One of the most talked about topics in
the economics realm in India is the ongoing effort to formalize the informal
sectors of the economy, bring everything into ship-shape and into the tax net;
ensure registration, increase tax compliance and so on. Let us consider the MSME sector and the
informal sector. This employs the maximum people. You cannot call it an issue;
you cannot just summarize non tax compliance as an issue and simply formalize. The
thing is, the entire current structure as it exists - warts and all; performs a
few functions :
1) First, it employs people. The concept
of formalization will perforce lead to layoffs, and in the absence of proper
handling will lead to massive social problems, and human problems.
2) Second, it is a supplier, vendor,
customer etc of larger corporates and customers
3) The current system as it exists is a
part of the overall competitive and cost structure and has extensive upstream
and downstream dependencies
THE NEED OF THE HOUR
Need of the hour is to understand the
overall structure industry-wise, not look at it piecemeal. We have to
understand the cost structure, role/capability/functional competence and
contribution of each layer of each industry, examine intra-industry
dependencies and then formulate answers, responses and actions on the ground,
such that risks that emanate from newer, admittedly superior strategy are
understood and planned for. This ensures a smoother transition, and further
ensures lesser roadblocks and much much lesser resistance to the new policies.
EXAMPLE
Ex - Stainless Steel. The
intra-industrial dependencies of distributed small and large manufacturing,
trading organizations has spread risk, while simultaneously reducing
capability. The dependencies of the larger traders, even producers, who
sub-contract tasks and jobs to small companies and jobbers is massive. Cost
saving is built into the competitive structure. as are deep structural
relationships. You remove one cog, the whole edifice collapses
Thus, while this structure is extraordinarily
resilient to external and internal shocks, innovations, capability enhancements
become hard; which is why you find special steels, steel quality etc as a
manifest complaint issue, hampering the further development of the industry on
the quality-value scale. Deeply forged interdependent ties make a system highly
resistant to shocks. That is why the Indian
Market is so impenetrable for most outside companies
IMPACT OF FORMALISATION – ONE PARAMETER
If you formalize, you remove one cog-
introducing cost-implications all along the channel. Unless you think of a
workable strategy to counter this change, it leads to a collapse - this is
pretty much exactly what happened since 2014-15. The introduction of
compliance, formalization etc - while a decided plus, introduces deep systemic inefficiencies
{to take but one functional example}, altering the cost structure - pricing out
companies, leading to a collapse. The current revenue streams are irrevocably
tied to the current methods. So, in this atmosphere, given the chance of a
loss, people pull out; choking the channel all along the line....
IMPACT ON INDUSTRY STRUCTURE
Everyone is saying formalize. Fine. But,
what about the current structure and revenue streams that are dependent on a
calculation that does not account for these additional costs? Sure, benefits
are certain - but in order that we encash on those pies in the skies, where are
the attendant plans to ensure that the resultant shock waves from the
alteration of the fundamental premise of an industrial vertical structure are
mitigated? They don’t exist; ensuring certain failure of formalization attempts.
The returns from GST are mute proof of that. You require structural reforms,
painstakingly planned and executed with a focus not on big talk but on small
incremental steps that engender systemic change, tackled on a war footing.
