The Subcontracting Paradox: A Challenge for Inclusive Growth in India's Informal Economy

From an #Investor and #ESG professional perspective, a writeup The Statesman Subcontracting Paradox provoked me to share my observations about the exploitative nature of subcontracting in India's vast informal economy. While subcontracting is often touted as a pathway to growth and formalization, the reality paints a far bleaker picture.

The Illusion of Upliftment

Data reveals a harsh truth: less than 30% of informal enterprises are engaged in subcontracting linkages, and this number is even lower in urban areas. This exposes the myth that subcontracting automatically translates to empowerment. In fact, subcontracted enterprises often struggle to accumulate capital, falling significantly behind their non-subcontracted counterparts.

The Putting-Out System: A Recipe for Stagnation

The primary culprit behind this stagnation is the archaic "putting-out" system. Here, large corporations dictate production processes while subcontracted units, despite their formal independence, are essentially reduced to appendages. They receive raw materials and specifications, returning the finished product with little autonomy or room for innovation. This stifles their potential for growth and locks them into a cycle of low productivity and dependence.

Women-Owned Enterprises: Bearing the Brunt

The impact is particularly severe on women-led and household-based enterprises, which are heavily represented in these exploitative arrangements due to socio-economic constraints. While subcontracting offers some degree of assured demand, it traps these enterprises at the bottom rung of the economic ladder, with minimal prospects for advancement or formalization.

Rethinking Subcontracting for Inclusive Growth

We urgently need to re-evaluate the role of subcontracting in India's informal economy. Subcontracting should not be seen as a one-way street to growth for large corporations, but rather as an opportunity to foster a more equitable and empowering ecosystem. Policy interventions should target:

• Strengthening Contract Enforcement: A robust legal framework that ensures fair treatment and protects the rights of subcontracted enterprises is essential.
• Promoting Equitable Partnerships: Subcontracting arrangements should be mutually beneficial, enabling knowledge transfer, technology sharing, and capacity building for informal enterprises.
• Empowering Women Entrepreneurs: Specific programs should target women-led businesses within the informal sector, providing them with the resources and support they need to thrive.

Learning from ESG Practices

International buyers' insistence on ESG (Environmental, Social, and Governance) practices from their vendors offers valuable insights. ESG frameworks promote responsible sourcing and ethical labor practices, which can be adapted to the Indian context to ensure a more sustainable and inclusive subcontracting model.

By addressing these challenges, we can unlock the true potential of India's informal economy, empowering millions of small businesses and fostering inclusive economic growth that benefits all stakeholders.