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? (2016)

Globalization means free trade in goods, services, and capital. Globalization boosted the economy’s multidimensional efficiency, but it also promoted flexible employment and informalization.

Globalization has reduced formal sector employment for the following reasons-

1) Globalization exposes technologies globally, leading to robotics and other technology replacing manpower.
2) India has 2% skilled labour compared to 96% in South Korea. Due to technology, unskilled labour was forced out of the formal sector, leading to informalization.
3) Globalization pushes subcontracting to the informal sector due to cheap wages and production costs. It boosted contract labour and cut formal sector jobs.
4) Globalization increased industry rivalry, shifting employment/industrial units from non-competitive to market-favoured economies. Recent examples include the textile industries in Vietnam and Laos.

High informalization reduces the tax to GDP ratio. India’s rate is 16.6%, while OECD countries have over 30%. Social security plans are limited to the formal sector. A large number stay uninsured. It reduces economic efficiency. Informalization of labour has hurt development. So, there is a need to provide social security to these informal workers.

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