The Economic Cost of Exclusionary Politics

In Development as Freedom, Nobel prize winning Indian economist, Dr. Amartya Sen proposed personal agency as a solution towards a strong economy. He conceptualized poverty, not merely as a lack of income, but as the result of impending people’s ability to lead the lives they want and argued that for a nation to be developed, the social, political and economic institutions must actively expand the personal freedoms of its people. In Annihilation of Caste, the principal architect of the Indian Constitution, Dr. Bhimrao Ambedkar, theorized that social mobility is seminal to a well functioning civil society. In the context of stratification by the caste system, he argued that uprooting caste is the only way to achieve this mobility since, unlike class, caste is not defined by economic position but at birth.

What these ideologies share is the recognition that exclusionary systems intrinsically impede personal, social and economic development. Both situate human dignity and autonomy at the center of a functioning democracy, implying that any structure which curtails participation inevitably weakens the systems built upon it. Distilling these frameworks, this essay aims to argue that the Indian Transgender (Protection of Rights) Amendment Bill is detrimental to the economic development of the state by identifying the economic consequences of institutional exclusion, deriving from research done on the effects of excluding people from the LGBTQIA+ in emerging economies.

The Amendment in a Nutshell

The Transgender (Protection of Rights) Amendment Bill (2026) narrows the definition of ‘transgender’ by limiting the recognition only to certain socio-cultural demographics such as Kinnar and Hijra or to chromosomic criteria. In doing so, it collapses distinct identities by removing separate classification of intersex persons and suggesting that trans and intersex identities may be declared interchangeably. At the core is the explicit revocation of the right to self-identification. The right to self identification is replaced by a system where identity must be verified by a medical board and subsequently approved by the District Magistrate in order to be valid within the State for formal documentation, social security, access to healthcare and other formal institutions.

What constitutes the Economy ?

To examine these consequences, it is first necessary to define what constitutes “the economy”. In theory, an economy is defined to be an entity of production, distribution and trade, as well as the consumption of goods and services. It functions within pre-defined laws, monetary regulations and is a structured nexus of producing, sharing and allocating resources within the state, to sustain the livelihood and activity of its people. Simply put, it is the practice of generating and allocating resources within a society with the goal of reducing scarcity as much as possible. In contemporary political discourse, an economy is understood through the country’s GDP (Gross Domestic Product), a global indicator that measures the total market value of goods and services produced within the formal sector.

In practice, the GDP provides a partial measure of economic activity, capturing only formal market output while excluding substantial segments of informal labor. According to the International Labor Organization (2026), over 60% of the global workforce operates within the informal sector – economic activity that remains untaxed, undocumented, and largely unprotected. This distinction is critical. Any analysis of economic impact that fails to account for the informal sector risks overlooking how structural exclusion redistributes labor, suppresses productivity, and ultimately constrains the development capacity of the state.

Barriers to The Formal Economy

In this context, the proposed amendment is likely to operate not only as a social constraint but as a  direct economic barrier to labor force participation. Existing evidence across emerging economies indicates that discrimination against LGBTQIA+ individuals is associated with lower employment rates, reduced job retention, and limited access to formal work. In India, transgender persons already experience disproportionately high levels of unemployment, driven by barriers to education, stigma in the hiring process and lack of access to legally recognized identity documents. By replacing self identification with a system contingent administrative verification, the bill is likely to intensify these barriers, making entry into the formal labor market force more conditional and exclusionary. The foreseeable consequence is a contraction in effective labor supply, as individuals are unable or unwilling to undergo verification processes are pushed out of formal employment structures. Such a restriction represents narrowing of individual capabilities, when, when aggregated, translates into a measurable decline in economic productivity.

Expansion of the Informal Economy and Loss of State Revenue

The likely outcome of restricted access to formal employment is not the disappearance of economic activity, but its displacement into India’s already disproportionately large informal sectors. When individuals are structurally excluded from formal institutions due to barriers such as identity verification requirements, they are compelled to seek alternative means of livelihood outside regulated economic frameworks. This pattern is well documented in studies of marginalized communities across emerging economies, where discrimination correlates with higher rates of informal labor participation (Badgett et al., 2014).

With informal work serving as a survival mechanism, its expansion carries significant macroeconomic costs. Informal labor is typically characterized by low wages, minimal job security and absence of legal protections, which suppress overall productivity. Moreover, because informal economic activities are largely untaxed, the state loses potential revenue that could otherwise be reinvested into public goods. In this sense, the amendment also weakens the fiscal capacity of the state.

In the Indian context, where transgender individuals are already overrepresented in informal occupations such as begging, sex work, and unregulated service roles, further institutional barriers will likely deepen this trend. By formalizing identity verification through bureaucratic and medical gatekeeping, it effectively raises the cost of entry into the formal economy. As a result, economic activity is not eliminated but rendered invisible to the state, weakening both revenue generation and the capacity for inclusive growth.

Human Capital Underutilization

Human capital is the set of skills, ability and knowledge that informs a person’s productivity and subsequently their contribution to economic growth. When sections of the population are systematically excluded from opportunities to build and deploy this capital, the economy as a whole operates below its potential. Gary Becker’s theory of discrimination provides a useful logic here : when markets discriminate, they allocate resources inefficiently by excluding capable individuals on non-economic grounds (Becker & Friedman, 1957).

