Atmanirbhar Bharat & the informal sector
Why in News
- The overarching vision of the Atmanirbhar Bharat envisages self-reliant economic development via ‘vocal for local’ and ‘make for the world’
- India’s vast informal sector is poised to play an instrumental, decisive and an intriguing role in this vision.
- But the sector appears severely constrained to harness the opportunities under this vision.
- In addition to being unleashed from growth-stifling constraints, it is bound to undergo three major transformations in and for atmanirbharta.
Atmanirbhar Bharat in Economic Development
- The vision of the Atmanirbhar Bharat is rooted in classical paradigm of economic development, based on demand injection in the economy via two sources, domestic and external.
- ‘Vocal for local’ exhorts a distinct and decisive shift in consumer preferences towards locally-produced goods and services.
- ‘Make for the world’ is more ambitious and resembles the export-led growth strategy adopted in East Asia. Thus, the Atmanirbhar Bharat categorically bestows the Indian economy with twin engines of growth.
- The strategy is based on an assumption of lack of adequate demand, so a prognosis of supply side with respect to the ability of domestic producers of goods and services to seize the opportunity at the requisite scale and scope is pertinent.
- The nature, character, structure and contributions of the informal sector require retrospection.
Atmanirbhar Bharat in Informal Sector
- The size of India’s informal sector is massive and so is the extent of diversity therein.
- It accounts for about 50% of GVA and a major share in the export basket.
- This position proffers it with growth opportunities emanating from domestic as well as external sources.
- As a corollary, a large portion of prospective demand injection from the Atmanirbhar Bharat is bound to trickle down to the informal sector, directly or indirectly.
- However, the informal sector is plagued by various constraints.
- Most firms are micro in size and deploy little capital. They have a small scale of production, substandard/unbranded quality of products, and localized scope of procuring raw material and marketing their product
- They are vulnerable to business downturns and other market uncertainties, as reflected in high mortality.
- Their access to cheap, reliable and long-term credit sources is highly restricted. The sector also endures a lack of official identity and recognition of its existence and contribution.
- Atmanirbhar Bharat promises enhanced demand for domestically-produced goods and services, but the exposure to stiff global competition, especially for informal sector units, is imminent.
- Goods and services produced in the informal sector must conform to global standards, if not exceed them, and at a competitive pricing.
- Reconciling the hand-to-mouth existence of units in the informal sector with their stipulated globally competitive role in Atmanirbhar Bharat is a Herculean task.
- In such a scenario, the informal sector must embrace for three tectonic shifts with respect to internal transformation, strategic positioning and labor-market dynamics:
- Enterprises must undergo drastic internal transformation, progressively converging at incremental formalization through spontaneous and self-propelled transition into economically-viable units.
- It requires infusion of capital to ensure enhanced labour productivity and higher wages.
- The entrepreneurial energy in this sector must be unleashed from growth-stifling constraints, mentioned previously.
- A systemic disruption, fostering natural growth must be ushered in, which would also curb the birth of new informal enterprise
- Moreover, internal consolidation in the sector via merger and acquisitions of units would bring benefits accruing from scale economies.
- Two, because the vision of the Atmanirbhar Bharat exposes the informal sector to global competition, entrepreneurs must embrace the subtle art of strategic positioning in global mega-supply chains.
- They must pick their products and markets with utmost care, and engrain two mantras of success at the global stage in the DNA of their business strategies.
- Global mega-supply chains demand ultra-flexibility in production cycle in addition to heightened resilience to withstand headwinds emanating from not just domestic factors but also global.
- Three, India is a labor-surplus economy.
- The informal sector employs more than 80% of India’s workforce.
- The changes in the first two spheres (higher capital intensity-led enhanced labor productivity and ultra-flexibility in production cycles) may have severe repercussions on the availability and quality of jobs in India.
Solutions
- The first assumption is that the proportionate increase in expected demand must be more than the enhanced labor productivity to at least retain the currently employed workers.
- To continuously employ current workforce, we need to incrementally corner an extra chunk in product market.
- It necessitates increased competitiveness, being led mainly but not solely by enhanced labor productivity which tends to make a part of the workforce redundant cyclically.
- To generate good quality jobs, diversification (both horizontal and vertical) must be encouraged.
- Vertical diversification entails products not just be partly produced or assembled in India, they must be the end-products of fully indigenized and integrated production and supply chains, from design to made in India.
- Horizontal diversification involves expansion into newer products and markets, smartly aligning with India’s comparative advantage of surplus labour.
Conclusion
- The vision of the Atmanirbhar Bharat is an inflexion point for India’s informal sector, which stipulates adroit maneuvering between contrasting forces of continuity (persistent and pervasive informality) and change (incremental formalization).
- Atmanirbharta must embrace informality via factoring in these three transformations and nudge it towards incremental and spontaneous formalization.
(Source: Indian Express)
GS PAPER – III
Lend a hand
Why in News
- Recently, RBI Governor announced a slew of measures aimed at lessening the financial stress in the economy.
- The announcements, which come at a time of acute economic uncertainty, amid a wave of infections that is yet to peak, are designed to boost the flow of funds to the healthcare sector, and ease the pain of small businesses and individuals — parts of the economy that are most at risk.
- By doing so, the governor has sent a clear signal to all possible policy support will be extended to the economy as the fallout from the second wave of infections intensifies.
New Framework of RBI
- The central bank has provided an on-tap liquidity window, allowing banks to borrow Rs 50,000 crore at the repo rate for lending to the health care sector.
- This lending will encompass vaccine manufacturers, suppliers of medical devices, oxygen and ventilators, and hospitals, among others.
- By allowing these loans to be classified as priority sector lending, the RBI is incentivizing banks to ramp up support to the sector during these troubled times.
- Credit to small businesses and retail borrowers is also being incentivized through two channels.
- First, small finance banks have been provided the option of borrowing Rs 10,000 crore at the repo rate which can then be used for lending up to Rs 10 lakh per borrower.
- And second, these banks have been allowed to classify lending to microfinance as priority sector lending.
- Considering that during this period of stress, cash flows of businesses are likely to come under pressure as economic activity limps, the RBI has also announced a resolution framework for small businesses, MSMEs and individuals to allow them to restructure their obligations.
- However, this scheme has been extended to those who had not availed of the earlier restructuring scheme.
- Alongside, the RBI also announced the second tranche of its government securities acquisition programme (G-SAP) of Rs 35,000 crore which is part of its stated commitment of Rs 1 lakh crore.
- For state governments, which are likely to face a mismatch between their revenues and spending in the near term, the central bank has eased their overdraft limits, allowing them greater access to funds to fulfil their expenditure priorities.
- The number of days states can be in overdraft has been increased from 36 days currently to 50 days now, providing them with greater flexibility to manage their borrowings.
Conclusion
- Considering the ferocity of the second wave, and its yet uncertain economic fallout, it is reasonable to expect more steps by the central bank.
- The government too has announced some relief measures — the Centre recently announced the provision of 5 kg of foodgrain to the poor under the Pradhan Mantri Garib Kalyan Anna Yojana for the months of May and June.
- However, considering the gravity of the situation, and given that large parts of the economy were yet to recover to pre-COVID levels even before the second wave hit, far greater support is required from all levels of government.