apropos of my previous post, i'd like to post here an excerpt of a debate with a fellow blogger, over email, on , among other issues, the informal sector in india- i think it's relevant to the issue discussed in that post. actually, this excerpt consists of only one message (mine), which is my response to one portion (which is referred to in the course of my message) of an earlier message from the other debater. i've edited out names, personal references, some obvious typographical errors (in my message) and other sections which i felt were irrelevant to the issue i wish to focus on in this post (in a general sort of way): the rickshaw pullers. reworking on the message to present it as an independent, new post is an option i've considered, but i find it a demanding task right now. it's too long, among other things..so, here goes:
i'd said we've a strongly interfering government which is a weak regulator. the presence of a large (93% of our workforce) informal sector itself is the strongest piece of evidence that the indian government is a weak regulator. you seem to be unaware of a lot of aspects of what exactly constitutes the informal sector- actually that is what the informal sector is all about - the govt too is not totally aware of what happens in the informal sector. informal sector, broadly, is that section of an economy on which a government doesn't have complete information. or of whose activities the government is not informed - it may have partial information on some sections of it, less than partial information on other sections, or very little infomation on some other sections.
let me explain: informal sector, broadly, might be viewed as composed of a) the self-employed b) and those who work for others. the self-employed may a) work alone, like many doctors who have their clinics at home or the street corner mochi b) or employ others, like restaurateurs or scrap dealers. in the second category fall people like me who broadly employ less than ten people (this is a kind of universal norm). that is one way of defining the informal sector, but that doesn't completely define it. another way of looking at it is from the angle of activity rather than mere employment- some activities of some organized sector companies might go unreported. companies might not disclose all of their turnovers or put all of their employees on their payrolls (even psus do this). a large portion of the government itself seems to work in the informal sector (ask the prime minister or the chief minister of any state how many people actually work for him at any given moment and, a hundred times out of hundred, you won't get the right figure - there are so many estimates of how many govt servants work for this or that govt that you never really get the true picture. so you could say a large portion of the government too falls in the informal sector).
now let us look at your view of the informal sector and also the role weak regulation and a strongly interfering government play in informalising the majority of the work force in the country. you say:
The informal sector in India is not the same as informal sector in US. In US, even if you employ a homeless person or even if you do a business selling in ebay, you are regulated by IRS, Labor Dept., etc. You need to pay taxes and you need to play by the rules. Well, there are a few who don't follow the rules but a big chunk of them are clearly following the rules laid out. It is not an informal sector like the one in India.the informal sector in india is almost the same as the informal sector in the u.s., a) every single participant/person in the informal sector in india pays some kind/kinds of taxes or the other- income tax, service taxes, professional taxes, property taxes, municipal taxes, vat or sales taxes, duties, user charges, cesses, levies, fees etc., you name them. and b) the burden of taxes, as compared to their incomes, is disproportionaltely higher on them, individually, than on their average counterparts in the formal/organized sector. c) and their share of access to government services, in return, is disproportionately lower than the access of their average counterparts in the formal/organized sector. and they do play by the 'rules' of a' strongly interfering govt' (in the form of babus from every govt/dept/authority you can think of- police/ income tax/excise/commercial taxes/municipalities/labour/pollution control boards/customs/weights & measures...and a thousand other kinds). you name them. in reality, they pay a much higher price, on an average, than they'd have if they'd been playing by the rules of a reasonable government- rather than the rules (if they were reasonable) of interfering govt officials.
i'd like to expand on all the statements (a), (b), (c) i've made in the preceding para - let's consider the premise (b) first, that the burden of taxes is higher on those in the informal sector than on the formal sector, first. take two families, one headed by someone who works in the formal sector and one who works in the informal sector. let's assume that the first family makes around 50,000 rupees a month and the second family makes 2000 rupees. let's assume a uniform tax burden of ten percent on all consumption by these two families (i am taking of indirect taxes like sales/excise etc., ). we can safely assume, the first family because it has a higher income, and because it's head is regularly employed it's very likely that it'd also have accessed credit from banks etc., to buy some property and invested in deposits, stocks etc. shall we assume that they use around 20,000 rupees a month towards mortgages, loans, savings etc.,? i think it is also realistic to assume that the second family has no such access to credit...and their incomes are totally spent on consumption. so, what would the total expenditure on taxable goods and services, or consumption in rupee terms, of each family be at the end of every month? rs.30,000 in the case of the first family and rs.2,000 in the case of the second family. and the taxes paid by each family on consumption? rs.3,000 and rs.200 respectively. and the burden of taxes? 6% (of total income) of the first family ( in the organized sector) and 10% (of total income) on the second family (in the informal sector).
