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Global Financial Crisis and India’s Informal Economy

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Rupika Khere

INTRODUCTION

The global financial crisis, believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly unstable. The crisis took a severe toll on the Indian informal market as well. The Self Employed Women’s Association (SEWA) and the ‘Central Trade Union’ of India selected a few key sectors to assess the impact of the financial crisis on its members working as rag pickers or as marginal farmers. The selected sample was interviewed and studied through Fixed Group Discussions (FDGs). The general objective of the report is to deal with the social factors of living (viz. education, food intake and healthcare expenditure) being affected by the drop in income patterns and poor coping strategies of workers engaging in both these occupations. The UNDP report critically analyses the conditions of the people engaged in these occupations and also attempts to recommend appropriate policy measures from the inferences drawn from the study.

MARGINAL FARMERS- FROM A BIRD’S VIEW

Introduction:

Agriculture is the only means of livelihood for more than two thirds of India’s population, though the sector contributes only 18 percent to the country’s GDP. Agriculture also has the largest number of informal workers (estimated at 98.4 percent). Given that a significant percentage of the poor in India is made up of farmers with small or no landholdings, agriculture as a sector becomes an automatic choice for such a study and thus forms the core of the report. Further, rural households that had shifted their focus to urban factories have reverted to agriculture for support. 5 districts from the state of Gujarat were targeted for inspection and an attempt for proportionate representation from different communities in the respondent profile was made. For statistical convenience, 100 subjects were questioned and their suggestive responses were also taken into account. The period of October 2008 (Diwali) was taken as a check point for a comparative study of the conditions of these marginal farmers.

Impact:

While very few of the affected were unemployed, most had either trouble finding the same volume of work or were working under more stringent payment terms.

With the advent of the financial crisis, major changes were noticed in the domain of work- income ratio and the availability of employment opportunities. 52% respondents found that the magnitude of work at increased but the wage rate stayed more or less the same while 43% farmers found it difficult to seek new work. The respondents were categorized by income bands, and there was a visible shift in the numbers towards the lower income bands after Diwali. . More than 80 percent respondent households reported that their financial condition (household income) worsened between October 2008 and March 2009. This also suggests that households had been unable to take advantage of the National Rural Employment Gurantee (NREG) scheme to secure employment. The FGDs revealed many issues that had discouraged villagers from joining the scheme. Apart from a general lack of awareness of NREGS, there were issues related to inefficient distribution of job cards and delay in payments which worsened the situation further. Therefore, a new and more efficient programme/policy was needed. Before understanding the impact the crisis had on children’s education, it is important to look at the respondents’ education profiles. With nearly 60% of the subjects being illiterate, the crisis took a toll on the education of their offspring and increasing the gravity of the issue.

Healthcare was affected significantly, with households unable to afford private healthcare facilities. The number of people reporting instances of depression, and mental and physical illness increased as well. Instances of domestic conflicts/tension increased marginally due to financial difficulties. Fifty-two women reported such instances after Diwali, as against 44 in the preceding period. Respondents also tried to cut transportation costs by shifting to public transport. As many as 33 respondents reportedly resorted to public transportation after September 2008, as against eight in the period before. Also, more people stopped using transportation and resorted to walking.

RECOMMENDATIONS:

An important and substantial part of this section of the report is dedicated to the suggestions and recommendations that the respondents wanted to make to the Government and to the NGOs. This sort of an exercise was made fruitful through focussed group discussions (FDGs) where people tend to voice their opinions more under the realm of similar distress. Trying to generate solutions from the view of the sect closest to the problem would be much more successful than any programme or policy initiation based on common and obvious expectations of results. This is something every macroeconomist, in my view, needs to understand. Their suggestions to the Government were as follows:

  1. Generate employment, better wages, encourage cottage industries (43%)
  2. Provide canal irrigation, seeds, fertilizers (30%)
  3. Provide relief, curb inflation (14%)
  4. Provide subsidies, loans at low rates, higher prices for produce (13%)

What this report through the help of SEWA also does is that it integrates communities to develop community based organizations to strengthen and increase the pace of coping strategies. For example, a strong group dominated by farmers would ensure licenses, subsidies, storage spaces, access to loans and microfinance and implementation of irrigation programmes. A model based on that of a labour union in a factory which would ensure fulfilment of improvements in the work environment.

