India’s industrial sector has blossomed over the past couple of decades, yet casual workers still make up more than 93 percent of the country’s workforce. That means they do not have any social security benefits such as provident fund or health insurance. Shifting informal workers into the organised sector is a gargantuan task and will take years. But for now, what’s the best way to provide Indian workers at least basic social security?What Experts Say
Some of the deterrents to enterprises shifting to the formal sector are additional transaction costs (like taxes and duties) and harassment by officials (the various inspections that they would be subjected to), resulting in lower profitability. “State patronage [to casual workers] incentivises informality,” says Sugata Marjit, director of Kolkata-based Centre for Studies in Social Sciences. “The informal sector thrives because it does not need to have a formal identity,” he adds. What he means is that if the state takes care of employee benefits, the employer is spared that cost, so his transaction costs remain the same.
However, when workers get social security benefits, it acts as an incentive for them to improve their skills and hence productivity. Prof. Marjit cites the changes at a West Bengal textile unit when it got an export order with quality and time specifications. The owner put his best workers on the project, offering them health insurance and even paying for their cigarettes. “That means the incentive to become formal is to generate enough profits,” he says.
At this stage in India, state involvement is unavoidable. Says K.P. Kannan, member, National Commission for Enterprises in the Unorganised Sector, “Providing social security to workers will improve their productivity and profitability. Which entrepreneur would not want his company to grow and make more profits?”
Prof. Marjit says that the government can also help by reducing bureaucratic hassles and tax rates, measures that can help reduce transaction costs.Our Take
A combination of government-sponsored benefits to informal workers coupled with incentives to informal enterprises (like simplified taxation, easy credit) will help limit the cost to the state as more and more enterprises will assume the role of welfare providers as formal employers.
Although in the past, militant trade unionism has ensured the bankruptcy of many a company, worker organisations have to be integral to industry. Sensitive unions can fight for employee welfare and help workers upgrade skills. Skilled employees stand a better chance of landing jobs in the formal sector.
(This story appears in the 28 August, 2009 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)