now i come to the premise (c): you may object to some of the assumptions in the above illustration- about the incomes, consumption levels, savings rates, tax rates (a uniform rate for two different kinds of consumption?), 'unconsumed' portions of incomes etc., for instance how can i equate taxes imposed on only consumption with the 'total burden of tax' on an individual? the rich pay income tax (not everyone in the organized sector pays income tax, and not everyone in the unorganized sector avoids them), don't they? yes, the first family is most likely to be paying income tax. but, this has to be seen against the backgroud of 1) the family's share of access to public services and 2) and the various kinds of relief offered to assessees in the form of exemptions (see http://www.surfindia.com/finance/income-tax/income-tax-exemptions.html ) and deductions (medical expenses, education expenses etc.). for example, a family (like the first family i am talking about) would be entitled to exclude from its income, education expenses to the tune of 24,000 a year, spent on the educational expenses of two kids (most of you probably know about this). think about this: the government probably spends less than a tenth of that amount on the education of each child (like one from the second family) at a government school. what about other public services - like better neighbourhoods, sanitation, potable water, electricity, roads, security, schools, universities, libraries, parks, stadia, museums, galleries, hospitals and schools and many privately provisioned (subsidised by the public in one fornm or the other) services like cinemas, malls, restaurants, theme parks, hospitals and schools etc., etc.,? those who work in the organized sector, because by definition they are better organized, have better access to all of those services. they're mostly urban, and where they're not urban, ( like factories, mining companies, railway stations in rural, semi-urban locations), the government or the companies they work for build/s/built them townships, campuses, colonies which provide much better access to public services than that offered to other people in the same rural/semi-urban neighbourhood. in fact these were india's first gated communities (every large public sector company/organization/dept has at least one, sometimes two or more)...and the big private sector companies too build them. the one at jamshedpur, ---------------- can be called modern india's first gated community (with 24 hour water supply, uninterrupted electricity etc.,), if you ignore forts st.george and st.william etc., i don't think i've to list here again the deficiencies/shortages/absence of public services in areas where informal sector workers live (mostly rural and low income neighbourhoods in cities). yes, there are exceptions - but broadly, that is how the organized/informal sections of our working population live. i'll deal with statement (a) in a short while.
The informal sector we have in India is nothing but lawlessness. You can give a spin by saying market forces are in play there. If this kinda market force is question, tomorrow a Tom dude can extrapolate it and say that swords and guns are the tools of market forces and he will argue that theft, murder, etc are valid and he can make a claim that it is also a case of market forces in play where people who are strong enough and who can hold guns or knives survive. We don't want this kinda lawless market forces to determine our lives. The informal segment in India is wrong and it shouldn't exist.interesting you should dub the informal sector 'lawless', because some of the top lawyers in the country work in the informal sector. and the sincerest social/political activists, artists, writers, film stars- the big majority of course are the 'lawless' landless labourers, artisans, manual workers like scavengers and butchers, cattle and sheep herders, screen printers and engravers, all kinds of farmers, smugglers, gun-runners, prostitutes, pimps, child traffickers, hired assassins and other anti-social elements.
the great majority of the workers and the self-employed in the informal sector are not 'lawless' in any sense of the term, -------. a great majority of them conduct legally recognized work and businesses and they can only be described as 'law-struck', or 'persecuted' or 'law-oppressed' or 'law-starved' etc., and as i said earlier [in statement (a)], everyone of them, workers or self-employed, pays some kind of tax or the other. i'd told you i work in the informal sector - the business i run is --------------, the it department knows about my business because i have to file annual returns, so does the excise department because my suppliers/vendors charge the business service tax/vat on goods/services supplied and i am supposed to file periodical returns with those authorities (and oh yes, i pay more than my share of taxes because i don't reclaim the excess paid by me because i don't/can't file regular returns), and so on, and at any given moment any of them and a hundred other kinds of authorities can send notices or inspectors to me. so you see, none of those who work in the informal sector are truly hidden from the law. even the lowliest rickshaw puller usually has some kind of authorization/licence (renewed periodically) or the other from civic authorities. many are members of unions recognized by some govt arm. those who do not possess a licence/authorization are even more persecuted than the licence-holders. pushcart vendors, barbers, vegetable/fruit vendors- others who sell their goods/services on the street possess/or are quite willing to pay (to possess) any reasonable 'ransom' to be recognized by the government because that'd lessen the harassment from a hundred different kinds and shapes of bribe-seekers. retailers of every kind, traders... all other kinds of businesses that work behind shutters -the majority of self-employed people(who may/or may not employ others) do not keep the govt fully informed (the government does have at least partial information on each one of them through one agency or the other) about their business/work because # the rules are unimplementable # their resources are limited (i don't include the 'creamy layer' of film stars, high paid professionals, businesses and industries and the very small layer of the criminal element, who find it lucrative not to report or let the government know the full extent of their income, size, wealth or activity to the govt depts., in this category).
