How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country? (150 Words 10 Marks)

Globalization has undoubtedly transformed the economic landscape of India, ushering in both opportunities and challenges. One significant consequence has been the discernible reduction in formal sector employment. The integration of the Indian economy into the global market has fostered a shift towards industries that thrive on flexibility, outsourcing, and cost-cutting measures. Multinational corporations, seeking competitive advantages, often resort to outsourcing jobs to countries with lower labor costs. While this has led to increased opportunities in certain sectors, the formal job market has experienced a decline, impacting stability and social security. Simultaneously, the rise of the informal sector has become a defining characteristic of the labor market. This shift raises critical questions about the country’s development trajectory. The surge in informalization, marked by precarious employment conditions and lack of social protections, poses challenges to sustainable and inclusive development. As we explore the ramifications of this trend, it becomes imperative to scrutinize whether increased in formalization is detrimental to the overall progress and well-being of the nation.

Tag: Effects of liberalization on the economy, changes in industrial policy, and their effects on industrial growth.

Table of Contents

Decoding the Question:

In the Intro, try to define the term globalization.
In Body,
Discuss reasons behind the substantial amount of workforce.
Discuss how informalisation is detrimental to economic development.
Try to conclude the answer with the need for more formal sector jobs.

Answer:

Globalization is the spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free trade. India opened its economy by adopting the LPG policy, (Liberalisation, Privatisation and Globalisation) of 1991. These economic reforms paved the way for its larger integration with the global economy. In subsequent years of higher economic growth rate a robust private sector emerged generating employment for millions of Indians over the years.

Globalization has led to the reduction of employment in the formal Indian sector:

Decline in public employment: The most stable source of formal employment has been the public sector. Because a major focus of liberalization is a reduction in the size of the public sector. The proportion of formally employed workers falls as governments cut their work force unless.
Restrictive labour laws: With restrictive labour laws and lack of labour reforms after liberalization, industries went for contract hiring. It was done in order to circumvent rigid hiring and firing provisions. This led to reduction of formal jobs and more contractual jobs of short-term nature.
GlobalCompetition: The impact of global competition encouraged formal firms to shift formal wage workers to informal employment arrangements without minimum wages, assured work or benefits.
Service-sector led growth: Globalization led to growth of the service sector in India. Service sector requires skilled labour that was not available as required. As a result many sectors lacked skilled manpower and formal jobs were not created.
Women employment: As the decent formal jobs declined and economic growth slowed many men remained unemployed. As a result, women increasingly seek paid employment in the informal economy as a means to ensure the living standards for households that are already living in poverty. Further, with responsibility to manage home, more women seek informal employment.
Capital-intensive industries: The newer industries were capital intensive rather than labour intensive, thus absorbing lesser workforce. Due to this labour remained out of formal sector employment.
Informalisation: Due to rise in the service sector many jobs were outsourced which were fulfilled by the informal sector. Further, contractual jobs led to insecurity in the labour sector and formal sector. Thus, many people took up informal jobs.
Mechanization: With globalization and the growth of the internet and automation, many jobs were replaced by machines. Industries to increase their production went for automation and this was supported by technology transfer through liberal policies. Further, most of the inflowing FDI went into technology and capital-intensive sectors like information technology, engineering, automobile etc. which mostly are automatic requiring less human resource.

Increasing Informalization is detrimental to economic development as:

Informal workers lack proper wages: These lower wages lead to increasing inequality, which is detrimental to development. Lower wage rates led to lower saving rates, which is detrimental for the credit cycle and further impacts lending.
Lack of welfare benefits: Workers lack welfare benefits such as healthcare, insurance, and education facilities. This leads to increased out of pocket expenditure on those things, entrenching poverty and inequality, both detrimental to development.
Hampering productivity: Contractual labour has no loyalty or affinity towards the company, thus hampering productivity and economic development.
Financial inclusion: Informal workers usually lack literacy, depriving them access to institutional credit, thus reducing domestic consumption and harming development.
Lack of formal sector benefits such as maternity leaves etc. lead to inadequate attention toward child development, thereby, hampering human resource development.
The informal sector is majorly cash-based which generates huge amounts of black money and tax evasion. This deprives the state of legitimate tax collection of the government and further increases resources crunch to spend on developmental activities.
A low tax base due to the informal sector does have multiplier effects such as low tax revenue, increased government borrowing, higher fiscal deficit, higher inflation. All of these affect the low-wage informal workers the most, creating a vicious cycle hampering development. High fiscal deficit and high inflation also lead to credit downgrades and lead to outflow of foreign investments due to macroeconomic instability. This is catastrophic for a capital-starved country like India.

From above it can be concluded that informal employment provides badly needed jobs for the poor, but it harms workers’ protection, earning predictability and social benefits. The Arab Spring is such an example, which began when a young street trader set fire to himself due to continued harassment and humiliation by the police. Thus, increased in formalisation is detrimental as it impacts long-term goals. Steps must be taken to create more formal jobs.

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