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Social investments can create opportunities and growth in the informal sector

A depiction of an Indian woman running a small tent shop, created in vector art style.

Since the implementation of a country-wide lockdown on 22nd March 2020, we have all come across reports of daily wage workers, travelling back to their hometowns due to loss of employment and means of earning a livelihood. With this great exodus also came the irreconcilable loss of lives. Many walked uncountable miles to reach homes, many lost their lives in the process and the few that successfully reached home, neither had the cash flows to meet their daily expenses nor the means to earn a living. As we were looking at a global decline in the economy, these stories were indicative of an inevitable economic dip in our own country.

Early this month, when the Ministry of Statistics and Program Implementation indicated a 23.9% decline in the GDP for the April-June quarter, it was only then that the intensity of the crisis was realized. The government was swift to step in and provide the next round of stimulus. The target audience and the stimulus package were soon determined. Non-salaried middle class and small businesses were to receive financial aid to survive these unprecedented times. However, in spite of these relief measures, something that is missing from both, the government’s financial aid as well as the contribution to the GDP is the informal sector of the country. With more than 90% of the nation’s workforce belonging to this sector, their ginormous contribution (of about 40%) to the country’s economy is undeniable. Despite this, the informal sector does not form a part of the county’s GDP calculation. This is major because of the dispersed and small-scale nature of the sector’s activities, making it difficult to measure the informal economy.

What makes the informal sector?

What are some of the occupations that come to mind when you read the phrase 'informal sector'?

Small and petty shopkeepers, daily wage workers, domestic help, street vendors, and waste pickers, all of them form a part of the informal economy. According to the Periodic Labour Force Survey of 2017-2018, more than 90 % of the workers are from the informal sector. In numerical terms, this contributes to about more than 400 million workers. The country had been seeing a decline in the economy and an increase in the unemployment rate even before the spread of the pandemic. However, the unanticipated nature of the pandemic and the subsequent lockdown of the country hit many of the above-mentioned occupations extremely harshly. According to the Centre for Monitoring Indian Economy (CMIE), within a week of imposing the lockdown, the rate of unemployment increased from 8.4%- 23.8%. While the increase in unemployment is an alarming fact, an article by the Firstpost draws our attention to something especially important. According to the article, along with the increase in unemployment, there has been a decline in the Labour Force Participation Rate (LFPR). LPFR is an indicator of the number of people who are currently employed along with those who are actively looking for a job. According to the article, LFPR which stood at 44.6% in 2016, fell to 39.2 in the first week of lockdown and to 35.5 by the second week of April. This indicated that not only were people out of a job, but they had also stopped actively looking for employment. The reverse migration that occurred due to loss of employment has had some far-reaching effects. Many of these workers are struggling to access government schemes due to a lack of proper identity cards. With schemes such as the ‘One Nation, One Ration card’, yet to be implemented in their full capacity, these workers from the informal sector are struggling to meet the expenses for their daily essentials. Ironically when we think of the informal sector, it is these very people who ensure our access to essential goods and services.

What can be done?

According to the IMF, the informal sector is often associated with “low productivity, high unemployment, poverty and slower economic growth”. Due to the nature of the sector’s activities, their needs are immediate. While the government has allocated 25 lakhs as seed funds to start-ups to help them tide over the current crisis, it should be noted that less than 2% of this fund has been allocated to meet the needs of the informal sector. The rise in unemployment brings with it the risk of plunging these communities deeper into poverty. With the easing of the lockdown by July, a lot of informal sector jobs have started picking up, shifting the government’s focus to the unsalaried individuals.

The reverse migration has resulted in several individuals trying to invest and set up businesses in their hometowns. However, having dipped into the modest savings, heightened by the lack of cash flows, these individuals find themselves starved for credit. While the moratorium granted by the RBI along with the Atmanirbhar Bharat Scheme will ensure the survival of some small businesses, equal attention to a small, individual entrepreneurs will help them sustain their business through these tough times. On one hand, the banks are being encouraged to lend more and provide long-term to SMEs, however, the financial needs of the individual entrepreneurs in the sector are small, short-term, and immediate.

The COVID-19 pandemic is not just a health crisis but has brought global economies to their feet. In a country with rampant unemployment, the stress on the economy is greater. For individuals from the informal sector to set up or grow businesses, there is an immediate need to infuse credit into the sector. Some of our partners are working closely with migrant workers who have returned home to survive the pandemic to help rebuild their livelihoods.

Visit to support these businesses.

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