Demonetisation and the cash-dependent informal sector

The demonetisation anniversary should nudge us to think differently about the informal sector

November 09, 2017 12:15 am | Updated 12:17 am IST

New for old

New for old

I am a critic of Prime Minister Narendra Modi’s demonetisation initiative not because I belong to the Opposition, but because of demonetisation’s disruptive force, especially since India’s economy includes a large, cash-dependent informal sector. Demonetisation’s initial objectives remain unmet. Black money did not stay out of the banking system , terrorism continues, and counterfeit currency is still in circulation. As time went on, dreams of a cashless society were weaved into the pro-demonetisation narrative . Informality became a dirty word while anything digital was feted. However, reports emerged of extensive damage to the informal economy and, partly due to its linkages with the formal sector, economic growth took a hit. As opposed to a surgical strike on black money, demonetisation turned into a carpet-bombing of the informal economy. All is not lost, however. This anniversary offers an opportunity to think differently about the informal sector and its contributions to the broader economy and to the lives of millions of Indians.

Unwarranted contempt

My academic training and professional experience have typically taught me about the desirability of reducing the size and scope of the informal economy. However, the contempt with which demonetisation’s supporters portrayed the informal economy gave me pause. It was perplexing that we were pouring scorn over a part of the economy that supports livelihoods for 80-90% of Indian workers and accounts for an estimated 40-50% of GDP. It isn’t by choice that a casual labourer does back-breaking work at a construction site or on a farm for a few hundred rupees a day. What drives us to laud the “intention” of enforcing the economy’s formalisation without a full and proper assessment of the costs and benefits of the informal economy? If you listen to Mr. Modi and his supporters and, frankly, to many experts, the informal sector is parasitic, escapes government regulations and evades taxes. Let’s bring “them” into the tax net, goes the refrain. Tax arguments and poor working conditions in the informal sector are frequently employed to push for a rapid formalisation of the economy. It may be time to revisit some of these arguments.

If demonetisation was about going after tax evaders, then the government effectively treated the entire informal economy as a homogeneous construct. While the informal economy can enable illicit activities and create a safe space for tax evaders, it also supports the livelihoods of millions of workers who have no opportunities in the formal economy. These are the roadside vendors, marginal farmers, construction workers, cobblers, artisans, fishermen, landless labourers, etc. When we talk about demonetisation as a means of increasing formality, we need to keep the lives of these workers in mind. A 2009 OECD study on informal economies concluded that enforcing formality can be counterproductive and lead to an increase in poverty. The 2016-17 Economic Survey (Vol. 2) admitted as much by pointing out the spike in demand for MGNREGA work in the aftermath of demonetisation.

The persistence of the informal economy is a global phenomenon, and the “shadow economy” is estimated to be approximately 23% of world GDP. In many countries, employment in the informal sector is growing faster than in the formal sector. In India, according to the 2015-16 Economic Survey: “Of the 10.5 million new manufacturing jobs created between 1989 and 2010, only 3.7 million — about 35% — were in the formal sector.” This indicates that the informal sector is not some aberration that we can simply wish away. It is an integral part of India’s economic framework and we need to pay far more attention to it.

Deal with it

With a burgeoning youth population, India will need to create millions of jobs. This comes at a time of heightened concerns over the impact of automation on the availability of decent, well-paying, formal sector jobs. In such a scenario, neglecting the linkages between the formal and informal sectors would be unconscionable. While developing an appropriate policy framework for the informal economy will take time, some ideas appear obvious. For example, strengthening government schools and health facilities could disproportionately benefit poor and low-income children and families who likely operate in the informal economy. Another idea would be to focus on improving productivity of informal enterprises by creating awareness of good business practices and prevailing market conditions. Reducing the threat of coercive government regulation and action can also help informal workers earn a living without constant harassment of police and inspectors. There is no dearth of ideas on how to improve the functioning of the informal sector. But first we need to be open to the idea that informal is not abnormal. It is normal and it is here to stay. We have to learn to deal with this reality.

Salman Anees Soz, formerly with the World Bank, is a member of the Indian National Congress. Views expressed are personal

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in


Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.