DMPQ- How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country

Globalization means gradual integration of economics through free movements of goods, services and capital. Globalization increased the efficiency of economy multi-dimensionally but one of the major challenges posed by globalization is the growing tendency towards flexible employment and informalisation. The reasons behind the reduction of employment due to globalisation in formal sector are following.

 

  • Increased automation in industries: Globalization exposed the technology globally which led to replacement of man power with robotics and other technology.
  • Shift from labour intensive industries to technology intensive industries: In India only 2% labour is skilled in comparison to 96% skilled labour in South Korea. Due to arrival of technology, unskilled labour was forced out from formal sector due to incapability of handling the new machines and led to informalisation.
  • Globalization encourages sub contracting of work to the informal sector because of low wage and lost cost of production in informal section. It increased the participation of contract labour in economy and reduced formal sector’s employment.
  • Globalization increased competition among the industries which shifted the employment/industrial units from non-competitive countries to market favoured economics. The shifting of textile industries to the Vietnam, Laos are recent examples of this phenomenon.

Impact of informalisation on the development of the country  Less revenue generation: Due to high informalisation, tax to GDP ratio remains very low. In case of India it is only 16.6% whereas more than 30% in OECD countries. Less coverage of social security schemes: Nearly all government schemes, programmes related to social security benefits are restricted to formal sector. A huge section of population remains out of the ambit of benefits. It ultimately reduces the efficiency of economy. This shows how informalisation of labour force has proven detrimental to the development.

 

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