Formalisation v Transactionalisation

India has started its path on formalising the economy and thereby bringing many of the untraced economic activity into the mainstream. But we need to beware of Transactionalisation.

Formalisation allows for numerical tracking and oversight (if required) of activities that do not manifest before the government and other agencies. These are the hidden economic activities that remain invisible and, hence, do not create history and track records so that they can be leveraged into formal activities. In formalisation, we achieve some of the automatic benefits that Hernando de Soto talks of¹. The formal system can be leveraged (i.e., social or financial leverage) to improve economic prosperity.

Reluctance for formalisation?

Unlike popular opinion, Indians are not averse to the formalisation of economic activity.

• Most activities remain informal because they are either too small or lack the affordable infrastructure (payments and records) to formalise them. While we have payment infrastructure, we still do not have the means to create business entities cheaply.

• Other reluctance is the result of tax persecution, which has been a central tenet of Indian financial governance. Once the persecution of the taxpayer abates, people will automatically prefer to formalise all of their activities that add economic value.

But beware of Transactionalisation!

We need to differentiate between formalising economic transactions, which are informal, AND transactionalising social interactions by adding monetary incentives to otherwise social give-and-take.

There are two ways of transactionalisation:

1. Turning an activity into an economic activity (e.g., community-sourced babysitters vs. provided babysitters). Thus, gone are Mr. Baker and Mrs. Grocer, replaced by “starred” service providers on your favourite Food delivery App.

2. By placing the responsibility on the state (e.g. if there is an emergency we call police or emergency services but not out neighbours which was the norm in 1900s). As I wrote previously², this leads to bigger governments.

There is this push to unravel interdependence between people. Everything ends up reducing our interactions with our neighbours, our community. In the eras past, we were forced to rely upon our neighbours, today we have to be forced to interact with our neighbours. The only time we do sense the community around is when we see lost pets posters. Many have lost the art of connecting with our neighbourhoods and communities, thus feeding into our modern lonliness epidemic.

If we transactionalise social interactions, we reduce the interconnectedness of society, and therefore, we end up with a society that is easy to break. The question is how can we strike a balance.

Notes and References:

1. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else - Hernando de Soto

2. Breakdown of communities & Intrusive Government - RightVIEWS, Aug 18, 2022.

---