppressed, ex-untouchables) is, despite positive
discrimination, extremely poorly educated, still fighting contemptuous
treatment and generally confined to sanitary work, agricultural
labour and construction sites. Political assertion is taking caste
rather than class forms. Caste politics has a dual role in the
economy. On the one hand castes aim for upward mobility through
absorbing the customs of higher castes and shunning low caste
occupations. At the same time they queue for official recognition
as backward in order to qualify for positive discrimination by
the state. Over the last 10-15 years, middle caste organisations
have been transformed into trade associations which regulate entry
to, and the terms and condition of participation in, the market
economy. Through these institutions the informal economy takes
a corporatist form. Labour may be represented inside such lobbies
but the agendas of these self-regulating institutions do not prioritise
their needs. Trade associations play a very active role in the
non-party politics of marketplaces, negotiating and representing,
and redistributing resources. But as regulators and redistributors
they are incomplete, local, arbitrary and exclusive. Pervasive
and persistent, they present challenges to both economic participation
and democracy. International codes of conduct and sector-wide
voluntary labour codes have little purchase as yet on this economy.
11.3 Religions—and India has a notable
plurality of them—supply collective identities that in turn
supply indispensable conditions for capital accumulation. In India
religious affiliation can be found to govern the acquisition of
skills and contacts, the circulation of finance, the establishment
and defence of collective business reputation, the circulation
of information, the norms that regulate the inheritance and management
of property, the creation and protection of rent and the subordination
of women. In addition religious groups are often found regulating
and distributing livelihoods, providing insurance and last-resort
"social security". As a result, the distinction between
the private and the public sphere is blurred. Public protest and
riots have been triggered by religious events—the damage
that results not only affects people but also is mapped onto commercial
property and living quarters.
11.4 Ethnicity: in the late 1980s, an extremely
small proportion of the population (0.4%) controlled the major
part of India's industrial assets (60%). Although now being diluted,
this ethnicised control is still remarkably concentrated. While
ethnicity is generally understood as a phenomenon of tribal identity
and some of the most under-developed regions of India's economy
are populated by tribal societies; a more widespread economic
expression of ethnicity is the control over rural money markets,
agricultural processing, pawnbroking and the jewellery trade of
ethnic diasporas which spread slowly from North West India to
those regions of the east and south which did not have local business
castes. These highly entrepreneurial communities are development
"problems" when lending to poor smallholders at monopolistic
interest rates. State attempts to compete are sometimes captured.
11.5 It is due to these kinds of social
regulation that the rising tide does not lift all boats. These
forms of "social regulation" do not only structure the
economy, they also pervade the "care economy" and structure
the "help in times of need" which compensates for the
lack of a welfare state for a labour force whose workplaces are
often dangerous and unsanitary. They also pervade the state and
compromise its Weberian organisational principles. Any policy
change has to square with them, yet development policy discourse
(where it is not directly addressed to them) is couched in terms
rendering them invisible.
12. India punches well above its weight
in military and scientific affairs and diplomacy. It is now flexing
its muscles as a foreign investor. The UK's biggest aid receiver,
it has always been an aid donor too. It must be concluded that
the Indian state has taken the choice to regulate much of its
economy through its social institutions. A novel vision is urgently
needed for exactly that part of the economy that is out of state
control - in particular the informal, rural, non-farm economy.
The conditions under which labour-intensive utilities, infrastructure,
production, services and trade may be developed are not necessarily
ones mediated by untrammelled markets. Production and delivery
systems for the creation of the capabilities which would transform
the workforce's well-being and security are also urgently needed.
Ironically, strong state institutions will be needed to support
a flourishing informal economy able to absorb excess agrarian
labour.
Barbara Harriss-White, Professor of Development
Studies and Director of Queen Elizabeth House, Oxford University.
See Barbara Harriss-White, 2003, India Working Cambridge University
Press; 2004, Rural India facing the 21st Century, Anthem, London
(with S. Janakarajan and others); 2006, Trade Liberalisation and
India's Informal Economy Oxford University Press, New Delhi (ed.
with A Sinha).
REFERENCE i A
lakh is Rs 100,000 or £1,175. £1 = Rs 85 in late 2006
Professor Barbara Harriss-White
Director, Queen Elizabeth House, Oxford
November 2006
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