In the year 2020, when the Government of India raised a clarion call for Atmanirbhar Bharat Abhiyan (Self-reliant India Mission), an umbrella mission engulfing all sectors of the country from the manufacturing sector to the education sector, through envisioning projects and policies that promote self-reliance and to pave a way for India to play a larger role in the world economy so that it can become more competitive and resilient as well. In order to realize this mission of national eminence thoroughly and effectively, the informal sector of India comes to the fore because of being an indispensable part of India’s economy and playing a pivotal as well as monumental role in its economy.
The informal economy consists of activities that have market value but are not formally registered. It is the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. The concept originally applied to self-employment in small unregistered enterprises. It has been expanded to include wage employment in unprotected jobs. An Inform economy comprises of all those enterprises that are not registered, where employers do not provide social security to employees. In most parts of the developing world, including India, informality has reduced at a very glacial pace, manifesting itself most visibly in urban squalor, poverty and unemployment. Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of the Gross Domestic Product (GDP).
Official Periodic Labour Force Survey (PLFS) data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers. Combining the ILO’s widely agreed-upon definition with India’s official definition (of formal jobs as those providing at least one social security benefit — such as EPF), the share of formal workers in India stood at only 9.7% (47.5 million). The informal economy is a global and pervasive phenomenon. Some 60 percent of the world’s population engages in the informal sector. Although mostly prevalent in emerging and developing economies, it is also an essential part of advanced economies. The share of the informal unorganised sector is more than 50% in India and given the size of India, dependency on surveys of unorganised informal sector is inevitable. Around 80% of India’s labour force is employed in the informal sector and the remaining 20% is in the formal sector. Of the 80% informal sector workforce, half work in agriculture and the remaining in non-agricultural sector. According to the latest data, as many as 27.69 crore informal sector workers are registered on the e-Shram portal. Launched in 2021, e-Shram portal is aimed at building a comprehensive National Database of Unorganized Workers (NDUW) in the country. The formation of e-Shram portal came after the Supreme Court directed the Government to complete the registration process of unorganized workers so that they can avail the welfare benefits given under various government schemes. Over 94% of 27.69 crore informal sector workers registered on the e-Shram portal have a monthly income of Rs 10,000 or below and over 74% of the enrolled workforce belongs to Scheduled Castes (SC), Scheduled Tribes (ST) and Other Backward Classes (OBC). The proportion of the General Category workers is 25.56%. The data showed that 94.11% of the registered informal workers have a monthly income of Rs 10,000 or below; while 4.36% have a monthly income between Rs 10,001 and Rs 15,000. 61.72% of the registered workers on the portal are of age from 18 years to 40 years, while 22.12% are of the age from 40 years to 50 years. The proportion of the registered workers aged above 50 years is 13.23% while 2.93% of workers are aged between 16 and 18 years, 52.81% of registered workers are female and 47.19 % are male. Agriculture is at the top with 52.11% of enrolments done by those related to the farm sector followed by domestic and household workers at 9.93% and construction workers at 9.13%. Therefore, the Indian Scenario pertinent to the informal sector is that the Indian Economy is characterized by the existence of a vast majority of informal employment.
The Ministry of Labour, Government of India, has categorized the unorganized labour force under four groups in terms of occupation, nature of employment, especially distressed categories and service categories. In terms of occupation: small and marginal farmers, landless agricultural labourers, sharecroppers, shermen, those engaged in animal husbandry, beedi rolling, labelling and packing, building and construction workers, leather workers, weavers, artisans, salt workers, workers in brick kilns and stone quarries, workers in sawmills, oil mills, etc come under this category. In terms of the nature of employment, attached agricultural labourers, bonded labourers, migrant workers, contract and casual labourers come under this. In terms of especially distressed categories, toddy tappers, scavengers, carriers of head loads, drivers of animal-driven vehicles, loaders and unloaders come under this category. In terms of service categories, midwives, domestic workers, fishermen and women, barbers, vegetable and fruit vendors, newspaper vendors, etc belong to this category. In addition to these four categories, there exists a large section of unorganized labour force such as cobblers, hamals, handicraft artisans, handloom weavers, lady tailors, physically handicapped self-employed persons, rickshaw pullers, auto drivers, sericulture workers, carpenters, tannery workers, power loom workers and urban poor.
