Atmanirbharta & the informal sector

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Atmanirbharta & the informal sector

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• Atmanirbhar Bharat vision: The key idea in it was self reliant economic development, via 'vocal for local' and 'make for the world' themes. The huge informal sector of India was to play a central role in it. That's not happening though, and informal sector is now transforming.
• What drives the vision: The Atmanirbhar Bharat vision comes from the standard theory of economic development, which says that domestic demand and external demand will 'inject demand' into the economy. 

1. 'Vocal for local' is a strong message to buy local goods and services
2. 'Make for the world' is an ambitious call, resembling the East Asian exports-led growth strategy
3. Together, these will be 'twin engines' of growth

• Assumption: This strategy assumes a lack of enough demand, hence the govt ought to make a clear prediction of how local producers (goods and services) will seize opportunities at that scale. Here, one must study the informal sector first.
• Informal sector in India: The sector is huge and hugely diverse. Half of India's GVA comes from here, and nearly half of exports too. (GDP = GVA + net indirect taxes)

1. So demand injection via Atmanirbhar Bharat will trickle down to informal sector, directly or indirectly
2. Problem is that informal sector is hit by many constraints

• Constraints: Most MSMEs are actually micro, and with little capital investment. Production scale is low, quality substandard and raw material procurement as well as sales done locally. Many die rapidly. Most don't have access to cheap, long-term credit. No one recognises and respects this sector. 

1. For such units, a competitive role in global market is being envisaged, which won't be easy at all.
2. Unless the informal sector embraces three changes - internal transformation, strategic positioning and labour-market dynamics - things won't improve.

• Internal transformation: Informal sector units must slowly move towards formalisation, by infusing capital, raising labour productivity and wages. Government has to facilitate mergers and acquisitions in this sector, and not allow birth of any more newer smaller units.
• Strategic positioning: Local entrepreneurs (of informal units) have to now position their units strategically, in global mega supply chains. There are two mantras - ultra-flexibility in production cycle, and ability to withstand sudden changes (both domestic and global).
• Labour market dynamics: Informal sector in India employs 80% of India's workforce (and India is a labour-surplus economy). The two changes discussed can impact jobs generation. Hence, rise in demand must be more than the rise in labour productivity, so that jobs aren't lost. To build newer jobs, more diversification (horizontal and vertical) is needed. Horizontal refers to newer products and markets, and Vertical refers to entire supply chain for a single product. 
• Summary: Atmanirbhar Bharat is the turning point for informal sector, needing a balance between continuity and change. Slow and steady formalisation is the key.

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