Unfortunately, the people who took over focused almost entirely on building cities in the image of those in the West. The resulting horror has gone undocumented, but then again, perhaps there is no need to document something that is so apparent. As India’s population grew manifold, and its urban population even more so, little low-cost housing space was created. What is worse, no space was created for low-income economic activities.
Focusing only on one segment, shops, it is quite astonishing that independent India created no space for the chaiwallah, paanwalla, juicewallah, rediwalla, the mechanic, the sabjiwala, or, for that matter, the weekend market, which has little or no space allocation across urban India. But it is not just the shops; activities ranging from garbage collection to construction contracting to micro-scale garment making were ignored and continue to be so. Even where space was allocated, such as in the sabzi mandis, it is quite abysmal across Indian cities.
Go back to the documents of the erstwhile Planning Commission or the many committees aimed at giving direction to policy. The only mention therein related to low-cost housing for the poor, not to low-scaled economic activities. But these activities are critical. Urban India cannot be either economically productive or socially inclusive without them. The numbers are massive. Of the nearly 190 million employed in urban India, upwards of 80 per cent are in the informal sector. And it would be safe to say that the bulk of these are micro-businesses.
And, therefore, the lack of legal space is a key factor that perpetuates India’s large urban informal sector. Because we don’t allocate space in our cities to such activities, such entities are effectively not legal. And because they are not legal, they are labelled as informal or unorganised and mostly ignored.
Not just the government, rarely do we see philanthropy and corporate social responsibility (CSR) initiatives focus on this sector. Startups largely ignore servicing units in this domain. The multitude of skilling initiatives, both private- and public sector-led, touches this segment peripherally at best. Researchers in academia, think tanks, and even PhD students rarely study them.
This ignorance and alegality contribute to many different classes of undesirable outcomes. One, such units become vulnerable to localised strongmen and government functionaries. The hafta, for instance, is a universal phenomenon in urban India; it is not cultural, as many believe, but an outcome of this alegality.
Two, the incentive to invest in such business is reduced significantly because there is little certainty of tenure in that location. Three, the ability to become formalised is effectively eliminated because planners have not created small spaces near demand centres in Indian cities.
Much of the debate and policy instinct on the informal sector tends to focus on helping to make it more formalised and bring it into the economic mainstream. The point being made in this article is that in terms of employment, this segment is the mainstream. Just as we focus on ease of doing business for the organised sector, it would help immensely if we had similar policy objectives for the informal sector.
Of course, there are many arguments against promoting the informal sector, including that they don’t follow labour protection laws, pay taxes, or follow regulations such as those on hygiene or workplace safety. Each of these arguments is not correct. First, the argument here is not to promote such units but to allow them to exist legally by allocating space. Second, they do contribute to indirect taxes that apply to their product segments, and they are too small to be in the direct tax bracket. And third, laws and regulations on safety, hygiene and workplace practices would be easier to apply when they have space.
Another class of arguments against them relates to their low productivity, a lack of skills, and poor use of technology. These arguments are flawed as well. The UPI and digital payments, for instance, have been embraced wholeheartedly by such units across India. They are easy to use, require little training, help ease payments, help manage liquidity better, while also reducing the risk of theft and cash extortion.
The point is that this segment can be highly responsive to positive support. Moreover, with close to universal literacy and large numbers of educated, enhanced access to information through the spread of digital infrastructure, the growth of AI solutions, and a dynamic startup ecosystem, the potential of such micro-businesses to walk up the productivity ladder has gone up tremendously.
What should India do? The key lies in an acceptance that universal formalisation of India’s economy is some decades away. Therefore, while India needs to continue with efforts such as ease of doing business and increasing manufacturing, space for micro-businesses needs to be made available close to their demand centres. This will require city administrations to allocate space near major markets, residential areas, and transport hubs. The collateral benefits of such an initiative include improved municipal coffers through low-cost rental and a dent in the hafta economy.
Of course, this is a very large ask administratively due to India’s federal structure. Moreover, many local politicians, state governments, and even city administrations are likely to oppose it, as they will have much to lose. But the central government can play an enabling role. More than 90 city administrations, for instance, are currently under its direct control. The government also recently announced the creation of many new cities. The support from the Union government to state and city governments can be made conditional on allocating spaces for such activities. There are many other possibilities as well that will not require additional funding allocations.
The Union government has successfully implemented far more difficult programmes across states and cities, and will need to take the lead and create examples for the states to follow.
The writer heads the Centre for Social and Economic Progress. The views are personal
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