Although the informal sector is accredited with the absorption of large masses of workers that would otherwise remain unemployed due to the absence of formal-sector opportunities, however, the plethora of challenges and problems possessed by the informal sector has been detrimental to the country’s developmental progress in multifarious forms. The informal segment of the economy is responsible for maintaining India’s unequal status quo; in fact, it is accountable for exacerbating the pervasive divide in the standards of living amongst the population. Figures published by Credit Suisse in 2018 state that the richest 10% of Indians own around 80% of the country’s wealth while the less-privileged 60% own less than 5%. Inequality obstructs the eradication of poverty, leads to social stratification and drives crime upward. The informal sector consists of enterprises which are labour-intensive. Low-skilled labourers who are desperate enough to work for miserly wages in order to meet their subsistence requirements largely constitute the labour force of unorganised economic activities. Since unorganised firms operate outside of the jurisdiction of corporate law, workers in their employ are assured of neither job security nor social protection.
Owing to the nation’s mammoth population, an oversupply of menial labour is paving the way for easy exploitation on the part of unconscionable entrepreneurs. The expendable nature of the unorganised labour force causes wages to remain at minimal levels, sometimes lower than the legal minimum. Also, the prices of products and services produced by these workers usually do not rise in sync with the rate of inflation, further adding to their despair. Workers are unable to improve their work expertise in such a paradigm, are deprived of career growth opportunities and finally are bereft of the capacity to accumulate significant savings. In this manner, they are further excluded from the main economy due to their inability to save and invest. Due to the superabundance of cheap labour in the informal sector employers are granted a large scope to disregard laws and ethics in their relationship with respective casual employees. While the introduction of the Unorganised Workers’ Social Security Act, 2008 and The Code on Social Security, 2019 are conducive to the conservation of the rights of unorganized labourers, they have not been very effective. The constant influx of menial migrant labourers also makes the nation susceptible to the expropriation of its workers’ surplus value. Unorganised firms are disadvantaged in comparison to the organised ones in terms of access to financial services from banks, exposure to new information and technology, etc. What is true for individuals employed in the informal sector is true for the enterprises which employ them – they are unable to expand and thrive due to their unorganised nature. In order to maintain a cost advantage over organised businesses, informal enterprises must remain as crude and underdeveloped as possible; this is due to the fact that their cost advantage does not stem from augmentations to infrastructure.
The Indian agricultural sector (the largest employer of the informal sector) serves as an example of an industry which is tainted by disguised unemployment due to an oversupply of labourers. Such industries function very inefficiently and are in dire need of infrastructural transformation. Labour-intensive models of production are not sustainable by being more expensive in the long run as well as due to diminishing marginal returns from labour. The automation of manual labour is revolutionising labour-intensive production worldwide and is predicted to result in the obliteration of millions of jobs. Raising efficiency in production necessitates the elimination of superfluous inputs, if such are present: those jobs which do not require high skill sets are most vulnerable to obsolescence. A report by the World Bank suggests that 69 per cent of jobs in India are under threat due to automation. In the agricultural sphere, seasonal employment is an inveterate problem in which agricultural labourers do not have continuous work due to rainfall and climatic conditions. On average, a farm labourer finds employment for about 197 days in a year and for the rest of the year they are unemployed and it is also accompanied by another acute complication i.e. sparse wages. And in the case of home-based workers also, the complications are rife like they are unprotected by labour law: No policy or law for home workers exists in India. Most of the labour laws are designed for the protection of wages and working conditions of workers in the organized (formal) sector. When the workplace is in the home, such laws cannot offer protection to the workers.
Poor remunerative policies: Home-based workers are paid on a piece rate, not on a time basis (unlike many other workers in the informal sector). A minimum wage is usually applicable mainly to workers paid on a time basis for an eight-hour working day. The home-based workers got poor wages only.
