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11 MAY, 2017 (MAINS)



Q1. How has globalization led to the reduction of employment in the formal sector of the Indian economy? Is an increase in formalization detrimental to the development of India? (200 words)


Please write the answer in comments section

  • Osho Korde

    • Globalization has accelerated the economic growth. However jobless growth with low employment elasticity in the formal sector has emerged as new socio-economic challenge in 21st century
    • The informal sector, informal economy, or grey economy is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and gross domestic product (GDP) of a country.
    • Several economists say that rigid labour laws are the reason India has not generated enough jobs in the formal sector — only about 10 per cent of jobs are in the organised sector and the remaining 90 per cent in the unorganized sector.
    • In local terms, organized sector or formal sector in India refers to licensed organization’s that is, those who are registered and pay sales tax, income tax, etc.

     Increase in formalization detrimental to the development of India

    • Major source of generation of black money and tax evasion is due to informal sectors. Size of Indian black economy is estimated at nearly 24% of GDP. This deprives the State of legitimate taxes, hampering economic development.
    • Programmes like Skill India, Make in India, Stand up India, Labour reform, etc. are some initiatives taken by government to boost up the employment in formal sector.

  • Ashish

    Globalization has contributed to increasing informalization of the workforce
    Integration with global supply chain calls for ability of the corporations to make changes in the size of the workforce as per demand
    However due to rigid labour laws they prefer to outsource the work to an informal organization doing the same work rather than increasing the size of their own workforce
    Global supply chain to be distributed across different places thus reducing the workforce size for instance football making can now be carried out with
    Increased informalization though intended to avoid regulatory cholesterol, leads to:
    • Increased cost for the companies in the long run, around 14% [Economic Survey 2015-16]
    • There is no accumulation of firm level human capital which would have otherwise accrued
    • Labour welfare suffers as they are outside the pale of labour laws
    • Employees are deprived of the social security benefits to which they have been entitled to if in formal sector
    • The exchequer loses revenue in the long run due to underreported incomes
    • Infrastructure Projects requiring Long term funds too are deprived of a valuable source of funding
    Informal sector though provides more jobs in the short term prevents a developing nation from becoming into a developed nation by imposing aforesaid long term costs