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Union Budget 2022: Why the informal sector needs govt support

Union Budget 2022: Why the informal sector needs govt support

Despite formalisation gathering pace, the informal sector continues to employ about 80% of India's labour force and produces 50% of its GDP.

While the informal employers are light on physical capital, they often require short-term working capital to even out irregular cash flows. While the informal employers are light on physical capital, they often require short-term working capital to even out irregular cash flows.

After the first shock of the pandemic, India's corporate sector has recovered quite well as reflected by GST collections consistently exceeding Rs 1 lakh crore in recent months and the buoyancy in the stock markets.

However, it's a different story for the unorganised sector that has borne the brunt of the lockdowns and other disruptions. 

Despite formalisation gathering pace, the informal sector continues to employ about 80% of India's labour force and produces 50% of its GDP.   
 
To be sure, about half of them are engaged in agriculture which has held up well, thanks to good rainfall and relatively inelastic demand for food products. 

Also Read: Every third informal worker registered on e-Shram, total enrollment past 14 crore mark

It is the other half, employed in the non-agricultural informal sector that is in crying need of help. Most are engaged in construction, manufacturing and in services like trade, transport, hotels, eateries etc. 

With activity carried out on a minuscule scale and living hand-to-mouth at the best of times, informal employers rarely have the reserves of capital to absorb unanticipated shocks. The past two years have been especially tough, and many have closed shop.  
 
While the government has tried to ease their stress, much ground remains to be covered. 

For a start, we must extend better social protections to informal workers, especially the urban poor who don't come under the NREGA. 

Further, sustained efforts are required to free informal employers from dependence on informal financing-yes, informal employers require formal finance-by expanding microcredit and putting more resources in the hands of formal financial institutions with proven last-mile reach. That implies more NBFCs than banks. 

Also Read: 10 million lost jobs in Covid 2nd wave, 97% households' income declined: CMIE
 
While informal employers are light on physical capital, they often require short-term working capital to even out irregular cash flows. 

Many rely on gold loans for their short-term needs. Gold is a widely owned asset in India as people without access to banks have traditionally parked their savings in gold. 

Today, about a third of gold loans from NBFCs are availed by small businesses, tradespeople, shopkeepers, and the like.  
 
Given that gold loans are widely used by informal employers, we must look at ways of widening its availability and lowering its cost. 

It's heartening that in recent days banks have become active in gold loans, but their reach is strictly limited. 

That's why NBFCs continue to matter more when taking gold loans to the informal segment is concerned. 

And in this context, restoring the priority sector lending status for eligible gold loans extended by NBFCs (which prevailed until 2011) will be the right way to go. 

It lowers the cost of borrowing for gold loan NBFCs which then gets passed on to their borrowers. 
 
(V.P. Nandakumar is MD & CEO of Manappuram Finance Ltd. Views are personal.)