The slowdown in private investments in India is chiefly visible in the informal sector and less in the corporate sector. Critically examine the reasons for this formal–informal divide. (200 words)
Refer – The Hindu
Enrich the answer from other sources, if the question demands.
IAS Parliament 7 years
KEY POINTS
· The Economic survey-2018 points out that, the slowdown in private investments in India is well recognized and is visible chiefly in the informal sector and lesser felt in the corporate sector.
What caused the present situation?
· The government had increased its spending in the aftermath of the global economic slowdown to provide an economic stimulus.
· This saw a surge in fiscal deficits, which had to be serviced by borrowing.
· Concurrently, banks that were already stung by the bad loan problem have been played safe by lending generously to government projects.
· Along with all this, the recklessness of some states governments also seems to have crowded out the informal sector from formal credit avenues.
· As a consequence, there has been a cut back in private informal sector investments due to lack of sufficient credit.
Why is the informal sector more vulnerable?
· Consuming households tend to be net savers, while the government, corporates and unincorporated enterprises are net debtors.
· Competition for Funds - A major chunk of saving are held with banks, insurance companies, from which the net debtors borrow from.
· When government borrows considerable sums to finance its deficits, it reduces the lending potential of financial institutions due to a smaller fund pool.
· Hence, while the big corporates can still access capital from the remaining or through the bond/share market, the informal enterprises get left out.
· Notably, informal sector does not have the resources required to access credit from diverse sources and is left to depend on extortionist money lenders.
Way Ahead
· As the slowdown is particularly centred in the informal sector, policies need to be recalibrated to specifically address this problem.
· Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments.
· The current credit policy seems skew in favour of the visible and large organised enterprises, which needs to be corrected.
· Recognising the credit needs of the unorganised sector is hence crucial.
