The Indian informal sector: The impact of globalization and reform

Abstract

Globalization and economic reforms typically affect the formal sector, the informal sector existing outside regulation. Yet, numerous links between them mean the informal sector is variously affected. Traditionally, the model used to explain the impact of these forces was labour market segmentation and migration: workers laid off in the formal sector increase informal labour supply, leading to wage decline and increased poverty. The author examines whether this pattern applies in India following economic reforms in the 1990s, and finds a more appropriate model, driven by expansion both in labour supply and in demand, through outsourcing, skill transfers and new enterprises.he impact of globalization and economic reforms is most directly felt by the T agents and activities of the formal sector. By its nature, the informal sector exists in the shadow of regulations. Nevertheless, there are various ways in which the informal sector is affected by economic reforms. For instance, trade liberalization, which tends to lower the prices of tradable goods, can have a similar effect on informal-sector prices, to the extent that its products are close substitutes for tradable goods and services. The informal sector can also be affected by trade liberalization through the linkage of labour markets: workers who lose their jobs in the formal sector help increase the labour supply to the informal

Is informality a barrier to sustainable development?

“…However, others have argued that workers do not generally opt out of the formal economy by choice and that formal‐sector employers reap most of the benefit (Valodia, 2001; Altman, 2008; Valodia & Devey, 2010, all cited in Meagher, 2013, p. 8). In India, whereas some studies have suggested that such labor market linkages increased demand for informal workers without reducing their wages (Siggel, 2010), many others have argued that informal‐sector workers suffered increased poverty (Arvin‐Rad, Basu, & Willumsen, 2010, Breman, 1996, 2010, Harriss‐White & Gooptu, 2001; Marjit & Maiti, 2006; Sinha & Adam, 2006, cited in Meagher, 2013). Related literature on the global value chains also shows more evidence of intensifying poverty and vulnerability within the informal sector (Meagher, 2013).…”

Informal Workers’ Aggregation in India: An Evolving Model of Collective Action

“…Both enthusiasts and sceptics of the liberalization-induced growth indicate that poverty has either increased, remained stagnant, or on the most positive evaluation, marginally decreased in India in the postliberalization era (Patnaik, 1997 : 174-176 ;Bhaskar & Gupta, 2007 ;Jha, 2008 ;Nayyar, 2006 : 818-822). While on one hand, liberalization of the economy failed to have any visible impact on poverty reduction, liberalization-induced structural adjustments adversely impacted the livelihoods of the significant number of the working population (Harriss-White & Sinha, 2007 ;Siggel, 2010 ;Agarwala, 2013 : 3 ;Agarwala, 2008 : 382 ;Basu & Maertens, 2007 : 163). In order to compete in the newly opened up economy, businesses and industries increasingly started to move their activities from the formally regulated domain to the informal unregulated sphere (Agarwala, 2013 : 2, 40-41 ;Siggel, 2010 ;Agarwala, 2008 : 389 ;Basu & Maertens, 2007 ;Castells & Portes, 1989 : 12-15, 26-31).…”

“…While on one hand, liberalization of the economy failed to have any visible impact on poverty reduction, liberalization-induced structural adjustments adversely impacted the livelihoods of the significant number of the working population (Harriss-White & Sinha, 2007 ;Siggel, 2010 ;Agarwala, 2013 : 3 ;Agarwala, 2008 : 382 ;Basu & Maertens, 2007 : 163). In order to compete in the newly opened up economy, businesses and industries increasingly started to move their activities from the formally regulated domain to the informal unregulated sphere (Agarwala, 2013 : 2, 40-41 ;Siggel, 2010 ;Agarwala, 2008 : 389 ;Basu & Maertens, 2007 ;Castells & Portes, 1989 : 12-15, 26-31). In order to avoid production costs and maximize profits, businesses tended to either sub-contract their production or engage informal workers (Castells & Portes, 1989 ;Benton, 1989 ;Agarwala, 2008 : 382, 389 ;Routh, 2011).…”

Manufacturing and Trade Liberalisation of India: The Continuing Debate

“…In this sub-section, the theoretical studies in this area have been discussed and an attempt has been made to comprehend which hypothesis suits the case of India's unregistered sector. Siggel (2010) argues that impact of globalisation and economic reforms will be mainly felt by the registered sector because the informal sector operates in the shadow of regulations. If the registered sector is adversely affected by trade liberalisation, then the sector shrinks with a rise in unemployment.…”