The farmers lacked the possession of an alternative skill which could’ve helped them to seek jobs elsewhere (within the domain of agriculture or elsewhere) to cope with the crisis. This phenomenon is observed across marginal occupations and SEWA has therefore brought an important suggestion to light. The slowdown may allow the government and other agencies to invest in skill building and organize large-scale skill-building programmes. This will be beneficial in the following ways:

  1. It will provide cash to participants thereby reducing their current hardships
  2. The energy and time of unemployed workers could be usefully employed to generate products and services of value as part of the programmes.
  3. It will help create a pool of multi-skilled workers capable of handling such crises.

Out of the list of areas where these training programmes could be carried out, I thought these would be most significant:

  1. Agricultural skills in the fields of water harvesting (conservation) and seed production
  2. Agro and food processing
  3. Micro-enterprise development (Micro finance as the hope of the future). Government schemes that encourage such enterprises should be increased. Particularly, access to finance and credit with a gestation period of 5-7 years at easier terms should be introduced.
  4. Skills related to green and alternative renewable sources of energy, textiles and handicrafts (cottage industries)

A good report is one that also critiques (NOT criticizes) the existing reforms existing in the space of the problem. NREGs have emerged as the country’s largest employment programme. It is important to cite these recommendations as agriculture not only forms the heart of this report but also the heart of the entire country. With consideration of the following points, this programme could be made more effective and efficient.

  • Increasing awareness of the scheme among communities
  • Ironing out implementation gaps, such as irregularity in providing work to members with job cards, non-payment of work done under the NREGS, inconsistent distribution of job cards to families, and difficulties in procuring job cards and subsequent linkages
  • Services such as healthcare, childcare, old-age care, hospitality, and travel and tourism
  • Works of public interest, such as nursery raising, tree plantation, cleaning campaigns, recycling, water harvesting and resource maintenance (to be sponsored by the government)

Introducing schemes to create employment for skilled labourers, since NREGS largely addresses the needs of unskilled labourers. (See training programmes under skill development).

In conclusion to what I believe truly uplifted the weight of this report was the initiatives taken by SEWA towards the marginal farmers. Though SEWA is an NGO, it completely understands its role towards the economy and performs the function of a macroeconomist or the Government unofficially through the following:

  • Microfinance

To meet farmers’ working capital needs, SEWA linked as many as 2,736 farmers with various lending institutions, such as Bank of Baroda, Dena Bank, State Bank of India and SEWA Bank. Loans amounting to Rs. 30,763,400 were disbursed to these farmers, meeting their working capital needs and reducing the incidence of distress sales.

  • Market Linkages

In its bid to eliminate middlemen and empower producers, SEWA has tied up with wholesale buyers to enable direct procurement of commodities, thereby reducing the impact of low market prices. A number of other benefits, apart from farmers being able to sell their produce at market prices have been realized. Farmers are slowly learning to work collectively; procuring the produce from individuals, grading it, packing it and loading it onto transportation vehicles. Farmers, who earlier relied on middlemen’s assessment about the grade and price of their produce, and lacked the knowledge to verify it, can now value their produce themselves.

SIGNIFICANCE TO MACROECONOMICS

One of the main objectives of macroeconomics as a discipline is to study how government policy can reduce the frequency and severity of economic calamities. The UNDP report of my choice follows a uniform structure of selection, analysis and inference in the process of its research. As a student of macroeconomics, I firmly believe that this sort of a chronological order is extremely important to adopt when the intention is to save a drowning economy. Only when the findings of a report are systematically arranged would it be possible to critically and microscopically study each and every exogenous and endogenous variable presented by the report. The job of a macroeconomist is to attempt to formulate general theories that help to explain the data collected which is subjective of different time periods. In the report, October (the month of festivals) 2008 was selected as the checkpoint, after which the economic slowdown intensified, and the respondents were asked about various aspects of their life.

