Answer Writing Practice for UPSC IAS Mains Exam: Paper - IV (General Studies – III) - 29 November 2018

Answer Writing Practice for UPSC IAS Mains Exam

UPSC Syllabus:

  • Paper-IV: General Studies -III (Technology, Economic Development, Bio-diversity, Environment, Security and Disaster Management)

Q. How globalisation has led to the reduction of employment in the formal sector of the India n economy? Is increased informalisation detrimental to the development of the country? (250 words)

Model Answer:

Broad Outlines

  • What is Globalization?
  • Globalization and reduction of employment in the formal sector
  • Increased informalisation detrimental to the development
  • Conclusion

What is Globalization?

Globalization is the process is which attempts are made by different countries of the world to allow free flow of goods and series , labour technology, investment etc. India embarked on the path of globalization in 1991 through LPG reforms done in the wake of balance of payment (BOP) crisis, high fiscal deficit and high inflation.

Globalization and reduction of employment in the formal sector

  • Globalization led to privatization of non-performing public sector units causing decline in formal public sector jobs.
  • Decline in public investment led to almost no new job creating in formal public sector.
  • WTO’s Doha round has restricted subsidies to famous making agriculture an unviable profession. Moreover, look of thrust on manufacturing did not create formal jobs to absorb people from agriculture sector.
  • Globalization has promoted business process outsourcing, closure of plants, relocation of plants abroad (like Bangladesh) and structural adjustment program within the organizations causing huge decline in the organized workforce.
  • In order to keep pace with global competition, companies are bound to lower costs of products which they adjust by cost-cutting through sub-contracting resulting in informalisation of Besides, companies also do it for profit minimization.
  • Consumerism increasing due to globalization puts pressure on people pushing them to work, irrespective of age and skills they possess.
  • Freedom to move capital across national boundaries increases this risk for businesses and thus reduces investment. Such employers prefer hiring labor informally and contractually.
  • In order to circumvent restrictive labour laws companies prefer contract labours.
  • There is predominance of service sector in India’s economic growth for which skilled labour force is required but India lacks skilled workforce. So the result is rise in informal jobs.
  • To circumvent formal sector laws like maturity benefitsprovident and pension fundcontributions companies prefer keeping large pool of informal workers.
  • Market mechanisms and competition led to closure of obsolete units likes textile mills causing shrinking of formal employment.
  • Modern industries are capital intensive rather than labour intensive so there is lesser absorption of labour force.
  • Due to predominance of Fourth Industrial revolution and automation these days, there is lesser number of jobs being created.
  • Globalization led to increased integration of national economics around the world causing individual economics to suffer global economic crisis like Global financial crisis in 2008 and Euro zone crisis in 2011. This led to closure of several industries and massive job cuts in India.

Increased informalisation detrimental to the development

Increasing in formalization is detrimental to economic development because—

  • Low wages in informal sector leads to:—
  1. Lower purchasing power thereby reducing domestic demand.
  2. Low savings causing inadequate credit generation for investment and development.
  3. Low expenditure on education and health hampering human resource development. It will increase out-of-pocket expenditure pushing such workers further into poverty besides increasing state’s social sector expenditure resulting into higher fiscal deficit.
  • Informal workforce shows no loyalty towards the organization affecting its growth and country’s development.
  • Lack of financial literacy in such workers will deprive than of access to institutional credit thus reducing domestic consumption and hampering economic growth of country.
  • Informal sector does not invest in skill development of workers which hampers growth of organization in long run.
  • Lack of formal sector benefits like maternity leaves and health insurance etc well adversely impact the human resource development.
  • Social security expenditure of government will raise leading to higher fiscal deficit.
  • Cash-based informal sector is breeding ground for black money generated through tax-evasion.
  • Lower tax base in informal sector will result in lower tax revenue which will lead to higher fiscal deficit through massive borrowing hurting intergenerational equity and pushing up inflation. Cost of credit will raise discouraging investment and growth. High inflation will hurt these low wage informal workers ultimately.
  • High fiscal deficit and inflation will downgrade sovereign credit ratings and increase the outflow of foreign investments.


Informal sector contributes about 50 percent to country’s GDP and provide employment to 80% of India’s work force. Despite such advantages in short run, increasing informalisation is detrimental to development and growth in long run.

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