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In the platform economy workers function in a formalised realm but without benefits of tenure or welfare

One of the research questions that the NITI Aayog report ‘India’s Booming Gig and Platform Economy: Perspectives and Recommendations on the Future of Work’ poses is whether platforms are formalising or informalising the economy? We attempt a conceptual answer here. We argue that the platform work moves the economy towards formality. But that does not amount to completely formalising the economy.

What is an informal or unorganised economy? The National Commission for Enterprises in the Unorganised Sector (2007) defined unorganised workers as “those working in the unorganised enterprises or households excluding regular workers with social security benefits and the workers in the formal sector without any employer/social security benefits provided by the employers.”

Unni and Naik (2013) in their article ‘Measuring Informality of Employment in Urban India’ (published in The Indian Journal of Labour Economics. 56(4): 493-508) point out that there is considerable heterogeneity in the urban informal economy in India. There is a continuum of employment relationships (see Table).

Platform work defined

Keeping this in mind let us focus on labour platforms. The Draft Code on Social Security (DCSS) 2020 defines “platform work as a work arrangement outside of a traditional employer- employee relationship in which organisations or individuals use an online platform to access other organisations or individuals to solve specific problems or to provide specific services or any such other activities that may be notified by the Central Government in exchange for payment”.

The platform acts as an intermediary between the service provider and the service seeker. The intermediary is not an employer but helps the service provider land paid tasks. The service provider is the food delivery worker in Zomato/Swiggy the cab driver in the case of Ola/Uber and the beautician/plumber/electrician in the case of Urban Company etc.

The contract between the service provider and the platform is market/transaction based. For example in the case of the food delivery platform sector a worker signs an agreement with the platform that he/she will get paid a particular amount upon delivery of food to a particular location within a particular time.

The tasks and amount that one is going to be paid for that task are pre-decided. The platform reduces transaction (search bargaining and monitoring) costs and bears the burden of transaction failure. It is in a position to verify that the transaction has been completed like Zomato/Swiggy/Ola/Uber.

Unlike the traditional informal economy the intermediary in the platform economy takes the burden of the failure of an exchange between the service provider and service seeker like Ola/Uber.

The working conditions of the worker remains essentially informal but has some ‘formal’ features such as the use of bank accounts as a result of digitised payments.

In contrast there is a contract based on a personalised understanding between a traditional informal worker and a service seeker in the regular economy. This contract becomes self- enforcing due to the mutual trust between the two parties which is formed after repeated interactions.

This holds true for our neighbourhood plumber electrician etc. If any one of the parties reneges from commitment in the transaction the relationship breaks down. This can be costly if future transactions are contingent on the success of current transactions. This creates the incentive for each party to go through the commitment.

The transactional contract (as opposed to a relational contract) makes the work done by a platform worker “formal”. The task and payments associated with it are pre-decided; all parties know the costs of failure. Here the transaction for work also may have a tax component attached as for food delivery. But to reiterate the working conditions are informal.

Whether the platform is just an intermediary or an employer is an empirical question because it will depend on the degree of autonomy the platform workers enjoys in their job. Autonomy is the choice of the worker to decide how where and when to produce. In the US and the UK platform workers in specific platforms have been deemed to be employees rather than independent contractors due to the lack of autonomy. These need to be assessed in India.

In sum the platform worker himself/herself remains informal because he/she has neither employer-provided social welfare support (such as pensions and medical insurance) nor a tenure- based job contract nor access to state pensions. Food delivery platform workers are covered by accident insurance which is a very specific form of medical insurance (covering only on-duty casualties) and not a comprehensive idea of the latter.

A policy conundrum is that if the platform worker actually starts receiving social security either from the employer or the government then will s/he become completely formal? The answer will lie in the details.

Bhandari is a Senior Fellow and Sahu and Urs are Associate Fellows at NCAER; Gupta is an Assistant Professor at Ahmedabad University and Das is a Research Fellow at the National Institute of Urban Affairs. Views are personal

India’s annual GDP growth 7% plus is the continuation of an ongoing acceleration. The question is whether this can last.