The pre 2008 and post 2008 arrangement of data gives a panoramic view to the macroeconomist who would then carry out his job of explaining the two scenarios. Thus, as an example of how basic macroeconomics would function with its dependence of microeconomic principles, this report is extremely helpful. The add-on of this report as a good example of macroeconomics would be that it features the key sectors of an informal economy which in a country like ours is conveniently sidelined and was thus, urgently seeking help in policies that would uplift their conditions and integrate them into the economic system of this country.

WITH RELATION TO SOUTH SUDAN

South Sudan, has been the world’s newest nation gaining its independence as recent as 2011. Since it has been a new entity into the economic process, economic growth in this nation can be translated to economic development in several ways, as seen in the case of Waste Pickers and Marginal Farmers in India. As the Global Financial Crisis may not directly have hit the Indian citizens, its indirect consequences have been already discussed before. Crisis has loomed South Sudan since the dawn of independence, but the way that can be paved towards the economic development process as exercised in India can prove beneficial for its citizens:

  1. Towards securing employment to all its citizens by setting up of cooperatives as done by SEWA for the waste pickers, to secure a flowed and decent standard of work.
  2. There is a dire need for capacity building to assure self reliance amongst workers, as done by SEWA in a very systematic manner of training and awareness.
  3. The setting up of various government bodies that would look at citizens first through means of emphasising on social security. This also calls for lobbying (labour unions) to provide voice and visibility to the subdued voices.
  4. In the case of farmers, since agriculture dominates South Sudanese and Indian economies, they require policies and initiatives that would enhance their skills and reduce the utmost dependence on agriculture, which remains on the mercy of the climate and the world market prices. They are the worst sufferers due to volatile conditions existing in the economy- financial or political.
  5. In both cases of Marginal farmers and Waste Pickers, just generating employment opportunities will not culminate into development. The enhancement of social sectors like education and health also requires urgent attention.
  6. Both economies should look at establishing women centric self help groups, as they are sidelined in the economic process. Their involvement through these groups can prove beneficial by making the voice of the vulnerable sections heard, and thus direct policies onto this path.
  7. Since South Sudan is extremely dependent on the oil industry, its crash is seen with 98% being affected due to conflicts persisting in the region. Skill enhancement and diversification becomes a necessity.
  8. Microfinance may also prove beneficial for the farmers, as done by SEWA. It linked as many as 2,736 farmers with various lending institutions, such as Bank of Baroda, Dena Bank, State Bank of India and SEWA Bank. Loans amounting to Rs. 30,763,400 were disbursed to these farmers, meeting their working capital needs and reducing the incidence of distress sales. This can showcase some kind of economic development which would induce growth and thus provide sustainability.
  9. Most of the citizens, especially the vulnerable ones, do not have the required documents which would provide them to be beneficiaries for the various development policies, thus hampering the process further. This was seen in the case of Sahebkhan Muhammadkhan Malik, of Sedla village who could not avail a loan for agricultural inputs. The government and various organisations should look at providing the necessary documents for these vulnerable sections, and thus give them an incentive to avail of government facilities like loans.

LESSONS LEARNT

Economics can never be independent of social sustainability. The two must always go hand in hand to ensure a fair trade off. If either of the strands is dominant, the economy will go for a toss. Perhaps, this is one of the most important lessons that this assignment has taught me. I chose the United Nations Development Programme’s report on financial crisis and its impact on the informal sector to understand the other side of the story. Where everything is so industrially oriented, these marginalized sectors of employment eventually collapse due to lack of representation. As a student of macroeconomics, it is important to have a larger view of the picture for a comprehensive comparative analysis. This exercise familiarized me with the workings of an economic organization which seeks to help its subjects. The systematic order and flow in which a report is organized helped me to organize mine similarly. The report also provided deeper insights to the working of a global economic crisis and how not one sector is spared by its clutches. A rigorous reading of the report explains what aspects one must focus on while formulating policy reforms to tackle that crisis. In the process, an important step of understanding policy making was how one should consider the current policies from the viewpoint of those suffering or benefitting directly from them. Reading economic reports frequently are something that an interested student of economics must develop and I will try an incorporate this sort of a habit not only to understand economics better but to also understand the role of other social sciences which back up this system.


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