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Mainstream, VOL LVIII No 20, New Delhi, May 2, 2020

The Political Economy of Formal-informal Dichotomy and Post-coronavirus World

Sunday 3 May 2020

by Indranil De

The policy and planning in post-colonial countries have always been biased towards the urban elites (Chaplin, 2011). It is very much evident from the division of urban areas between well-served and unserved areas . The well served areas emerged as formal areas of residence and unserved areas as informal areas or slums. The Indian policymakers have always maintained a hierarchy between formal and informal sectors, with informal as subordinate to the formal. This is not only reflected in the urban settlements but also urban service provides. The urban informal waste collectors are ignored by the policy makers by not including them in the planning process. However, they are the major service providers in the urban waste management and meets the gap in service provision which municipalities should have done otherwise. Practically the formality-informality divide of the sectors is a negotiated concept (Roy, 2005). It depends on the convenience of the elites to define some activity as formal or informal. Whenever needed an informal area of residence may be formalised for crony capital gains. On the other hand, formal transactions are hided by relegating them as informal for personal illiterate gains.

The Indian economy is dominated by the informal sector with more than 80 percent of the labour force engaged in it according to International Labour Organization (ILO). Almost all the employment in agricultural sector is informal. With so many people engaged in the informal sector, this sector is probably more important than the formal sector. But the formal-informal hierarchy relegated it to lesser important ones, sometime as non-existent. For example, the recent announcement of Rs. 50,000 crores by RBI for the benefit of NBFCs and micro-finance institutions. The NBFCs would in turn support the real estate companies. It is not clear how this finance is going to benefit the rural money lenders or organizations registered under the society act. They are very important part of rural credit system till date. Each of the organizations registered under the society act have hundreds of members, if not thousands. They are not considered as formal credit institutions but meet the requirements of rural credit to the unorganized or informal sector.

In this light let us discuss the strategy of government to contain COVID-19. The government locked down the country on 24th March, initially for 21 days, which was extended later. Before the lockdown government allowed all Indian nationals to comeback to India. These foreign travellers are the initial carrier of the virus as they were exposed to it. Government did not give any hint of lockdown before actually declaring it a few hours before its implementation. The army of informal workers suddenly found them in lurch. The sudden unfolding of events brought them to the streets. The untold misery of the informal workers is well known to us. The formal sector employees remained at home, although with a lot of inconvenience. But the major cost of lockdown is borne by the informal sector due to loss of livelihood and insufficient public support. However, benefits of lockdown are distributed to every citizen, more so formal sector employees who are more tied by social networks with those who are exposed to the disease due to foreign travel. In a nutshell, the major cost has been distributed to large section of population generally ignored by bureaucracy, while the benefits are incurred by a small influential group of people.

Why is it possible to ignore a large section of population to the benefit of a smaller section of population in a democratic country. The combined effect of two important anomalies of institutional functioning leads to it. The first reason is that institutions are endogenous (Acemoglu et al, 2005). The policy and functioning of the political and economic institutions are dominated by a group of rich and influential. As a result, the policies benefit more to them than others, which in turn increases their control over the institutions. Then why not the ignored group collectively overthrow the influence of a much smaller but influential group. The influential group provides selective benefits to a smaller section of ignored group and develops a patron-client relationship. This is called political clientelism, where a group of poor is given some benefit against political support while another group is declined the same benefit (De & Nag, 2016). Thus a market for public goods is created and public service is privatized against votes. This exchange may be some caste being included in the group of scheduled backward caste for getting preferred treatment or distributing higher amount of foodgrains from the public distribution system to a smaller group of poor.

We are now waiting for any vaccine for coronavirus to be invented. Lockdown is only buying time for rolling out the vaccine in the market. However, it is not certain whether the poor would be able to reap the benefits of vaccination. We may draw lessons from poor basic public service delivery to poor. One reason, of lack of basic public service, specially sanitation and pollution control, in densely populated urban slums is that there is no great benefit for such initiative for the rich. With the discovery of modern medicine (such as Antibiotic) (Chaplin, 2011)and better nutrition, the rich can protect themselves against most of the public health disaster happening in slums. According to WHO, a total of 1.5 million people died from TB in 2018. The international media’s response to such a loss is anyone’s guess, because hardly is policymaker, statesman or important personality has been affected. Hence, the post-coronavirus world would be gloomier for the poor, not only for higher economic inequality but also for higher disparity in access to protection against coronavirus. People associated with the informal sector would be managed through political exchanges.


Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as a fundamental cause of long-run growth. Handbook of economic growth, 1, 385-472

Chaplin, S. E. (2011). Indian cities, sanitation and the state: the politics of the failure to provide. Environment and Urbanization, 23(1), 57-70.

De, Indranil and Tirthankar Nag. (2016). Dangers of Decentralisation in Urban Slums: A Comparative Study of Water Supply and Drainage Service Delivery in Kolkata, India. Development Policy Review, Vol. 34, No. 2

Roy, A. (2005). Urban informality: Toward an epistemology of planning. Journal of the American Planning Association, 71, 147—158.

Indranil De is Associate Professor at Institute of Rural Management Anand. He holds a PhD from Jawaharlal Nehru University, New Delhi. He has worked on political economy of basic service provision (especially water and sanitation) during his doctoral research and also in his professional career. He has worked with United Nations Children’s Fund (UNICEF), International Water Management Institute (IWMI), and National Institute of Rural Development & Panchayati Raj (NIRD&PR) as a researcher or consultant on access to basic services including water and sanitation. He has published research papers on various issues of water, sanitation and housing in various international and nationally reputed journals such as Housing Studies, Development Policy Review, Water Policy, Journal of Water Sanitation and Hygiene for Development, International Journal of Social Economics, Asia-Pacific Journal of Rural Development and Economic and Political Weekly. He has also contributed short pieces on water and sanitation in Yojana and Global Water Forum. Dr. De is also a member of Expert Committee for the National CSR Awards.

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