One country stands out from the gloomy overall tone of the International Monetary Fund’s (IMF) recent update of its World Economic Outlook. Against the backdrop of tepid 3.2% global growth in 2022 the IMF expects India’s gross domestic product (GDP) to expand by 7.4%. This is the fastest growth of any large economy except Saudi Arabia which is the incidental beneficiary of upward pressure on global oil prices from Russian President Vladimir Putin’s war against Ukraine. India may be buying Russian crude oil at a discount but as the world’s third-largest oil importer it is still burdened by high oil prices.

One might quibble that India had an exceptionally difficult pandemic so its economy now has exceptional scope for bouncing back. But other countries hit hard by covid such as Mexico are not doing nearly as well. One might also note that with India’s still-rapid rate of population growth per capita incomes are rising more slowly than its aggregate GDP figures. But a population growth rate of 1% does not fundamentally change the story.

India’s annual GDP growth in excess of 7% is in fact the continuation of an ongoing acceleration from roughly 5.7% in the 1990s to 6.2% from the turn of the century to the 2008 global financial crisis and then to 6.9% from the crisis to the eve of the covid pandemic. The country has benefited from a buoyant tech sector surprisingly robust agricultural productivity gains and decent manufacturing growth. With the worst of the pandemic now behind it the country’s economy is firing on all cylinders.

The question is whether this can last. Unfortunately there are good reasons to believe that given the current set of economic policies the answer is ‘no’.

To maintain its growth momentum India needs to export a lot more. The country has never been an export powerhouse to put it mildly. Exports of services do help but the outsourcing of back-office and customer-facing services is now poised to slow as firms ‘friend-shore’ more of their operations. The current Indian government’s commitment to investing in logistics seems promising but only time will tell how investment projects pan out. Rupee depreciation can make merchandise exports more competitive and limit consumption of imports. But the Reserve Bank of India (RBI) treating exchange rate stability as an important totem has been reluctant to let the rupee fall.

In the future Indian exporters will face a less favourable external environment. China’s economy has slowed. The US may not be able to avoid recession and Europe is already in one. So it is not clear whence demand for India’s exports will come. Every Asian economy that has successfully expanded its manufacturing sector has scaled up by exporting but this avenue may no longer be available to India.

The country can of course borrow abroad to finance its current-account deficit and domestic investment. But India continues to underperform as a destination for foreign direct investment which is deterred by bureaucratic obstacles to doing business. Having discarded suggestions that it issue dollar bonds the government now seeks to encourage foreign investors to purchase local currency bonds. But this revised strategy is no less risky. Foreign investors in local currency bonds tend to cut and run at the first sign of trouble since they otherwise will be hit by the double whammy of falling bond prices and a falling exchange rate.

Nor does India’s government have space to borrow from residents to finance additional spending on the infrastructure healthcare and education needed to sustain long-term economic growth. General government debt is already around 90% of GDP. The primary budget deficit which excludes interest payments is 3% of GDP. The government pays an average of 8% interest on its debt.

But Indian authorities are able to keep interest rates at that level and maintain a veneer of debt sustainability only by requiring banks and other institutional investors to hold government bonds. This in turn limits the ability of Indian banks to provide essential investment finance to the private sector. Meanwhile much of what the government takes in as revenue goes to entitlements and interest payments. Additional capital spending will therefore have to come from the private sector. And private savings are low by international standards.

Most fundamentally the government seems to have found it hard to implement structural reforms. Having experienced pushback from vested interests it has basically taken significant reforms of labour and product markets off the table.

Given its favourable demography democratic polity and its large and diversified economy India could in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that relax all of the aforementioned constraints at a stroke. 

Barry Eichengreen & Poonam Gupta are respectively professor of economics at the University of California Berkeley and a member of the Economic Advisory Council to the Prime Minister of India.

