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Distressed India’s informal sector needs urgent reform

The government has made several efforts to formalise the economy since 2016. Currency demonetisation, introduction of the Goods and Services Tax (GST), digitalisation of financial transactions and enrolment of informal sector workers on numerous government Internet portals are all meant to encourage the formalisation of the economy. Informal Nature
  • The Indian Economy is characterized by the existence of a vast majority of informal or unorganized labour employment. More than 90% of the workforce and about 50% of the national product are accounted for by the informal economy.
  • The First Indian National Commission on Labour (1966- 69) defined, unorganised sector workforce as –“those workers who have not been able to organize themselves in pursuit of their common interest due to certain constraints like casual nature of employment, ignorance and illiteracy, small and scattered size of establishments”.
  • In the 15th International Conference of Labour Statisticians (1993) of the International Labour Organization, household enterprises not constituted as separate legal entities independently of the households or household members that own them, and for which no complete accounts are available, are categorised as informal enterprises.
Informal Sector: The unorganized sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than 10 total workers. Informal worker/employment: Unorganized workers consist of those working in the unorganized sector or households, excluding regular workers with social security benefits provided by the employers and the workers in the formal sector without any employment and social security benefits provided by the employers. Informal economy: The informal sector and its workers plus the informal workers in the formal sector constitute the informal economy.
Challenges due to informality
  • Underdevelopment: According to the study ‘Informality and Development’, persistence of informality is a sign of underdevelopment.
    • It finds a negative association between informality (as measured by the share of self-employed in total workers) and per capita income.
    • A similar association is also evident across major States in India, based on official PLFS data.
    • Hence, the persistence of a high share of informal employment in total employment seems to be a lack of adequate growth or continuation of underdevelopment.
  • Reduction of informality in India at a slow pace: East Asia witnessed rapid structural change in the second half of the 20th century as poor agrarian economies rapidly industrialised, drawing labour from traditional agriculture.
    • However, in many parts of the developing world, including India, informality has reduced at a very sluggish pace, manifesting itself most visibly in urban squalor, poverty and (open and disguised) unemployment.
    • According to the PLFS data, 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers.
  • Inequality: informal economy is accountable for exacerbating the pervasive divide in the standards of living among the population.
    • Inequality hinders eradication of poverty leading to social stratification.
  • Low wages: The expendable nature of the unorganised labour force causes wages to remain at minimal levels, sometimes lower than the legal minimum.
    • The workers are thus, unable to improve their work-expertise in such a paradigm, are deprived of career growth opportunities.
  • India’s youth bulge: every month for the next several years, one million Indians would turn 18.
    • Most of these hands will look for livelihood in the informal economy.
    • The so-called demographic dividend can become a serious problem for society and the economy if their expectations and aspirations are negated.
  • Formal incredulity: The neo-liberal theory considers the informal economy a marginal and deviant force. It is viewed with suspicion and scorn.
    • In order to integrate them into the nation’s economy, their socio-economic role needs to be acknowledged and redefined to respect them and their agency.
Road ahead
  • Skilling of the workforce is required for adapting to transformation of increasing automation in various sectors.
    • At present, the Indian economy is faced with a conundrum of simultaneously securing the future of an ever-increasing labour-force and sustaining high levels of economic growth through the adoption of capital-intensive technology in production.
  • It is believed that simplifying registration processes, easing rules for business conduct, and lowering the standards of protection of formal sector workers will bring informal enterprises and their workers into the fold of formality.
  • The economy would get formalised when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.
India stands at the cusp of three vital transitions, if it is to transform itself from an emerging to a developed market economy.






POSTED ON 30-01-2022 BY ADMIN
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