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Effects of Liberalisation on the Informal Economy

Trade Liberalisation and India's Informal Economy edited by Barbara Harris-White and Anushree Sinha;

Effects of Liberalisation on the Informal Economy

Sarasij Majumder

according to customary norms. Casual workers, family or non-family, have no rights to minimal benefits such as paid leave or bonuses. But they are controlled through gangs or groups based on caste, religion or locality and are paid on piece rate through a contractor who skims a

redominance of the discipline of economics in the formulation and evaluation of policies leads to an undue reliance on a macro-scale understanding of changes brought about by trade liberalisation. Economic reality is far too complex to be captured in frameworks that favour one kind of analysis over others. Few seem to disagree with these propositions. Yet, rarely do social scientists dare to break disciplinary boundaries to mingle methodological approaches. Trailblazers in this respect, Harris-White and her collaborators have fruitfully combined economic analysis with social anthropological methods of participant observation and interviews to learn the nuances of the informal economy. But the common theme running through the chapters in Barbara Harris-White and Anushree Sinha’s edited book Trade Liberalisation and India’s Informal Economy is that the trade liberalisation has radically blurred the boundaries of the formal and the informal. Essentially, informal economy is an oxymoronic category because in India more than 90 per cent of the livelihoods are informal and of those remaining only half are unionised. The editors conclude that “if the informal sector workers are protected through minimum/decent wage legislation, a positive outcome could be obtained from the casual worker, letting them reap some benefit from informalisation” (p 11).

Liberalisation and the ‘Informal’

Liberalisation not only spurs the growth of tiny unlicensed production units but it also creates pockets of casual employment within the formal wage-regulated sector. The absence of a strict distinction between the formal and the informal and the variation of the overlap across regions and industries necessitates a blending of the computable general equilibrium model

Economic & Political Weekly

april 5, 2008

book review

Trade Liberalisation and India’s Informal Economy edited by Barbara Harris-White and Anushree Sinha; Oxford University Press, Delhi; pp xii + 392, Rs 695.

and a fieldwork method to ad equately grasp the effects of the informal on the economy and to examine how workers in the informal sector fare vis-à-vis those in the formal sector. The authors chose to examine the effects in the garment manufacturing sector in Tiruppur, Tamil Nadu and in Delhi and in the rice-processing sectors in Punjab and West Bengal.

In their chapter on conceptual problems with “informality”, Harris-White and Christopher Adam give a brief historical sketch of informality. History, they show, contradicted the expectations of moder nisation theories that informal economy will disappear with industrialisation. The 1990s saw big firms engaging in flexible subcontracting and outsourcing, which reduce costs of production, transfer risks, and evade employers’ obligation to workers, to accumulate profit at a faster rate.

Thus, the authors emphasise the significance of informality for the formal. Informal is the realm cultivated by registered firms and corrupt officials to preserve right-less work, petty production and evade taxes and environmental regulations. Yet people earning a living in an informal economy do not themselves make any distinctions between different sectors, as represented in the abstract models. However, informality is also recognised through the status of wage labour. The permanent or “formal” labourers are the ones who receive a monthly pay and they have a place on the muster roll. But family labour, even in registered businesses, is informal. Such people are classified as own-account workers and are remunerated commission. Employers also self-organise themselves in associations to represent their interests at various levels of the government and also to co-opt and regulate workers and their unions. The saying goes “what ‘thangam’ (bribes/gold) cannot, ‘sangam’ (organisation) can” [Harris-White 2003, p 71]. Such organisations also manipulate technology and use corporal strategies to keep workers submissive. Forcing men to carry extraordinary heavy head-loads when burrows could be used and forcing women to stoop low and clean and sweep are typical examples.

Garment Sector

The garment industry is an interesting case study because of its diversity. The interconnection between the variety of labour regimes, technology and materials used and markets served has deep implications for the sector in the era of liberali sation. The cases of Tiruppur near Chennai in Tamil Nadu and the Delhi metropolitan area towns, the two main centres of garment production, are also interesting contrasts because the former is an old knitwear cluster and the latter is a relatively new cotton garments export centre.

In 1985, restrictions on the organisation of production in the garment sector were removed in order to increase the flexibility of the labour market. However, previously, the factory act laws required the mill industries to operate on eight-hour shifts and pay regulated wage, whereas the powerloom and hand-loom did not have to follow such stringent laws. Such preliberalisation protection of small entrepreneurs and post-liberalisation requirements of the reorganisation of industry, it seems, dovetailed. Nonetheless, the study shows that informalisation works against the workers in a double-edged fashion. Either informalisation occurs through subcontracting production to small firms,


which employ workers on harsh terms or through hiring of casual labourers within large mills. While the former is the hallmark of Tiruppur, the latter can be observed in Delhi.

The key to Tiruppur’s success is the prevalence of numerous small firms, each engaged in a tiny fraction of total production. This subdivision of production makes possible rapid changes in design, size and volume of output by distributing the costs and risks to a large number of small producers and workers. Big firms, mostly merchant exporters, whom these small firms serve, avoid worker obligations and market shocks are profoundly felt by the labourers. Small producers and firms flourished under pre-liberalisation government assistance to small-scale industries. The protection helped small firms to avail credit facilities at cheap rates and gain access to subsidised land for starting operations.