The amendment deepens this inefficiency by institutionalizing barriers at multiple stages of capital formation. Formal Identification is at the base of that. Without accessible and recognized identity documentation, trans individuals face obstacles in enrolling in schools, accessing higher education, and securing formal employment. These barriers compound over time. Limited access to education reduces skill acquisition, which in turn constrains employment opportunities and income, ultimately restricting access to healthcare and further diminishing productivity. Cross country evidence demonstrates that such inequalities in access to education and opportunity act as a brake on economic development by limiting the productive contributions of large segments of the population (Knowles, Lorgelly, & Owen, 2002).

Additionally, research on economic growth in innovation driven sectors underscores the importance of diversity and inclusion. Regions that are more open and tolerant tend to attract a wider range of talent, which enhances creativity, innovation and long term growth (Florida & Gates, 2001). Conversely, exclusionary policies suppress this potential. By narrowing the conditions of an individual’s economic and social participation, the amendment risks a broader stagnation of a multifaceted economy.

Public Health Burden and Productivity Loss

The economic consequences of the amendment also extend into the domain of public health. Barriers to identity verification often directly translate into barriers to healthcare access. For trans individuals, this can mean denial of general medical services and gender affirming care, leading to poorer health outcomes over time and most likely, an increase in mental health decline and suicide rates. Evidence from South Asia shows that legal and social stigmatization significantly impedes access to HIV prevention, treatment, and broader healthcare services among marginalized sexual minorities (Khan et al., 2005). These barriers contribute to higher disease prevalence and increased long term healthcare costs. At the same time, poor health reduces individuals’ ability to participate consistently in the labor force, leading to lower output and higher rates of absenteeism.

There is also a critical psychological dimension. The denial of self-identification and autonomy has been linked to higher rates of mental health challenges, including depression and anxiety. Within Sen’s framework, such deprivations represent a direct limitation on individual capabilities which are required to participate meaningfully in economic and social life (Sen, 1999). When individuals are systematically denied these capabilities, the effects are not confined to personal well-being; they accumulate into broader economic losses through reduced productivity and increased social costs.

Conclusion

Building on the frameworks of Sen and Ambedkar, this essay has argued that the Transgender (Protection of Rights) Amendment Bill is not only socially exclusionary but economically counterproductive. By restricting access to formal employment, the amendment pushes marginalized individuals into the informal sector, reducing both productivity and state revenue (Badgett et al., 2014). By limiting access to education, healthcare, and employment, it leads to a systematic underutilization of human capital, confirming Becker’s argument that discrimination generates inefficiency (Becker & Friedman, 1957; Knowles et al., 2002). And by exacerbating health disparities, it imposes additional economic costs through reduced labor force participation and increased public health burdens (Khan et al., 2005).

More broadly, the amendment stands in direct tension with Sen’s conception of development as the expansion of human capabilities. When individuals are denied the freedom to define and express their identities, their ability to participate in economic life is fundamentally constrained (Sen, 1999). Similarly, Ambedkar’s emphasis on social mobility underscores the importance of dismantling rigid, exclusionary structures in order to enable both individual and collective progress.

The broader implication is clear: inclusion is not merely a moral imperative but an economic one. Evidence consistently shows that societies which expand rights and protections for marginalized groups tend to experience stronger and more sustainable economic growth (Badgett et al., 2014; Florida & Gates, 2001). Conversely, policies that institutionalize exclusion risk entrenching inequality and limiting development. In aligning with the principles articulated in the Yogyakarta Principles (2007), policymakers would not only uphold fundamental human rights but also strengthen the economic foundations of the state.

Works Cited

Ambedkar, B.R. (1936). Annihilation of Caste. https://ccnmtl.columbia.edu/projects/mmt/ambedkar/web/readings/aoc_print_2004.pdf

Badgett, M.V. Lee, Nezhad, Sheila, Waaldijk, Kees, et al. (2014). The Relationship Between LGBT Inclusion and Economic Development : An Analysis of Emerging Economies. https://escholarship.org/content/qt3kn013kr/qt3kn013kr.pdf?v=lg

Becker, Gary S., Friedman, Milton. (1957). The Economics of Discrimination. https://ia601403.us.archive.org/14/items/in.ernet.dli.2015.118727/2015.118727.The-Economics-Of-Discrimination_text.pdf

Florida, R. & Gates, G. (2001). Technology and tolerance: The importance of diversity to high-technology growth. Washington, D.C.: Center on Urban and Metropolitan Policy, Brookings.

Informal economy. (2026, January 22). International Labour Organization. https://www.ilo.org/topics-and-sectors/informal-economy

Knowles, S., Lorgelly, P. K., & Owen, P. D. (2002). Are educational gender gaps a brake on economic development? Some cross‐country empirical evidence. Oxford Economic Papers, 54(1), 118- 149.

Khan, S., Bondyopadhyay, A. and Mulji, K. 2005. From the front line: The impact of social, legal and judicial impediments to sexual health promotion and HIV and AIDS-related care and support for males who have sex with males in Bangladesh and India, a study report, London, UK: Naz Foundation International.

Sen, A. (1999). Development as freedom. Oxford: Oxford University Press.

The Transgender Persons (Protection of Rights) amendment bill, 2026. PRS Legislative Research. (2026, May 3). https://prsindia.org/billtrack/the-transgender-persons-protection-of-rights-amendment-bill-2026

Yogyakarta Principles (2007). Yogyakarta Principles on the application of international human rights law in relation to sexual orientation and gender identity. Available at: www.yogyakartaprinciples.org.