Trade reforms and informal economy in India: a CGE analysis.

Informality is multidimensional and generally lacks clarity in its description. The ambiguity of the terms has constrained research on the macroeconomic aspects of the informal sector. This also means the linkages of this sector with other economic agents have not been largely examined so far. The current study intends to conceptualise the term ‘informal economy’ by taking into account firms and workers not protected by any legislation. Given the wide range of activities under the rubric of informal activities, the parameters to describe the informal sector are very varied. The objective of the current macro analysis is to define the macro aspects of the informal sector to enable a measurement of this sector's contribution to the economy. This is done first through the construction of a Social Accounting Matrix (SAM), as reported in Sinha, Siddiqui and Munjal (2004) and second, by using a Computable General Equilibrium Modelling approach to examine the economy-wide impact of trade reforms, as discussed in this paper. To understand the macro aspects, we consider two major perspectives through which we conceive the informal sector: q small-scale production, which is identified as the ‘unregistered’ part in national statistics; q informal ‘factor ownership’, i.e., workers involved in casual work and own-account workers. The informal sector is directly relevant to poverty analysis as most workers in this sector live in poverty (Sinha, Sangeeta and Siddiqui, 2003). There are a large number of case studies that have conducted reviews of the linkage between adjustment and poverty during the 1980s. These have analysed the impact of policy changes in developing countries on poverty and inequality. The findings of qualitative analyses of the relationship between reforms and poverty are presented in a short review by Killick (1995); while White (1997) provides a more recent review. These works describe the reforms undertaken and the changes in a variety of welfare indicators among different household and socio-economic groups. Such studies have been also reported in a series of Background Papers on "Globalisation with Human Face" prepared for the Human Development Report 1999 (UNDP, 1999). Similarly, McCulloch, Baulch and Charel-Robson (2000) provide similar analyses for a set of African countries. Case study analysis cannot generally trace exact linkages between any policy changes such as trade or fiscal reforms and the welfare changes, as these cannot be statistically tested. The results seen after a policy change could just as well be due to other reasons and no direct linkage may be traced without any quantitative connection. Sometimes, there is no impact of a policy change due to miscellaneous factors. As well, conclusions reached through analyses using qualitative studies cannot be taken as generally applicable and should be limited to the specific group interviewed. The inability of descriptive studies to provide a robust causality between impact and result has made research in modelling approaches more demanding. There are few instruments that can relate macroeconomic policy and microeconomic behaviour. 1 Comments provided at the NCAER-UNCTAD Workshop in Delhi (January, 2004) on the paper titled “Impact of Trade Reforms on the Indian Informal Economy and Poverty” is thankfully acknowledged. This paper addresses the critical comments and is a revised version of the earlier paper. This is also based on an augmented CGE model that takes into account the model extensions suggested by the experts in the workshop.