The first impact to the unorganized sector came with demonetization in November 2016. The sudden withdrawal of high-value currency notes led to a cash crunch, disrupting business activities and hampering the livelihoods of millions. The unorganized sector, heavily reliant on cash transactions, struggled to cope with the sudden shift to digital transactions. Lack of access to banking facilities and limited knowledge about digital payment methods further compounded the challenges faced by the sector.
While the initial impact of demonetization was significant, the introduction of the Goods and Services Tax (GST) in July 2017 further aggravated the woes of the unorganized sector. The complex structure of the GST and its compliance requirements posed significant challenges for small businesses. Many small-scale entrepreneurs found it difficult to navigate the complex tax regime and comply with the extensive documentation procedures. The burden of compliance and high tax rates forced several small businesses to shut down or downsize their operations, resulting in job losses and reduced incomes.
As if demonetization and GST were not enough, 2018 witnessed a crisis in the Non-Banking Financial Companies (NBFC) sector. NBFCs play a crucial role in providing credit to small businesses and individuals who struggle to secure loans from traditional banks. The crisis, triggered by defaults in repayment by a prominent NBFC, led to a severe credit crunch, adversely affecting the unorganized sector. With limited access to formal credit channels, small businesses and individuals faced difficulties in obtaining loans, hindering their growth and expansion plans.
As the unorganized sector was still reeling from these shocks, the COVID-19 pandemic hit in 2020. The nationwide lockdown imposed to contain the spread of the virus had a catastrophic impact on the sector. Small businesses were forced to shut down, daily wage workers lost their livelihoods, and farmers faced disruptions in the supply chains. With no income and no social safety nets, the vulnerable workers in the unorganized sector faced immense hardships during the lockdown.
The official GDP data fails to capture the full extent of the damage suffered by the unorganized sector. It primarily relies on organized sector data and does not adequately capture the dynamics of the informal economy. Agriculture data, for example, only reflects fulfilled targets, ignoring the adverse effects of weather conditions, fluctuations in crop yield, and market prices. Similarly, proxying the unorganized sector data with organized sector data leads to an upward bias in GDP calculations, disguising the true state of the economy.
The post-pandemic economic recovery further highlights the disparity between the organized and unorganized sectors. While the corporate sector has experienced growth in sales, the unorganized sector continues to struggle, facing a substantial decline in sales. This unequal recovery exacerbates the existing socio-economic disparities in the country, widening the gap between the haves and have-nots.
To address the challenges faced by the unorganized sector, a multi-pronged approach is necessary. First, there is a need to provide greater financial inclusion to the sector, ensuring easy access to formal banking services and credit facilities. Simplification of tax procedures and reduction of compliance burdens can help small businesses to thrive. Additionally, the creation of social safety nets, such as unemployment benefits and healthcare facilities, can provide much-needed support to vulnerable workers.
Moreover, the estimation of GDP needs to be revised to accurately reflect the contributions and vulnerabilities of the unorganized sector. Better data collection mechanisms, including surveys and research, can provide more accurate insights into the performance of the informal economy. This would enable policymakers to devise targeted interventions and policies to promote the growth and well-being of the unorganized sector.
In conclusion, the unorganized sector in India has been severely impacted by a series of shocks, including demonetization, faulty GST implementation, the NBFC crisis, and the COVID-19 pandemic. The damage suffered by this sector has far-reaching implications for the overall economy, as it employs a vast majority of the workforce. The official GDP data fails to capture the true extent of the challenges faced by the unorganized sector, necessitating a reassessment of data collection methodologies. Addressing the specific needs of the unorganized sector through financial inclusion, simplified tax procedures, and social safety nets is crucial for fostering inclusive and sustainable economic growth in India.
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