DEMONETIZATION AND ITS IMPACTS ON LABOURERS
What is the impact of Demonetisation on labour So, even within the organized sector of the
reforms? Indian economy, formal employment declined
Among the loudest critics of the demonetisation significantly and informal employment rose with
policy are those who predict doom for Indias time.
informal sector as a result of this exogenous shock. Within the unorganized sector, nearly all the
Numerous anecdotes are being forwarded to increase was, expectedly, informal in nature.
highlight the suffering of daily wage earners and While the share of agriculture in total employment
informal labourers across the country. has fallen from approximately 60% to less than
Let us use this opportunity to critically evaluate 50% and the share of manufacturing remained
the factors that have contributed to keeping largely unaffected at approximately 12%, it
approximately 83% of Indias labour force is the share of the non-manufacturing sector
informal, despite 25 years of modest growth in a (construction) which has nearly doubled from 6%
to 12%, while the share of the services sector rose
seemingly liberalized economy.
from 23% to 27%.
What is the situation of labourers in informal
sector?
Informal employment in the non-agricultural
sector increased by 27%.
The most authentic estimates of the size of
informal labour market in India are from the Most jobs created in the high growth period of the
National Sample Survey Office, the data shows last decade have been informal in nature, even in
little has changed over the years in the nature the organized sector.
of employment, as size the of the informal This implies that the benefits of Indian economic
labour market remained significantly high and growth are concentrated among a few, while a
predominant in the economy overall. growing proportion of the population has been
relegated to living as working poor.
In 2004-05, the composition of organized vs
unorganized was 13:87; while in 2011-12, this Why we need labour reforms?
had changed to 17:83.
The literature over the last one decade has
The growth in organized employment was, identified lack of labour reforms as the main
however, overwhelmingly informal in nature.
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culprit that has kept employment in India low and Why employing labourers informally is preferred?
informal. Despite high growth, most sectors chose to
employ labour informally because it lowered their
Poor labour laws have often been cited as the
overall costs.
menacing shackle around Indian manufacturing.
Routing wages and salaries away from cash
Lack of labour reforms has generally meant payments and towards formal channels such as
multiple labour legislation that deter hiring of bank accounts, electronic and mobile payments
labour. will create a formal culture of employment, but
in the process obviously lead to higher costs for
Over the last several years, some states have been
firms.
proactive and have lowered the stringency of
labour regulations and simplified compliance and Conclusion
procedural requirements.
Demonetization is forcing employers in the
But the empirical evidence on this leads us to a country to reconsider employment contracts.
fundamental puzzle: Even in those states of India There needs to be a simultaneous push from
that achieved a high labour reform index, like the formal financial institutions such as banks,
Gujarat and Andhra Pradesh, the jobs that were payment interfaces such as National Payments
created were overwhelmingly informal in nature. Corporation of India and other private firms to
facilitate the adoption of new payment methods.
The lesson, then, is that labour reforms are not
enough. Each firm will have to assess its internal
fundamentals to evaluate what the short-term
There is a need to make serious efforts at facilitating costs of going formal entail while achieving
a widespread environment that will develop a operational and dynamic efficiency to remain in
formal culture in Indias labour markets. business in the long run. This can only be great
for their employees and the economy overall.
Demonetisation has the potential to become one
such serious policy intervention.
SHANKAR IAS ACADEMY
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