From Unorganized Chaos to Organized Success: India's Economic Transformation

Once upon a time, India had a sizable informal or unorganized sector that was responsible for a significant chunk of the nation's economic activities. Small enterprises and self-employed individuals often operated outside the purview of formal taxation and labor laws in a decentralized and mostly unregulated environment.

Yet, there has been a discernible trend in India over the last few decades toward the organized sector. The shift towards the organized sector is driven by several factors, including increasing government regulations and enforcement, rising consumer demand for higher-quality products and services, a growing recognition of the benefits of formal employment and labor protections, and technological advancements.

The changing face of business in India

While there is still a significant amount of economic activity that takes place in the unorganized sector, particularly in India, the trend towards greater formalization and regulation is expected to continue in the years ahead.

So, do we have any examples from the past?

The textile industry is a prime example of an Indian industry that underwent a transition to the organized sector. The Indian textile industry was primarily disorganized in the early years after independence, with the majority of manufacturing occurring in modest, family-run businesses. But, with the advent of bigger, more structured companies that can compete globally in the decades since the sector has seen a tremendous transition.

Another major change comes in the Dairy industry which was historically dominated by small-scale, unorganized businesses. Yet, the emergence of cooperatives like Amul and the National Dairy Development Board (NDDB) contributed to the formalization of the industry and the development of more effective supply chains, which raised productivity and profitability.

Microfinance institutions (MFIs) started to appear in the early 2000s as a way to offer credit to underserved populations. Even though many of these MFIs were initially disorganized and unorganized, the advent of regulation and more transparency has aided in the development of a more formal and sustainable business.

The restaurant industry in India has traditionally been dominated by small, family-run businesses. Nonetheless, the emergence of fast-food chains like McDonald's, KFC, and Domino's has contributed to the formalization of the industry and the development of more effective and uniform business models.

These are only a few instances of India's unorganized to organized sector transitions in the past. Each time, the shift was brought about by a confluence of governmental initiatives, shifting consumer preferences, and technological developments.

What the data indicate!

As there is no agreed-upon definition of what defines the organized or unorganized sector, it is challenging to estimate with precision the overall share of the unorganized vs. organized sector in India. According to economists, the unorganized sector generates more than 80% of all new jobs in India and contributes nearly 50% of the country's GDP. The unorganized sector, which employs a sizable number of people and contributes to the nation's overall economic output, still continues to play a vital role in the Indian economy.

According to historical data, India's transition from an unorganized to an organized economy has been a steady and ongoing process. In India, the organized sector now accounts for about 22% of all employment in 2017-18 up from 18% in 2011-12 and about 14% in 1999–2000, as per a survey by the National Sample Survey (NSS).

However, the shift from unorganized to the organized sector has been more pronounced in certain industries such as manufacturing, where the share of the organized sector in total employment increased from around 23% in 1999-2000 to around 30% in 2011-12 and 39% in 2017-18. While, in agriculture and construction, the share of the organized sector still remains relatively low, 10-20%.

Overall, the data suggests that while the shift from an unorganized to an organized sector in India is happening, it is a gradual and complex process that varies depending on the industry, region, and other factors.

Is it true that India is shifting from the unorganized sector to the organized sector?

Evidence suggests that India is increasingly moving from an unorganized to an organized economy, especially in sectors like services, e-commerce, and retail. Nonetheless, in several industries, like agriculture, a sizable share of employment is still accounted for by the unorganized sector.

There are various indications that the transition in India from an unorganized to an organized economy is real and ongoing. The introduction of the GST, IBC (Insolvency and Bankruptcy Code), push for digital payments, the large-scale investment being made by domestic and foreign players in various sectors, rising demand for skilled labor, adoption of technology, and prevalence of automation in various sectors are a few examples of these signs.

Finally, what are the advantages and obstacles associated with accomplishing this transition?

India's transition from an unorganized to an organized economy has the potential to have various beneficial consequences, including stronger worker rights, more productivity, better working conditions, easier access to finance, and higher economic growth. Furthermore, a better-organized sector may result in larger tax receipts for the government, which may then be used to fund social programs and the construction of infrastructure.

Major obstacles include a lack of suitable infrastructure, bureaucratic hurdles, limited access to financing, and opposition from workers in the unorganized sector who are concerned about losing their jobs. The change can also be expensive and slow because it calls for large infrastructure, technology, and training investments. In the organized sector, it can be challenging to enforce labor regulations and maintain compliance, which can result in problems like exploitation and unfair work practices.

So, what is the final outcome?

For decades, India's economy was dominated by the unorganized sector, characterized by low productivity, low wages, and poor working conditions. However, in recent years, there has been a noticeable shift towards the organized sector, driven by government policies, technological advances, and changing consumer preferences.

Despite these challenges, the momentum towards the organized sector is expected to continue in the coming years, with several industries such as apparel, tiles and sanitaryware, plywood, textile, footwear, logistics, electrical equipment, and plastics likely to benefit the most. Overall, India's transformation from unorganized chaos to organized success is a significant achievement and holds great promise for the future.