i'll keep the explanation of these two reasons brief - why are the rules unimplementable? last year, a friend of mine wanted to start an edible oils firm- on a small scale, with less than 20 lakhs capital, and a small factory to process and package. he learnt he had to get 63 different kinds of approvals/licences/clearances/whatever. and it's not a one time affair- he'd have to deal with all those authorities all through his working life.another person i know, started a small -sized restaurant, only a scale bigger than a chaikhana- and from the first week he slowly started to learn, as inspectors/officials of various kinds started landing up, how many depts he actually had to get permissions/clearances and so on from. the figure was 29. i could tell you a hundred other stories, but for the moment, i think those two are enough.
i won't go into the details of how much paperwork needs to be done to comply with all the rules of all the departments, how much time needs to be spent, and how much money...i won't go into that familiar complaint- what i am saying is that to expect the self-employed person (roadside vendor/craftsman, small businessman or trader etc.,), given his resources, to comply with all the rules, given the size of the rules/requirements, is plain stupid.
now, the next question- in what way are their resources limited?
* a majority of them are from underprivileged communities - they start out with inherited resource limitations. for instance, around 20% of india's people own more than 70% of all the land in the country,
* they're illiterate or inadequately educated. most of them come from communities that have traditionally been excluded from higher education or were 'convinced', by their own communities and society at large, about the
irrelevance of modern education for people in their socio-economic positions,
* they're ignorant - education by itself doesn't bring in knowledge of laws/procedures/regulations. you are also required to be exposed to a particular kind of socialization to learn about these things,
* their businesses are too small- they can't hire the services of regular book-keepers, accountants, leave alone chartered accountants, lawyers etc., to maintain books regularly or comply with regulations,
* the cold truth is they can't afford to waste the only precious resource that they've, and that is time. a day lost could make a lot of difference to their incomes.
there could be a hundred other reasons but the essential picture you get is that they start out with less (of education, training, capital, credit, social support) and they're destined to get less ( of credit, training, technology, knowledge, social support, governmental encouragement). no broad industry associations and no powerful unions lobby for their cause on a sustained basis. one u.n (agency) report i read says that the one distinguishing feature which characterizes most informal sector businesses is that they can never scale up to their full potential. that characteristic is best exemplified by the marginal and sub-marginal farmers of india (those who work on holdings of less than one acre each) who are more productive than small/medium or large farmers who receive all kinds of support from the government. informal sector workers, mostly from the underprivileged sections constitute 93% of total indian workforce and contribute around 60% of our gross domestic product - the organized sector workers, mostly from the privileged sections contribute around 40%. if that doesn't tell you about the the curbing of potential, what will?
and if you think regulation had no role to play in that, i beg to differ. if the state directed the flow of all resources towards the creation, sustenance and growth of the organized sector on the one hand, it has also used its powers to restrain and suppress the energies of the communities originally associated with all production in india. the state in india, since independence, continued to play, and much more effectively than any time earlier, the historical role it was always assigned with: protect cows and the brahminized classes (and please don't accuse me of alluding to any one community). from the rakshasas perhaps? the rhetoric of the class argument had long deluded the rakshasas in india into believing they're not rakshasas - it produced mass hallucinations and redistributed more poverty than land.
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it's an email, so please don't expect it to present a coherent argument on all counts. also, you may not totally agree with my definition of the informal sector: there are too many working groups working at the national/international level to arrive at a better definition.what i considered relevant for this post was the fact that around 93% of india's workforce works in the informal sector.