The Narendra Modi government inaugurates a fundamental change in the relations between the state and the informal economy. The tentacles of the state now reach the bottom of the informal sector. The vast majority of Indian companies are in the informal sector. The sixth economic census revealed that 94.6% of the country’s non-agricultural establishments had five or fewer workers. Two-thirds of all nonfarm businesses were what the census called “self-employment facilities,” which means that they do not hire workers.
As the population grew and farms were subdivided into smaller fragments, agriculture became a losing proposition for most peasants forced to leave the land to emigrate to urban slums or scratch a precarious life by complementing their income with salaried labor or creating small businesses, or have taken their own lives. The vast informal sector is, for the most part, a vast reserve of disguised unemployment, reflecting the failure of the formal sector to create jobs for the masses. It is a symptom of the detained development of Indian capitalism.
As capitalism develops, the informal sector is expected to decline. Their stubborn persistence is a scandal. The theory was that as the economy grew, the informal sector was shrinking and people would find better and more productive employment in modern industry and services. Unfortunately, the reality for most of those behind industrialization is far from this rosy image. The post-colonial Indian state has always had an ambivalent relationship with the informal sector.
While previous reservations for small industries have been withdrawn, the state still helps with bank loans, interest subsidies, occasional exemptions from agricultural loans, and the provision of social services and programs such as the rural employment guarantee program. On the other hand, it considers the sector like an old-fashioned relic and attacks it often by dispossession. But the dominant attitude has so far been the benign abandonment of the small capitalists and the evil negligence of the workers. The government ignores the terrible working conditions in most informal enterprises, while turning a blind eye to widespread tax evasion. The Modi government is changing all this – it does not care about working conditions, but it wants the small capitalists to pay their contributions to the state.
The informal sector is in many ways linked to the formal sector of the economy. Many small businesses work under contract with large companies. Some are suppliers of large units. Organized enterprises benefit from low labor costs in the informal economy and their flexibility. Small traders sell products produced by the formal sector. Informal businesses have their own hierarchy and the larger entrepreneurs among them are not poor. Many of them were able to accumulate substantial surpluses and participate in conspicuous consumption.
These companies were the most affected by demonetization and the tax on goods and services (GST), as well as attempts to clean real estate. Although the demonetization clash has been timely, the TPS, with its self-monitoring mechanism and a clear audit trail, is a major threat to these companies and traders. Not surprisingly, they were the most violent protesters against the new tax. The real problem for them is not so much the high tax rates or cumbersome procedures, but how to declare suddenly the benefits that surpass the revenues reported last year.
One consequence of the introduction of the GST and other measures to combat the black currency will be the increase of the market share for the business sector. Stock traders held open opportunities. A research report from Citibank says, “The ongoing government’s (and GST deployment) structural initiatives will accelerate the transition to the organized sector.” The shift to a less-monetary economy, changes in indirect taxes through the GST, compliance with direct taxes, e-commerce, and some progress in labor law reform will disrupt traditional medium-term structures and long-term economies of scale. ” Not surprisingly, large companies have supported these changes.