Q1. How globalisation 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?

Model Answer:

Introduction

Globalization has profoundly impacted the Indian economy, particularly in shaping formal sector employment. This dynamic has spurred debates on the implications of increased formalization.

Body

Reduction of employment in the formal sector 

1. Shift to Capital-Intensive Production: Globalisation encouraged firms to adopt capital-intensive technologies, reducing demand for labour in the formal sector.
2. Rise of Informal Subcontracting: Multinational companies often outsource tasks to informal sectors to cut labour costs, bypassing formal labour protections. 
3. Increased Competition with Global Players: Indian companies face competition from global players, leading to downsizing and job cuts in the formal sector to maintain competitiveness.
4. Shift to Service-Oriented Economy: Globalisation steered India toward a service-dominated economy, creating fewer jobs in capital-heavy formal sectors like manufacturing. 
5. Economic Volatility and Layoffs: Global interconnectedness led to economic volatility, with global recessions triggering layoffs in India’s formal sectors.

Is Increased Formalization Detrimental to the Development of the Country?

No: 

1. Increased Tax Revenues: Formalization leads to higher tax compliance, increasing government revenue for development programs.
2. Better Labor Protections: Formalization guarantees labour rights like minimum wages, social security, and healthcare, contributing to workforce stability.
3. Improved Economic Data: A formalized economy improves economic data collection, leading to better policy-making and resource allocation.
4. Increased Investment: Formalization attracts both domestic and foreign investors, as regulatory compliance reduces risks associated with informal markets.

Challenges due to formalisation 

1. Risk of Job Loss in the Informal Sector: Rapid formalization may displace informal sector workers who lack the skills or qualifications for formal jobs.
2. Displacement of Low-Skilled Labor: Increased formalization can displace low-skilled workers as industries transition to more regulated and technology-driven processes.
3. Potential Rise in Bureaucratic Red Tape: Excessive formalization could lead to bureaucratic inefficiencies, stifling business growth and creating corruption risks.   

Conclusion

While globalization reduces formal employment, increased formalization presents opportunities for economic growth. Balancing these dynamics is essential for sustainable development in India. 

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