Cottage Industries – The Dwindling Saving Grace of the Indian Economy

Abstract: India’s vast informal economy is both a blessing and a curse. The hundreds of
millions of people who toil there, often without pay, outside the tax system, and frequently on
meagre incomes, include the country's farms, hawker stands, and small textile industries. The
cottage industry sector's ability to absorb unemployment ensures that the country continues to
run even during the worst of circumstances. It is considered to be the smell, sight, and taste of
India, the legacy of the Indian essence that can be a matter of immeasurable pride. But these
sights, sounds and smells may be less pervasive in future, for there are signs that work in
India is undergoing a transformation. It is debatable whether the ability to pursue legitimate
sources of long-term income is a net negative trend for Indians, if it is in fact detrimental to
the great majority of Indians who currently work informally for wages that are quite
constrained.

“It is the maxim of every prudent master of a family, never to attempt to make at home what
will cost him more to make than to buy. What is prudence in the conduct of every private
family, can scare be folly in that of a great family”, said Adam Smith, commenting on the
demerits of complete autarky of a nation’s economy, and trade protectionism practices
indulged in by most European countries of his time. Yet, India as a leading developing nation
of the current times, has always put its foot down when it comes to protecting its cottage
industries from the negative effects of globalization. It is hard to imagine the country without
the millions of people providing food, transport, and even currency exchange, outside the
restricting bonds of contracts and the tax system. They influence the way India appears
(packed markets), sounds (bargaining excitement), and smells (the snack carts lining the
roads). And it is the sector's adaptability, which absorbs unemployment, that keeps the
country running even in the most trying circumstances.

Against common expectations, trade protectionism has only increased as time has passed in
India, considering that it is one of Prime Minister Narendra Modi's defining aspects of Indian
economic policy. The simple average of India's tariffs increased by 25% over the last ten
years, from 8.9% in 2010–11 to 11.1% in 2020–21. Over the same time span, the percentage
of India's tariff lines that exceeded the 15% threshold increased from 11.9% to a startling
25.4%. Along with these expanding trade hurdles, Modi's administration has become
increasingly reluctant to sign on to new trade accords. The argument has always been that
losing the sights and smells of these hawkers and informal workers would essentially remove
the essence of India, and India would cease to remain the colourful, multicultural, exuberant
nation that it is.
Because of this, most scathing analysts and economists prefer to view India's growing trade
protectionism through primarily ideological lenses. They worry that such a change risks
flirting with India's unsuccessful import substitution policies of the 1970s, as well as undoing
nearly three decades of trade liberalisation. The claim is that trade protectionism is so alluring
that Indian officials are powerless to resist succumbing to it. However, there are indications
that the nature of employment in India is changing, so these sights, sounds, and smells may
become less prevalent in the future. The country's workforce appears to be becoming more
formal, according to data from a variety of sources.
The number of employees enrolled with the national pension fund increased by 35% during
the first half of India's fiscal year, which ended in September. This increase is equivalent to 9
million more people. Since 2017, there have been an increase from 8 million to 14 million
businesses paying the goods-and-services tax, a measure of the formal creation of businesses.
Online job advertisements on job search engines like Monster indicate a similar increase in
formal employment. The transformation is so significant and abrupt that observers are at a
loss for words to explain it. A significant change in the actual world is undoubtedly
underway, as noted by Rahul Bajoria of Barclays. This is because the swing is sufficiently
large and evident over a broad variety of indicators.

Strong commercial trends are probably to blame for the change. India's financial system has
undergone a drastic change. Companies are required to pay a tax on purchases under a 2017
goods-and-services tax, which can be deducted from sales. Getting this money back is an
inducement to register with the authorities. Meanwhile, since its establishment in 2016, a
government-backed electronic payment system has experienced rapid growth. It lessens
evasion by leaving a trace that may be followed. The employment proportion provided by
multinational corporations has increased, and they are often not the kind of companies to
avoid paying taxes. Foxconn, a Taiwanese electronics manufacturer, is constructing housing
close to Chennai to house more than 60,000 workers. In the last five years, the workforce of
Dixon Technologies, an Indian subcontractor with dozens of global clients and Foxconn-like
operations, has increased from 1,500 to 20,000. Smaller companies that supply such regulated
businesses with everything from the workers' food to the countless trucks that support
logistics must be formal enough to function with their payment and monitoring systems.
It appears that the great Indian fear of complete globalization is at the point of actualization,
despite political and economic ideologies of “aatma nirbharta” being rifer with the
population. The question arises whether it is a net negative trend for the people of India, if it
is indeed bad for the vast majority of the Indian population working informally under very
tight salaries brackets, to now be able to pursue legitimate sources of permanent incomes.
And if the Indian legacy is fragile enough to completely be obliterated by the annihilation of
hawkers and street vendors, replaced by tax-paying and stable traders.