The wages of informality

OKONOMOS

Most Indians work in what is known as the informal sector. But little is known about it because Indian economists with their obsession with macroeconomics, have tended to treat it as if it does not exist.

However, those who have read Barbara Harris-White's extraordinarily persuasive and well argued book* are left in no doubt as to how the Indian economy really works and why India's informal sector needs to be better understood.

Fortunately, and largely under her direction, some amends are being made now. Three recent "" and hugely informative "" papers from the National Council for Applied Economic Research (NCAER) tell us why. In one**, Anushree Sinha and Christopher Adam develop a model to study the sector.

In another***, P K Ghosh, Rupinder Kaur, Ratna M Sudarshan examine the rice processing industry after trade liberalisation. The third**** consists of case studies in garments manufacturing by Navsharan Singh and Mrinalini Kaur Sapra.

Sinha and Adam have tried to design a general equilibrium model to account for shocks. It seeks to analyse "the transmission of these shocks, originating from government policy having differential impacts on sectoral production, different types of incomes, consumption and trade."

They find that, contrary to popular myth, the wages of casual workers increase. This is because casual labour-intensive sectors expand due to trade reforms. The weakness of their paper, as they admit, lies in it not accounting for increases in labour supply and wage rigidities.

Its relevance, though, lies in its making possible the study of impacts of policy reforms. It also identifies the losers and gainers as a result of such external shocks.

Ghosh, Kaur and Sudarshan have studied the rice processing industry in Punjab and West Bengal in the context of trade liberalisation. Worldwide, they say, the rice market is probably the most distorted and the most controlled.

"Even though the incentive structure may have been unduly negatively distorted, part of the slow pace of reform is necessitated by the enormous implications, not all positive, that an uncontrolled rice market would have for the poor."

It turns out that in Punjab it makes no sense to divide the industry into formal and informal sectors because mills in the formal sector treat workers just as they would had they been in the informal sector "" in spite of regulations that oblige them not to do so. They simply ignore the rules and cheat the workers.

The share of informal sector units is over 70 per cent. However, the proportion of rice processed by them between 1 and 2 per cent. After trade liberalisation, the number of units in the formal sector has increased.

The government is an important player in the rice chain. "So it is actively lobbied at all levels by trade associations to secure (undue) advantages...in actual practice both parties "" the staff of the agencies and of the mills "" manipulate the system to their best advantage using fraudulent practices." The authors do not think that complete privatisation offers a solution.

Singh and Sapra look at what has happened to the garments business as the bulk of production is still in the informal sector. They study Delhi and Tiruppur.

Not to put too fine a point on it, "17.45 lakh people are employed over 7.8 lakh units, with the informal sector accounting for 83 per cent of employment and over 99 per cent of the units in 1999-2000. Of the 17 per cent employed in the formal sector, 5.8 per cent are contractually employed. Overall, 26 per cent of the garment sector workers are women, with females dominating employment in the formal sector."

The authors conclude that the data is not very good and that the official agencies need to get their act together; and that laws are not applied very strictly to the units in the garments sector.

Therefore, "without the evolution of an effective mechanism to oversee the regulation of the garment industry and its compliance with labour laws, piecemeal efforts to protect livelihood of workers through minimum wage enforcement and social security provisions will be meaningless."

*India Working, Cambridge University Press, 2002
**Impact of Trade Reforms on the Indian Informal Economy: A Macro Analysis with CGE Methodology
***Trade Liberalisation and Informality: Case studies of Rice Processing Industry
****Economic Liberalisation and Informality: Case Studies from Garment Sector