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The flip side to a formalised economy

Thursday, January 18, 2018
Hindu Business Line

A forced shift from the informal to the formal sector can lead to job losses. But labour reforms can smoothen the transition

Following the twin strikes of demonetisation and GST, commentaries on India’s economic outlook have frequently highlighted the two emerging trends of financialisation of savings and formalisation of the economy as factors set to hasten growth in the coming years.

Financialisation of savings — the shift towards formal channels of savings — is indeed an unmixed blessing for the economy.

Recent months have seen a surge of money flowing into the banking system and into mutual funds, insurance, etc. That has helped lower interest rates and brightened prospects of more lending by banks. The rush of money into the equity markets will make it easier for entrepreneurs to raise funds from the capital markets.

Besides, the persistent attraction of gold as a form of savings will likely fade, which is good for India’s balance of trade.
However, when it comes to formalisation of the economy — the shift of output and employment from the unorganised, informal to the organised, formal sector — the picture is clouded.

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