THE REHN PLAN
Look up the Rehn Plan : implemented
successfully in Sweden. We can all learn from such examples. Or the Singaporean
model, or many many others we can use for inspiration. We don’t need big talk;
we need small changes with the big talk, or rather - we need both. New costs
destroy the premise of previous investments, demand cycles, vendor
relationships and POs, leading to loss of production and sales. It leads to job
losses, layoffs; the beauty of the Rehn Plan was that such exigencies were
actually catered to BEFORE the big talk was implemented,strategised and
channeled into positive direction
WE NEED SELF PLANNED SOLUTIONS, NOT BLIND
APING OF THE WEST
That is why I stated we need independent
solutions. We cannot afford to talk big, implement big change without
anticipating and mitigating redundancies in the factors of production that the
new approach are sure to create {to put it in economic terms}. Most writers are
talking big, and are right. But their approach is very theoretical and without
catering to practical realities
We cannot compare India with other
countries – each country has its own realities. One recent writer compared
India with the USA among other nations, an erroneous premise in its entirety. He also doesn’t
address the critical HOW, as also what will happen to the millions who will be
displaced.... something others have thought of, and successfully strategized,
as indicated above. The US has 22 Mill Ent on a vastly different corporate and
economic structure; vastly different demographics, and most critically, a
population of barely 400 Mill. We have a pop of 1.3 Billion! Thus, we cannot
compare; we can examine models, study them and draw inspiration, after ensuring
local applicability basis solid fundamentals!
FACTORS OF PRODUCTION
There is no formalized structure to
mitigate the people who get left out. Typical US style of development, hard
hearted, impractical and theoretical. They represent a factor of production.
Also, the new system will also create other factoral redundancies, unless
properly mitigated. Waste of productive resources; also lead to internal
resistance and hindrances in the change process. They also represent human
beings, also factors of production and resources, also potent political
movement in the wings if rankled. And
this is just one factor of production; similar studies and analyses needs to be
done to identify redundancies and problems the new approach will create on all
factors of production, and mitigated.
Productivity follows as a result of
certain steps. Their productivity improvement {as referred to in some of the
cases above} involved anticipating redundancies two years ahead, relocating and
retraining manpower ahead of structural changes. We are doing the opposite. Formalizing without anticipating and
reallocation of productive resources in line with the new direction, which is
why we fail where others succeed! Without the other steps, this one sided
approach will either fail or stall the economy in the short to midterm… can we
afford that risk?
MITIGATING ATTENDANT RISKS
As you formalize, costs related to labour
go up, rendering the structure uncompetitive, or introducing unacceptable risk
{to the management that is}. That is what - exactly what- happened in Belgium.
This is just one small parameter that needs consideration; it also upends
existing agreements, cost structures, competitive balances, business relationships
etc. These are all risks that can be
foreseen and negotiated – and are not meant to be seen from a right or wrong
perspective. The current is the way it is, to change it, we need to mould the
incumbent players in the industry, not force them.
Articles, authors and writers advocating formalization
of the economy, introducing sea-changes are just talking big, without attending
to mitigation or evolving a broader structure - which is what most experts,
real researches documented in India, Belgium, Sweden, Sri Lanka, Brazil etc are
saying with solid established documented data. Th. e key is factor reallocation
planning and implementation BEFORE formalization.
The benefits of formalization of the
Economy are not in debate; but in order that we can get the benefits of formalization,
we need to plan for the resultant effects of formalization and strategize to minimize
the escalating impact of the same - some researches present in the public
domain prove that. We are just formalizing, leaving the rest to chance. The
downside of the attempts to bring all informal sectors into the formal fold needs
to be stated, planned for, strategized and implemented in order to mitigate the
involved risk. We all of us want the benefit of formalization to be reaped; unless
we plan for the downside, and mitigate risks, we won’t get there – or more
likely delayed considerably, that is a real risk!
CONCLUSION
There can actually be no arguments
against formalization, and bringing all informal economic activities such that all
are regulated, pay taxes, are under the net; but does that mean we leave the
risk mitigation to chance? Risk handling is fundamental to a working plan. Without
risk mitigation planning, it isn’t a plan, but a statement of intent or at best
a risky plan with no downside planning, no anticipation and no plan-b to cater
to hiccups and roadblocks! Does that sound like a great plan? Not to me it doesn’t.
And, basis what I have observed in India
so far, I don’t see any risk mitigation planning. If one is present, I for one
would love to read about it…
Note : Stay connected as I examine some models
of development from history in the next few months on this page – The Rehn
Plan, The Singapore Model of Housing as a means to develop, The Meiji
Restoration of Japan in 1868
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