Given its favorable demography democratic polity and large and diversified economy India can in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that the government has taken off the table.

One country stands out from the gloomy overall tone of the International Monetary Fund’s recent update of its World Economic Outlook. Against the backdrop of tepid 3.2% global growth in 2022 the IMF expects India’s GDP to expand by 7.4%. This is the fastest growth of any large economy except Saudi Arabia which is the incidental beneficiary of upward pressure on global oil prices from Russian President Vladimir Putin’s war against Ukraine. India may be buying Russian crude at a discount but as the world’s third largest oil importer it is still burdened by high oil prices.

One might quibble that India had an exceptionally difficult pandemic so it now has exceptional scope for bouncing back. But other countries hit hard by COVID-19 such as Mexico are not doing nearly as well. One might also note that with India’s still-rapid rate of population growth per capita incomes are rising more slowly than the aggregate GDP figures. But a population growth rate of 1% doesn’t fundamentally change the story.

India’s annual GDP growth in excess of 7% is in fact the continuation of an ongoing acceleration from roughly 5.7% in the 1990s to 6.2% from the turn of the century to the 2008 global financial crisis and then to 6.9% from the crisis to the eve of the pandemic. The country has benefited from a buoyant tech sector surprisingly robust agricultural productivity gains and decent manufacturing growth. With the worst of the pandemic now behind it the economy is firing on all cylinders.

The question is whether this can last. Unfortunately there are good reasons to believe that given current policies the answer is no.

To maintain its growth momentum India needs to export more. The country has never been an export powerhouse to put it mildly. Exports of services help but the outsourcing of back-office and customer-facing services is now poised to slow as firms “friend-shore” more of their operations. The current government’s commitment to investing in logistics seems promising but only time will tell how investment projects pan out. Rupee depreciation can make merchandise exports more competitive and limit consumption of imports. But the Reserve Bank of India treating exchange rate stability as an important totem has been reluctant to let the rupee fall.

In the future Indian exporters will face a less favorable external environment. China’s economy has slowed. The United States may not be able to avoid recession and Europe is already in one. So it is not clear whence demand for India’s exports will come. Every Asian economy that has successfully expanded its manufacturing sector has scaled up by exporting but this avenue may no longer be available to India.

The country can of course borrow abroad to finance its current-account deficit and domestic investment. But India continues to underperform as a destination for foreign direct investment which is deterred by bureaucratic obstacles to doing business. Having discarded suggestions that it issue dollar bonds the government now seeks to encourage foreign investors to purchase local currency bonds. But this revised strategy is no less risky. Foreign investors in local currency bonds tend to cut and run at the first sign of trouble since they otherwise will be hit by the double whammy of falling bond prices and a falling exchange rate.

Nor does the government have space to borrow from residents to finance additional spending on the infrastructure health care and education needed to sustain long-term economic growth. General government debt is already 90% of GDP. The primary budget deficit which excludes interest payments is 3% of GDP. The government pays an average of 8% interest on its debt.

But the authorities are able to keep interest rates at that level and maintain a veneer of debt sustainability only by requiring banks and other institutional investors to hold government bonds. This in turn limits the banks’ ability to provide essential investment finance to the private sector. Meanwhile much of what the government takes in as revenue goes to entitlements and interest payments. Additional capital spending will therefore have to come from the private sector. And private savings are low by international standards.

Most fundamentally the government seems to have found it hard to implement structural reforms. Having experienced pushback from vested interests it has basically taken significant reforms of labor and product markets off the table.

Given its favorable demography democratic polity and large and diversified economy India can in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that relax all of the aforementioned constraints at a stroke.

Barry Eichengreen Professor of Economics at the University of California Berkeley is a former senior policy adviser at the International Monetary Fund. He is the author of many books including In Defense of Public Debt (Oxford University Press 2021).

Poonam Gupta Director General of the National Council of Applied Economic Research is a member of the Economic Advisory Council to the Prime Minister of India.