Unorganized Sector being Colonized by Organized Sector

Arun Kumar

The corporate sector is doing well, as indicated by the stock market which reflects its health. But the corporates represent only a few thousand businesses out of the crores operating in the country. Ninety-nine percent of the businesses are in the unorganized sector and reports suggest that they are declining. The official GDP for Q1 of the current financial year 2022-23 was 3.3% above its pre-pandemic level. Yet, the stock markets are close to their historic high achieved in 2021. This disjuncture between the stock market and the economy reflects the surge in corporate profits in a stagnant economy – and there is a story behind it.

The Reserve Bank of India data on around 2,700 non-government, non-financial companies released in August 2022 shows that the sales of these companies surged by 41%, and net profits increased by 24% over the last year. Even if these figures are deflated by the wholesale price index (WPI) which has been rising above 10% during this period, the corporate sector surge far exceeds the growth of the economy.

If one component of the economy is rising so rapidly, the other part, the non-corporate sector in the industry, must be shrinking. The difficulty with the official data is that it does not independently capture the decline of the unorganized sector (it is proxied by the growing organized sector). If the true rate of growth could be obtained, the disjuncture between the official growth rate and the rise in the stock market would be even greater.

The government is arguing that tax collections are robust, thereby indicating that the economy is doing well. Indeed tax revenue has grown 52.3% according to the latest data. But this does not reflect the unorganized sector where most incomes are below the taxable limits and which is exempt from the Goods and Services Tax. No wonder, the survey of incomes by PRICE released at the start of this year shows the growing divide between the top 20% and the bottom 60% in the income ladder.

The shift in demand to the organized sector

The divergence between the two sectors is visible. The head of the largest luggage manufacturer recently said that their growth is surging because the smaller units are not doing well. The same was said by a top manufacturer of leather goods and earlier by the chairperson of the pressure cooker industry. The annual report of Hindustan Unilever also mentioned that its market share has increased. The rapid expansion of e-commerce is at the expense of neighborhood retail stores. Such evidence is available all around.

It is not being argued that the entire unorganized sector is declining. Some units are suppliers to the small and medium sector units which in turn are suppliers to the corporate sector. The growth of the corporate sector should benefit these units except where their payments are delayed by the larger units.

The government has been pushing for digitization and formalization of the economy on the plea that this will curb tax evasion and that as more taxes are collected, better services can be provided to the marginalized. But the unorganized sector cannot cope with these changes which increases their costs, compared to the organized sector which is already largely digitized and formalized. No wonder, demand has been shifting from unorganized and small units to larger ones, spurring their rapid growth. This is also true of those units that are suppliers to the larger ones.

The GST was designed to formalize the economy. But that does not mean the promotion of the small and unorganized sector; instead, it has led to their displacement by the organized sector. The market of the former is being captured by the latter. This is the colonization of the unorganized sector by the organized sector.

Colonization was marginalizing

Colonial powers had conquered other lands to promote their own prosperity. They looted the colonized and framed the rules of economic gains such that their produce could out-compete for the produce of the colonized. While loot was often for a limited time, capturing the markets gave their economy a long-term advantage over the economy of the colonized.

The surplus from the colonized countries was drained out, which set back their development. Simultaneously, it enabled the economy of the colonizers to develop faster and helped them in developing their technology, thereby widening the gap between them and the colonized. In self-justification, the colonizers claimed to be `civilizing the barbarians’. The benefits of colonization were listed as the setting up of institutions, universities, railways, rule of law, etc. The fault for the poor living conditions of the colonized was blamed on their own backwardness.

Organized colonizing the unorganized

These arguments have a parallel in the claims of the government and the Indian organized sector. Formalization of the economy is stated to be for the wider good, including the unorganized sector. It is argued that the benefits of development (of the organized sector) will trickle down to the marginalized. The extraction of the surplus from agriculture, via terms of trade, both for industrialization and the lifestyle of urban elites, is also said to be for the benefit of all, even though it pauperizes most agriculturists and rural areas.

The rules of economic gains enable the organized sector to corner most of the gains of development. The marginalized sections are expected to be satisfied with their meager material gains. Often it is implied that the marginalized should be grateful for whatever little they have got. Rising disparities are justified on grounds of merit while glossing over the impact of skewed social development at the expense of the marginalized sections. Did the colonizers not have similar arguments? Globalization which benefits the organized sector is also held out as progress for the country while ignoring its marginalizing impact.

The GST, digitization, and formalization are setting the rules of the gains in favor of the organized sector at the expense of the unorganized sector. As the production of the latter declines, the produce of the organized sector finds new markets for its expansion. The growth of the organized sector in a stagnant economy points to that.

Not only is the unorganized sector ignored in data, policies also ignore it even though it employs 94% of the workers and produces 45% of the output. This is the invisibilisation of this sector and quietly making its market available to the organized sector. But, the skewed development is reducing the size of potential future markets and that will slow down the growth of the economy, as happened prior to the pandemic. This would lead to further clamor for concessions to support organized sector exports. That will further narrow the home markets, in a Catch-22 situation.

The Atmanirbhar package announced by the government in May 2020 is a recent example of the rules of gains being set against the unorganized sector. It contained a package of policies for agriculture, designed to enable large businesses to capture the agricultural markets and eventually push the small and marginal farmers out of farming and turn them into agricultural workers. The policymakers seem unconcerned that this would aggravate the prevailing acute problem of unemployment and underemployment. The labor code being introduced is another concession to businesses that will further marginalize the already marginalized workers.

In brief, neither the colonizers earlier nor the policymakers promoting the organized sector now are concerned about social justice. But that is a crucial element of any democracy – the interest of the vast majority should prevail. The organized sector must consider how much can the unorganized sector be run down without hurting its own interest. The official rate of growth was declining even before the pandemic and that is continuing. It is myopic of the organized sector that they are not only unconcerned with the decline of the unorganized sector but seem to be celebrating it.

This article was first published on The Wire as India’s Unorganised Sector Is Being Engulfed, Further Marginalised on Nov 18, 2022

About the Author

Arun Kumar

Arun KumarMalcolm S Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi and author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead‘.

Read more articles by the author at IMPRI Insights