Lack of bargaining power and social protection: The employer has an own-account worker, they are no direct access to the best markets and limited bargaining power or home-based workers are economically and socially weak and have little or no bargaining power, it is very difficult for them to sustain. Furthermore, the glitches in the informal sector not only have a debilitating effect on a particular stratum but on a vast sector of the economy which it engulfs like, the informal sector is unable to take advantage of economies of scale and as a result causes soaring prices and which in turn, impacts demand pattern adversely. The businesses of the informal economy are not directly regulated; they usually avoid one or more taxes by hiding incomes and expenses from the regulatory framework. This poses a challenge for the government as a major chunk of the economy remains out of the tax net. The informal sector remains unmonitored by the government and due to this no official statistics are available representing the true state of the economy, which makes it difficult for the government to make policies regarding the informal sector in particular and the whole economy in general. Despite the fact, the informal sector employs the majority of the Indian population, the value-addition per employee is very low. This means that a major portion of our human resources is under-utilized.
The Government of India has sensed the solemn need of reconditioning the informal sector and to acclimatize it with its predetermined stupendous economic objectives, which India wants to secure its place at the driver’s seat in the economic world, it has lately devised and rolled down a few centrally sponsored schemes like Pradhan Mantri Shram Yogi Maan-dhan (PM-SYM). PM-SYM is a Central Sector Scheme administered by the Ministry of Labour and Employment and implemented through the Life Insurance Corporation of India and Community Service Centres (CSCs). LIC will be the Pension Fund Manager and responsible for pension payout. This scheme seeks to benefit around 42 crore workers from the unorganized sector of the country by providing a minimum assured pension. Under the Ministry of Housing and Urban Affairs (MoHUA), the government has launched Pradhan Mantri Street Vendor’s Atma Nirbhar Nidhi (PM SVANidhi), for providing affordable loans to street vendors. The vendors can avail a working capital loan of up to Rs 10,000, which is repayable in monthly instalments within a year. The loans would be without collateral. The scheme would benefit vendors, hawkers, thelewale and people involved in goods and services related to textiles, apparel, artisan products, barbers shops, laundry services etc. in different areas. It is for the first time that Microfinance Institutions, Non-Banking Financial Company, Self Help Groups have been allowed in a scheme for the urban poor due to their ground-level presence and proximity to the urban poor including the street vendors.
In 2019, the government launched PM KISAN SAMMAN NIDHI YOJNA, The scheme was initially meant for Small and Marginal Farmers (SMFs) having landholding up to 2 hectares but the scope of the scheme was extended to cover all landholding farmers. Under this scheme, the financial benefit of Rs 6000 per year in three equal instalments, every four months is transferred into the bank accounts of farmers’ families across the country through Direct Benefit Transfer (DBT) mode. The World Bank also provided assistance to the informal sector of India by approving 500 million USD with a maturity period of 18.5 years and a grace period of 5 years. And the opening of the e-Shram portal by the government to maintain the database of informal workers, so that the government has precise data about its informal sector and can devise the schemes accordingly. In spite of this, the amplitude of these centrally sponsored schemes, it still seems to be at a premium to cater and improvise the mammoth unorganised sector and bring its economic objective to fruition, therefore it would be expedient to bring more structural reforms in this particular sector so that disparity between the formal and informal sector is attenuated and India could settle on its mission of national eminence (self-reliant India) opportunely.
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. Inaction on these two fronts can have calamitous ramifications; without upskilling the working population and imparting necessary proficiency to young individuals, economic inequality will only rise and the working population with marginal financial stature may submerge into indigence. Government support for enhancing infrastructure is particularly essential for small and medium-sized enterprises to yield increased profits. As things currently stand, India’s semi-skilled labour force is a major hindrance to the nation’s overall development and poses perturbing challenges to which there are few solutions. Improvising the quality of human capital would make strides towards the attainment of this mission through the advancement of education and skill levels which will provide the necessary foundation for the formalisation of the economy. As it has also been stipulated in the National education policy 2020, to give special emphasis on vocational education through integration and mainstreaming of vocational education with general education, hence which would lead to a paradigm shift in the Indian market from a dependency approach to a skill-based and self-reliant approach and SWAYAM (Study Webs of Active-Learning for Young Aspiring Minds) platform can be fully drawn on by the government to reap maximum benefits and which will also improve the digital literacy in India because as per NSSO, digital literacy in India is 8.8% in rural India and about 30.2% in Urban India which presents a grim figure.
