Viewpoint: Government Aid and the Informal Sector

30 MAR,2020 | MEDC


With India entering a lockdown mode to contain the spread of Covid-19, it is more important than ever before for the government to support the economy, especially the informal sector, in combatting the virus effect. More than half of India’s gross value added comes from the informal sector, which has been badly affected by the developments of the past few weeks. The share of the informal sector is the highest in agriculture, followed by trade, construction, real estate and professional services. The key challenge before the government is to design suitable channels for delivering relief and support. Last mile connectivity is notoriously fickle in India, and that does not bode well for the process of economic stabilization required after a sudden shock to the system. Despite all the current constraints, some Mudra loans may have to be written off, repayments deferred and new loans extended to many in the informal sector. Depending on the fiscal situation, food stamps could also be provided to the affected. Almost half of the informal sector firms operate from homes, with family members as the only workers. Under the circumstances, productivity should not be impacted if the government ensures supply of inputs and access to markets in times of shortages. This is the biggest test that the government needs to pass. Inflation should not be a worry at this juncture, as higher government spending on relief for the informal sector will not push up prices, since lockdowns reduce demand in the economy. Even if some inflation occurs in the short run, in the long run it can be contained through appropriate monetary policy. This is certainly an experiment worth undertaking. Many other countries affected by the pandemic have undertaken concrete measures to make life easier for their business communities in these trying times, and our government could take a leaf out of them. For example, Italy has suspended payments for electricity in all the affected areas. The pandemic has underlined the world’s connectedness, and the size and persistence of the domestic economic damage will largely depend on how our policymakers handle the rapidly changing situation.

*Photo Credit: Google

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