470 Million Person Workforce, 35 Million Formal Jobs

Running the risk of being redundant, this entry highlights insights from Edward Luce’s 2006 book, “In Spite of the Gods” (my colleague Dan Kopf wrote an entry centred on this book entitled India’s Economic Path and What it Could Mean for MF). I was reading the book last night, and came upon a startling passage that discusses the formal job sector in India. It starts with the quote below:

“Less than 7 percent of India’s dauntingly large labour force is employed in the formal economy . . . That means that only 35 million people out of a total 470 million have job security in any meaningful sense; and only about 35 million Indians pay income tax, a low proportion by the standards of other developing countries.”

According to Luce, of this 35 million people in the formal sector, 21 million are government employees (e.g., civil servants, postal workers, teachers, soldiers, railway employees, oil sector workers). Of the remaining 14 million, which are formally employed in the private sector, only .25% are employed in IT, software, BPO work or call centres. Foreign companies employ somewhere between 1-2 million employees, “depending on the definition of a foreign company”. The rest are private sector employees hired by Indian private companies.

And what does the informal sector look like? According to Luce, “They are milking the family cow, making up the seasonal armies of mobile casual farmworkers, running small shops or street-side stalls, making incense sticks and bidis, driving rickshaws, working as maids, gardeners and nightwatchmen, and bashing metal as mechanics in small-town garages.”

Why is the small size of the formal sector (and huge size of the informal sector) matter? There are several reasons, including:
1) As of 2000, formal sector employees make about 9 times more money, and are 9 times more productive, than informal sector employees (Luce points this fact out).
2) The income tax base is tiny for a country of India’s size. I think this may be one of the reasons for the poor public infrastructure and health services provided by the government (among others such as corruption). Also, lack of government services actually has more of an effect on those making less money, meaning those in the informal sector are disproportionately affected by lack of government support.

To address the problems related to the huge size of the informal sectore Luce argues, “If India is to build a better bridge between the old world and the new it must provide jobs for unskilled and semi-skilled employees in its manufacturing sector . . . In 2005, India employed just seven million people in the formal manufacturing sector, compared to more than a hundred million in China”.

I don’t think China is the one and only shining example, and I do not 100% agree that scaling up manufacturing is the only way to go in India, which has great higher education and technology. However, I agree with Luce’s bottom line: for economic growth to be more equitable, a bridge must be built for the 400 million-plus informal sector labourers to help them make their way to the better-payed and more productive formal sector.