Improving productivity, earnings and wages because low labour productivity in the informal sector reduces the potential of economic units to transition themselves and their workers to formality. Due to limited access to finance, technologies, markets and skilled human resources, informal economic units tend to operate at low levels of labour productivity and remain in the informal sector. With capital, investments, technologies, property rights and a more skilled workforce, these units may be able to raise their production of goods and services, work more efficiently and benefit from economies of scale. For many, increased productivity is an important precondition to formalising and seizing opportunities in the formal sector. Technical skills upgrading through training schemes is an effective policy option to raise the productivity and earnings of informal workers and enterprises, productivity can also contribute to enhanced working conditions. Access to finance can increase productivity among small businesses and may entail an incentive to formalise. By improving access to finance and making financial services more relevant, entrepreneurs can seize business opportunities otherwise beyond reach. Measures to enhance access include credit guarantee schemes, collateral registries and small and medium-sized enterprise (SME) windows within financial service providers. Relevant services include leasing, business insurance and digital payment services. Combining financial services with non-financial business development support may also enhance productivity in micro and small enterprises. Upgrading business practices can enhance professionalization and increase productivity, which in turn may result in enterprise formalisation. Many informal operators lack access to relevant and affordable business management training, business development services and support programmes. Furthermore, they are often not organised but work in isolation, as a result of which they miss out on opportunities to access services jointly and negotiate better prices or conditions. By professionalising their business operations and working together (for instance, through member-based organisations), they may create economies of scale and access goods, services and markets at attractive rates or conditions.
Upgraded business practices may also be a stepping stone to accessing formal markets. Simplifying business registration and licensing is important in removing barriers to formalisation. Many entrepreneurs face tedious, time-consuming administrative procedures and high costs in registering their businesses and declaring their workers. Legislative changes that translate into shorter and cheaper procedures for registering businesses with the various administrative entities and for obtaining the necessary licences and operating permits should be a cornerstone of any agenda to formalise micro and small enterprises. The most common strategies to simplify business start-ups are one-stop shops, business licensing reform, administrative deadlines, reduction or elimination of minimum capital requirements, simplified legal formats for micro businesses, simplified administrative processes, electronic services and information and technical support. Reforms typically involve a wide range of stakeholders including social partners, who should be involved in the process from the beginning. However, simplified registration, while an important step to reduce informality, should be combined with other measures, such as increasing productivity and putting in place incentives to formalise. The household dimension is also essential to identify the right mix of interventions and develop an integrated policy package for the extension of social protection to informal workers, as the country looks to extend social protection to informal economy workers, it is essential to take into account their household contexts.
Household characteristics provide a range of information needed to develop an effective extension strategy, including how many informal workers belong to poor households and could be a priori covered if anti-poverty programmes were extended to all eligible households, how many informal workers live in households with formal workers and may be fully or partially covered through them, at least for health, without creating disincentives to contribute, increasing dependency between household members or further burdening formal workers, how many informal workers belong to food secure households and have capacity to pay contributions without risking food insecurity. And one more important step to address the deeply rooted decent work deficits in the informal economy and support the transition to the formal economy is to promote informal workers’ empowerment, a transformation in which fundamental principles and rights at work, such as freedom of association and recognition of the right to collective bargaining, as well as tripartite social dialogue between the social partners and government authorities, become firmly established and effective in the informal economy fundamental principles and rights at work.
Zubair Mushtaq is a Gold-Medallist in Business & Financial Studies from Kashmir University. Professor Dr Khurshid Mahajan is the former Director Management Studies, Islamia College of Science & Commerce. Feedback at [email protected]

Zubair Mushtaq and Prof Dr Khurshid Mahajan