The Modi Government’s New Policy Narrative is Tilted Against the Informal Sector

There’s very little sensitivity being shown in forcefully shoving India’s small traders and producers into the formal economy. To what extent will this affect the BJP’s support base?


Credit: Reuters

The Bharatiya Mazdoor Sangh(BMS) , an important trade union arm of the RSS, has severely criticised the Union Budget, saying it has done nothing for the millions of informal sector workers who have lost their jobs post-demonetisation, especially in the construction sector, the largest provider of employment. The RSS was probably hoping that the Budget would do a lot for those hit by demonetisation. It had remained somewhat muted in its criticism in the weeks following  November 8, 2016.

However, if the BMS’ response is anything to go by, the Sangh leadership seems to be expressing a more fundamental opposition to the key ideas contained in the Budget.  BMS Secretary General Vrijesh Upadhyay has openly questioned the Budget statement’s broader philosophy characterised by the intent to do “labour reforms”  and effecting a much bigger “divestment programme” which includes stock market listing of new PSUs “only with the intent of selling their shares”.

Suggesting labour reforms – the subtext being a hire-and-fire policy – when millions of workers have lost their jobs betrays a level of insensitivity which can only come from a lack of empathy. In fact this lack of empathy has truly marked the post-demonetisation policy discourse over the past 3 months with the Centre refusing to acknowledge massive job losses, citing a lack of conclusive data.  The Budget therefore is only a continuation of this deeper malaise.  It is this absence of compassion which underlines the President’s address – essentially the government’s statement – to the joint session of Parliament. Little wonder the opposition is demanding massive amendments to the address, including a line expressing condolences to all those who lost their lives due to hardships caused by notebandi. So far the government has refused to acknowledge the deep damage to the informal sector. The BMS has done its own research and has said 2.5 lakh units in the informal manufacturing sector have shut down.

Jaitley’s budget speech asserts it has done a lot for agriculture and informal sector but if one looks at the overall expenditure growth, such claims fail the test of statistical scrutiny. The total expenditure growth for 2017-18 is just 6.5% or 2% in inflation adjusted terms. And, mind you, the bulk of the expenditure – salary, interest and a slew of subsidies – is pre-committed. So the question is, how much can a 2% real expenditure growth accommodate the fresh needs of the social sector in the year of demonetisation. “The total expenditure as a ratio of GDP has actually fallen by 0.5% in the budget figures for 2017-18. If this ratio hadn’t declined the Centre would have had an additional Rs 70,000 crore which could have used to alleviate the pain of those who had suffered after demonetisation,”  former finance minister P. Chidambaram told The Wire.

So Modi’s oft repeated claim that the “the government coffers are meant only for the poor” has remained a slogan. The government boasts it has increased MGNREGA allocations, quite forgetting that it is a legislated entitlement and the increase in allocations is based on actual demand that emerges from Panchayat bodies. In any case, MGNREGA’s budgeted allocation at Rs 48,000 crore is almost the same as the actual spend ( revised estimates) in 2017-18. If anything, the demand for MGNREGA employment may be even more next fiscal as the employment situation does not improve.

Overall, demonetisation has hugely disrupted the informal economy ecosystem at the bottom of the consumption pyramid. Santosh Desai CEO and Managing Director of Future Brands, a brand and consumer consultancy company, says India’s informal sector serves a very critical need which large companies and MNCs have not been able to fulfil. Even after operating in India for decades consumer multinationals have still not penetrated the very bottom of the pyramid  because as operational costs go up, it becomes difficult to serve consumers at very low price points. Desai says the informal sector, in the non-branded segment, has a much better understanding of the needs of the consumer at the bottom. Consequently, they fulfil a very important need of the consumers which MNCs are unable to do.

Small firms in the informal sector often produce lower quality imitations of branded MNC products in the food and clothing segments.  It is also true this ecosystem of non-branded imitations in the unorganised sector  thrives on staying below the radar of tax authorities, labour inspectors and other corrupt regulators. Most of these firms may not survive being pushed prematurely into the big, organised and digitised world. They also need some transition time. If pushed prematurely there will be a serious damage to the informal sector ecosystem which the formal sector may not be able to repair easily.

Unfortunately,the Modi government’s post-demonetisation policy discourse is consciously catching the informal sector by the scruff of its neck and pushing it into the organised space in the name of establishing a “clean, organised and digitised economy”. The Budget has many tax carrots and sticks to effect this forced transition of the informal sector and bring it under the direct gaze of state authorities. The GST is also one such measure which will increase the cost of the smaller players in the medium term.

In one sense, demonetisation, digitisation and GST are all reforms which are inherently advantageous to the organised businesses and will disrupt the micro and small enterprises in the unorganised world. This transition needs to be handled with a great deal of empathy. One is not sure whether the present policy discourse is showing such sensitivity.

One recalls how after the 2008 global financial recession, many Sangh Parivar intellectuals had argued that India survived the crisis partly because its informal sector was not so linked to the global economy and therefore acted as a cushion to minimise the disruption of the domestic market. But the present government is now creating a policy narrative where small sector is being demonised as unclean, non tax paying compared to the organised sector which is clean and subjects itself to all forms of regulation. The reality is the bulk of the scams erupt from within the bigger and organised businesses which have wantonly subverted regulatory institutions to the point of rendering them meaningless. The top 10 indebted business groups still have not found a way of paying back overdue bank loans close to Rs 8 lakh crore. Needless to say the promoters of these defaulting groups loyally stand behind Modi’s demonetisation programme and other draconian policies that flow from it.  This is the elephant in the room Modi will probably never see.