India’s informal economy: Challenges and solutions – Explained, pointwise

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The majority of the urban population across the world makes its living from the informal economy. According to one report published by the ILO in 2018, more than 2 billion people – almost 61% of the world’s employed population – were dependent on the informal economy. In some countries, this proportion is as high as 80% of working population.

Informality is found in both the traditional informal economy and – increasingly – through the growth of informality in the formal sector. Limited employment creation in the formal economy means that for many people the only alternative is to seek employment in the informal economy.

According to the PLFS 2017-18, there are 92.4% informal workers (with no written contract, paid leave and other benefits) in the Indian economy.

Let’s try and understand various issues associated with informal economy and the ways in which India can deal with them.

What is an informal economy?

Informal economy can be characterized as a range of economic units which are mainly owned and operated by individuals and employ one or more employees on a continuous basis. Informal sector includes farmers, agricultural labourers, owners of small enterprises and people working in those enterprises and also the self-employed who do not have any hired workers.

The informal economy is the unregistered economy, small firms that are below thresholds for regulation, with unregistered labourers who have no rights to work, at work or to social security.

India’s informal economy is the biggest in the world, supporting possibly 400 million livelihoods, with no sector or region exempt. It is unorganized but not disorganized. It is not necessarily de-professionalised either, being regulated through local chambers of trade and commerce.

What is the range of jobs in the informal economy?

The informal economy has a huge spectrum of skills.

There are low-skilled jobs like porter work, basic construction or street vending which don’t need a lot of training.

There are intermediate-skilled jobs like informal manufacturing, workshops doing welding, making furniture, etc. — these need workers to operate machines which requires months of training.

Then, there are highly skilled jobs like high-end weaving or delicate metal work which require years of training.

Informal economy scenario 

Currently, more than half the developing world’s jobs are thought to be informal.

In OECD countries, about 15% of GDP is generated by informal activity. In China, this is about a quarter and growing. In India, it is about half of GDP.


India tops the list with about 85% jobs being informal.

The informal economy in India also employs 94% of the country’s female workforce.

Of the 384 million employed in the informal sector, half work in agriculture, living mostly in rural India, and the other half are in non-agricultural sectors. Of those, about half live in rural India and the remaining in urban areas.

Within the informal economy, women account for greater employment than men in India. Women are considered mainly for domestic work and when it comes to construction and other related sectors, they usually work as support workers.

What are the challenges associated with informal economy in India?

i). Labour in informal economy is generally low-paid or gains low returns. Small firms making some money tend to use this to establish more small firms, rarely expanding to become a big firm. It is the lack of assets, capabilities, volatile earnings, poor access to social protection that make this sector vulnerable.

ii). Poverty and Indebtedness: Workers in the unorganized sector have a much higher incidence of poverty than their counterparts in the organized sector. The low levels of income and uncertain employment in the unorganized sector make the workers unable to meet their basic necessities and other social and other cultural responsibilities.

iii). The prevalence of informal work is also associated with high inequality: Workers with similar skills tend to earn less in the informal sector than their formal sector peers, and the wage gap between formal and informal workers is higher at lower skill levels.

iv). Irregularities in Minimum Wages: Most of the studies undertaken to analyse the conditions of employment in the unorganized sector have examined the wage levels and earnings of workers and have found that the daily wages in the informal sector are below the minimum rate of wages.

v). Lack of social security: There are many times when a worker cannot be economically active. It may be due to biological reasons such as sickness or old age, or on account of personal circumstances such as an accident. In the informal sector, there are no social security measures to provide risk coverage and ensure maintenance of basic living standards at times of such crises.

vi). Informality also has a gender bias. Women are somewhat more likely to be engaged in the informal economy but significantly more likely than men to be working as informal workers in the formal sector. They usually get the most hazardous and laborious tasks. There is gender discrimination with harder work, less work security and lower wages for women.

What steps have been taken by the government?

i). Legal initiatives: The legal initiatives like the Employees State Insurance Act (1948), the Minimum Wages Act (1948), the Coal Mines Provident Funds Act (1948), The Employees Provident Fund Act (1952), the Maternity Benefit Act (1961) and the Contract Labour Act (1970) etc. are important for welfare of informal economy labour market.

ii). Poverty related development schemes: Govt has initiated various poverty-related development schemes which indirectly benefited the urban informal sector since independence. Schemes like the Nehru Rozgar Yojana, MGNREGA and the Swarna Jayanti Shahri Rozgar Yojana were launched to provide support to the poor who constitute bulk of the informal sector.

iii). Social security: To provide social security benefits, the Parliament enacted the Unorgnaised Workers’ Social Security Act, 2008. The government has also launched Atal Pension Yojana, Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Rashtriya Swasthya Bima Yojana etc.

iv). Skill development: To take care of the need for skills of workers in the informal economy, the government has started various programs such as the Skill India Mission, Pradhan Mantri Kaushal Vikas Yojana, Deen Dayal Upadhyay Grameen Kaushal Yojana, recognition of prior learning etc.

What is the way forward?

i). The informal economy workers shouldn’t just be called ‘informal’, implying that they’re not part of the economic mainstream. They should be called ‘self-employed’ instead. Indeed, they are also huge employment generators. For instance: Katherine Boo’s work showcases the incredible mosaic of small enterprises located in Dharavi, Mumbai, employing thousands.

ii). Upskilling: If attention is paid to the infrastructure, modernisation and upskilling of informal economy workers, they can become very competitive globally. This includes Varanasi’s weaving, Surat’s textiles, Moradabad brassware, etc.

iii). Skill-mapping exercise: In India skills are often measured through formal educational qualifications and the skills of informal economy workers often aren’t visible — they appear unskilled and unproductive. They don’t get social respect despite being core members of a productive economy. There is a need for an intensive skill mapping exercise. India’s huge spectrum of skills need to be examined and build on it to mainstream people, who may not have been formally trained, into the formal certification system.

The tremendous importance of the informal economy must be acknowledged in order to bring its people into the fore of policy and civic discussions. A good place to start is the classrooms where the young people should be taught about the the dignity and the contribution of such workers.

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