How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is…

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How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country?

Ghissu Editorial · Accepted Answer

Globalisation cut formal employment by pushing firms towards cost-cutting, labour-saving technology and contract labour, and informalisation is on balance detrimental to development. The NCEUS (2007) found over nine in ten Indian workers informal, with low productivity and no social security.

**Introduction**

The NCEUS (2007) found that over nine in ten Indian workers were informal, and that much of the new employment even in the organised sector was itself informal. Globalisation after 1991 lifted output and exports, but not the regular, protected job.

**How Globalisation Shrank Formal Employment**

SKETCH: flow | Globalisation to Informal Jobs
- Global competition
- Pressure to cut costs
- Labour-saving technology
- Contract and outsourcing
- Informal jobs grow

1. **Cost competition**: Cheap imports, especially Chinese manufactures, pushed formal firms to trim permanent payrolls and close weak units.
2. **Capital-intensive growth**: Imported machinery and automation let output rise without matching jobs, a pattern of jobless growth.
3. **Flexible labour**: To escape the hiring and firing limits of the Industrial Disputes Act, 1947, firms hired contract workers instead of regular staff.
4. **Shrinking public sector**: Disinvestment and voluntary retirement schemes cut public sector jobs, once the core of formal employment.

**Is Informalisation Detrimental to Development?**

1. **Low productivity**: Small, low-tech informal units keep wages low, skills thin and the economy short of scale, the problem of firm dwarfism.
2. **No social security**: The 2020 migrant exodus during the lockdown showed how exposed informal workers are.
3. **Narrow tax base**: Cash-based activity escapes tax and weakens the state's capacity to fund development.
4. **The other side**: It absorbs surplus labour that formal industry cannot, and EPFO net additions rose from 61.12 lakh in 2018-19 to over 1.29 crore in 2024-25, a sign of formalisation.

**Conclusion**

Informalisation is, on balance, detrimental to development. The four labour codes, universal social security and labour-intensive manufacturing can formalise work and realise India's demographic dividend.

How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country?

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