The relation of loyalty among exporters, contractors and workers is based on caste affinity. The workers in Tiruppur mostly belong to locally dominant caste of peasants called ‘Gounders’ and lately peasants from other regions of Tamil Nadu and unmarried women from Kerala are also migrating to Tiruppur to work in the garment sector. The Gounder peasants, the earliest entrants, were pushed to the garment sector because of small unviable plots. Many of them with kin and caste support became subcontractors and even exporters. Thus, some of the Gounders have successfully transformed themselves into small entrepreneurs taking full advantage of the economies of scale and low start-up costs. The Gounders have built their caste and kin network around a discourse of “toil” and caste identity strongly enough to block the entry of outsiders in the local garment business in Tiruppur. The workers in Tiruppur are no longer organised like they were in the past. Women form a large section of the labour force in Tiruppur but women earn less than the men. According to the Centre for Indian Trade Union estimates, less than 10 per cent of the workers are currently union members.

The garment production landscape in Delhi is also dotted with small workshops, which coexist with large mechanised firms. Unlike Tiruppur, Delhi’s garment industry is a largely low value industry, dominated by production of garments in the under-$ 5 category. But, in sharp contrast to Tiruppur, the workforce in Delhi has less women’s participation. The workshops are manned by groups of migrants who normally come from the same villages, migrate without families, and work long hours during peak season. The migrant workers use workshops as dormitories after work hours. This blurring of boundaries between work and leisure and the public and private is a reason behind excluding the women of patriarchal first generation migrant families. Large factories also employ contractual labourers for in-house production.

Rice Processing Sector

Rice is a staple diet in most of India. Yet the four rice-eating southern states – Andhra Pradesh, Tamil Nadu, Karnataka and Kerala – consume more rice than they produce. Punjab runs the largest surplus over consumption, whereas West Bengal ranks first in the country in rice production. Liberalisation has affected the rice sector because it has lifted regulations on movement, storage, transportation and sale and purchase of rice. Even in West Bengal, no licences are required to trade in rice.

However, Punjab and West Bengal are contrasting states in many ways when it comes to rice production and milling. West Bengal has an average landholding size much less than that of Punjab. Land redistribution in West Bengal has increased the class of small landowners and fuelled the proliferation of small businesses. Hence, capital investments in rice milling are much lower than in Punjab. Additionally, credit facilities and electricity supply in West Bengal are not well-developed. The Punjab farmers and millers, on the other hand, have access to subsidised electricity. Hence, almost 90 per cent of rice processing units in West Bengal are small husking mills and

8.77 per cent are big mills. 64.72 per cent of the processing units in Punjab are big mills and 28.80 per cent are hullers. Punjab’s rice is processed mostly for export and most of the mill owners are rich and well-educated individuals. Moreover, Punjab along with Haryana and Andhra Pradesh enjoys a high procurement price for rice due to strong lobbying tactics of the state government where big farmers wield considerable influence. “The continuation of high minimum support price for rice is perverse, given falling international prices of rice since 1998” (p 140). The partiality towards these states is crucial for the price of rice



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Economic & Political Weekly


because the states where government prices are negligible, the market prices of paddy are 10 to 20 per cent lower than the minimum support price. While 80 per cent of the rice procured comes from Punjab, Haryana and Andhra, West Bengal’s share in all-India procurement is only 1 per cent.

However, in both Punjab and West Bengal, there is preponderance of casual and contractual labourers. In Punjab, low-caste and Muslim workers migrate from Bihar and eastern Uttar Pradesh to work in mills as casual labourers. Their wage rate is much below the minimum legal wage and the work hours are also longer than the legally stipulated eight hours per day. The labour is controlled and recruited through ‘chaudhuris’ usually having caste and geographical affinity to the workers. Ties of identity and solidarity among these workers are rarely translated into collective bargaining and improvement of their positions in concrete terms.

In West Bengal, the husking mill owners are mostly from middle castes or schedule castes and from the Muslim community. The technical hands in husking mills and big rice mills are usually Muslims, who generally earn a monthly salary and food. The workers in the mills are intrastate migrant scheduled tribe men and women. The male migrant workers come with their families or individually to work both in husking mills and rice mills. Employed on a casual or daily wage basis, these workers are also controlled and recruited through ‘sardars’. Although labour unions exist in rice mills, the union representatives are not elected by the workers themselves.

While in Punjab, liberalisation has hardly affected the rice sector because government support to big farmers continues in West Bengal, reforms have benefited small mills owned by small landowners. The latter have been free to upgrade their technology and they compete directly with the formerly protected big rice mills, although dearth of credit and electricity remains a dogging problem.

Can Labour Arbitrage Be Stopped?

The authors argue that protection to informal sector workers through minimum/decent wages is the key to their well-being. The protection potentially empowers workers to demand higher wages. Given India’s political diversity, is it possible to bring the whole country under a uniform safety net? The employers, small and big, will try to exploit the regional differences to employ the cheapest labour. The region with least protection will tend to get the most investments. After all, labour arbitrage, which tries to source least protected labour, has been the primary reason behind the shift of garment manufacturing from Kolkata to Tiruppur.



Harris-White, Barbara (2003): India Working: Essays on Society and Economy, Cambridge University Press, Cambridge.

Economic & Political Weekly

April 5, 2008

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