INDIA’S SHADOW ECONOMY: A DOUBLE EDGED SWORD

The corporate lifestyle has often come under fire for being harsh, demanding, and exhausting to name a few. It has been criticised for turning a blind eye too often to the needs of the employees, and for being inhumane. The rising population did not help matters, as workers were reduced to statistics and everyone was deemed replaceable.

Nobody was therefore prepared for the changes that 2020 and the pandemic brought along. All of sudden, everyone was startlingly aware of their mortality. With waves of the virus infecting a significant chunk of the workforce, and rising deaths, all of a sudden everyone was not so replaceable anymore. Not only were people falling prey to the virus at a rapid rate, the global society saw a complete lockdown of everything in an effort to contain the virus. The economy had to keep moving, and society adapted to working from home. As this became the gradual normal, the new system brought quite a lot of issues along with itself. One of these is undoubtedly the massive boom in Shadow Economy and along with it (in an almost causal effect) a progressive rise in mental health issues among employees, around the world.

For the layman, one may define Shadow Economy as the economy facilitated by money under the table, cash in hand, or illicit work. In short, all informal workers and all forms of unreported employment are contributors to the Shadow Economy. In a system completely upturned by Covid, the International Labour Organization released an official report highlighting the conditions of 'The Misfit Economy'. At the end of just April of 2020, 1.6 billion informal workers were affected worldwide with women over-represented in the most hard-hit sectors. In 2020, over 2 billion workers (around 62% of all those working worldwide) were earning their livelihoods in the informal economy making it represent 90% of total employment in low income countries.

If one has to try and examine the damage to the economic fabric as a result of the global lockdown, one can categorise it as follows-

  • Immediate loss of revenue
  • Expansion of the informal economy followed by the collapse of formal MSME's, triggering an unprecedented surge in unemployment and under-employment
  • Uneven impact that triggered a large-scale restructuring

If one has to take India as a case study and delve into the impact of this pandemic on its already vulnerable and exacting informal sector, one would realise how India is standing at an economic precipice. The economy may be able to navigate its way out of this quagmire, whereas at the same time it may spectacularly crash and burn, and one might see an even worse scenario than what was seen during demonetisation. India recorded a GDP at -23.9% in the formal sector, something that has happened never before in the history of recorded fiscal history in independent India. While economists predicted an expected growth at 11.5%, India would be extremely fortunate with a growth of a probable 9% as it's best case scenario in the virus stricken landscape and in the wake of, as the newspapers are calling it, "a botched up vaccination rollout". It can be safely stated that the economy has lost almost 2 years.

Economic growth depends on both social and commercial engagement to have a solid footing and Indian economy suffered from comorbidities in the wake of this pandemic- from a slowdown to a lockdown to contraction. It was left to deal with both supply shock as well as the spectre of demand shock. In the wake of the collapsing public sector, especially in the second wave, India's private sector, shadow economy, and loan sharks were the ones to whom the public turned to. One is reminded of the famous movie Reservoir Dogs and the world famous critique of the workings of the informal sector in its opening scenes where Mr. Pink stubbornly tries to make a case against tipping waitresses by stating that one doesn't feel the need to tip the ones working at McDonald's.

As has been stated before, there are two ways by which India's informal sector may choose to travel by. The pandemic has lent a sense of urgency to the government to formalise the informal sector. If viewed as an opportunity to redesign India's economy, then is a golden chance to integrate a lot of the informal workforce into the formal fold. Not only will it help the labourers and the migrants to get access to the welfare schemes proposed by the government, it will also help in properly compounding a comprehensive database, the existence of which is completely lacking currently. The lack of this database has made it impossible for the government to send aid to the unreported workers, and even if allocated funds are deployed, it is nearly impossible to ascertain if the money has actually found the intended recipient.

Many enterprises in the informal sector are now in a position where the cost of registration is less than the benefits received from the government in terms of finance and liquidity. This liquidity is accessible only by availing the economic stimulus package announced by the government.

While this formalisation would indeed increase the revenues through indirect taxes, lots of industries with daily waiters, labourers, and staff are baulking at the thought of the corruption at the many levels in the government, weak rule of law, and unclear taxation that leads to high cost, wastage of time, and risk. Therefore, this formalisation might easily end up becoming a process that ultimately ends up in shrinking the economy leading to slower growth. There might be a demand contraction and a repetition of what happened in the light of demonetisation. Once again, the most vulnerable of the informal sector would be feeling the effect of this.

Organisations such as the ILO, and economists all over the world, however, have come up with probable solutions to this.

  • Building universal social protection and strengthening health systems to ensure access and financial protection for all
  • Supporting the recovery of productive economic units, stepping up their productivity and facilitating their transition to formality, so as to enhance formal job opportunities
  • A long term government vision to increase productivity by equipping all informal workers with technical and business skills, training, and finance and enterprise support to compete in the markets
  • Prioritise equity consideration in the post fiscal crisis responses keeping the economic and political vulnerability of the informal sector in mind
  • Establishing means of effective identification, and proper usage of UIDAI and PAN Card to help expand welfare schemes towards the SME's registering to the formal sector

All in all, the flourishing of the Shadow Economy may not necessarily be a bad thing if the government can properly harness the outcome after the easing of the pandemic. The situation as it currently exists may turn towards a rapid growth in lawlessness, rise in use of illegal substances, and sky high prices for basic medical necessities that leaves only the rich to be able to afford the rights to a basic lifestyle, as the poor gets systemically wiped out. The reverse may also be true, and we may yet get to see the economy make a glorious turnaround. One just has to wait to see if the outcome is indeed a 9% rise at the end of the financial year.

Experience is Everything!