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The Informal Economy of India

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    18th Dec, 2021
The Informal Economy of India

Introduction

  • The informal sector can be characterized as a range of economic units which are mainly owned and operated by individuals and employ continuously basis.
    • This sector includes farmers, agricultural laborers, owners of small enterprises and people working in those enterprises and also the self-employed who do not have any hired workers
  • According to the International Labour Organization (ILO), about 60 percent of the world's population participate in the informal sector.
  • In developing countries like India, a large percentage of the population generally depends on the informal economy.

  • A recent reportissued by the State Bank of India (SBI) estimated that India’s informal economy has shrunk to 15-20 per cent of the GDP in 2020-21 from 52 per cent in 2017-18.
    • The report uses employment and digitization to assess the extent of formalization in the economy.

What is the current scenario of employment in India?

  • Present data: At present, only 10% of India’s over 470 million workforces are in the formal sector. In other words, 90% of India’s workers do not have the privileges—like social security and workplace benefits—enjoyed by their counterparts who are formally employed.
  • NSSO Estimation: It is estimated by NSSO that 84.7% of jobs in the Indian economy are in the informal or unorganised sector. Of this, excluding agriculture, the leading contributors of informal employment are manufacturing, construction and trade.
  • Report: According to the Report of the Committee on Unorganized Sector Statistics, the informal economy makes a considerable contribution to the economy and caters to the requirements of the formal economy. However, its negative repercussions cannot be ignored.
  • Studies: Studies show that employees tend to be significantly more productive in the formal employment when compared to the informal employment. Also, the quantum of value added by a person in a formal job is almost double that of a person in an informal job.
  • Working condition: Informal workers also work under worse working conditions with little job security, no perks or protections and with low wages. The protections guaranteed to workers under different legislations are not complied with by the informal sector, and they also escape the purview of the authorities.
  • Tax GDP ratio: A large informal sector also impacts the government in terms of revenue foregone because the unit’s operating in the informal sector stay out of the government’s fiscal revenue net (This leads to low tax GDP ratio).
  • Long run: Hence, the informal sector is detrimental to the interests of the working population, the government and in the long run, even to the employer.

FAQ related to Informal economy

1.      What is present unemployment rate in India?

Unemployment Rate in India decreased to 6.90 percent in September from 8.30 percent in August of 2021.

2.      Does informal economy contribute to GDP?

In many cases, unlike the formal economy, activities of the informal economy are not included ina country's gross national product (GNP) or gross domestic product (GDP). The informal sector can be described as a grey market in labour.

3.      Does informal sector contribute to GDP in India?

The lack of frequent and up-to-date economic indicators makes it hard to track India's large informal sector, which employs around 80 per cent of the labour force and produces about 50 per cent of GDP.

4.      What percentage of workforce is employed in Informal Economy?

According to NITI Aayog’s Strategy for New India at 75India’s informal sector employs approximately 85% of all workers.

Importance of Informal Sector

The informal sector represents a fundamental component of the economic structure of many developing countries. Informal sector enterprises are a key form of organization of production and an important provider of employment and income opportunities in both rural and urban areas. In parallel to the many jobs created in the informal sector (i.e., employment in the informal sector), various forms of informal (or unprotected) employment in the formal sector have shown fast growth over recent years. Studies have shown that, in many developing countries, the informal sector could account for over 50% of non-agricultural employment and nearly 30% of non-agricultural GDP. Even in many countries with economy in transition, the size of the informal sector is estimated to be around 10% (in the case of Kyrgyzstan, as high as 25%).

However we tend to overlook and underestimate the importance of this sector which is multi-dimensional in its structure.

  • ILO update: According to ILO India Labour Market Update (2016) and NSSO data (2011-12), more than 90 percent of the employment in the agricultural sector and close to 70 percent in the non-agricultural sector falls under the informal category.
  • Dominant sector: Clearly, the informal sector is not the residual sector of the economy. In reality, it is the dominant sector.
  • Contribution: The informal sector may not contribute much to the national income but its dominance in employment is likely to continue for some more time.
  • Improvement: Even while the organised sector has lagged behind, the informal sector has shown improvement in productivity, real wages, employment and capital accumulation.
  • Change of perception:It may be wrong to look down upon the informal sector as stagnant and under-performing.
  • Performance: Empirical data underlines the fact that the informal sector has done better than its formal counterparts on economic parameters such as investment, job creation and accumulation of fixed assets, among others.

Informal VS. Formal sector

Dimension

Formal economy

Informal economy

Formal Contract

Pre-defined work conditions and job responsibilities.

Assured and decent fixed salary with perks and incentives.

Has a fixed duration of work time.

Social security for health and life risks.

Yes

Yes

 

 

Yes

 

Yes

 

Yes

No

No

 

 

No

 

No

 

No

Reasons for the Shrinkage of the informal sector

  • Inclination towards formal economy: At least Rs 13 lakh crore has entered the formal economy through various channels over the past few years, including the latest e-Shram website, according to SBI Eco wrap.
  • Emergence of gig economies: Since 2016, a number of measures, accelerating digital economic growth and the emergence of gig economies, have facilitated higher legalization at prices that are probably much faster than in many other countries.
  • Legalization: Over the past few years, the government has made many efforts to legalize it, the report said.
  • Improper channels of credible data:One of the sources analysing the accreditation level is the monthly EPFO ??payment report which provides data on institutions that send the first ECR (Electronic Challan-cum-Return) in a particular month. Based on this data it is estimated that approximately 36.6 lakh jobs were officially completed by August 2021.
  • Late recognition: According to the e-Shram website, India's first national website for informal workers, with 5.7 crore employees registered until October 30, 2021.
  • Low income: Sixty-two percent of employees are between the ages of 18-40, and 92% have a monthly income of less than Rs 10,000.
  • Agricultural sector: In agriculture, the use of KCC cards has also increased significantly and we are limiting the legalization of Rs 4.6 lakh crore only on the KCC route, with the more disadvantaged farmers entering the banking sector through such use.

However, this does not indicate a complete paradigm shift towards the official establishment of the Indian economy.

  • Diversity: The size of India's informal sector is huge and so is the level of diversity in it. Approximately 50% of GVA and a large share in the export basket.
  • Pandemic affect:About 93 percent of Indian workers are part of the informal economy (NSSO 2014). Although the epidemic has affected all sectors, it has felt the effects of the informal sector.
  • Share in GDP: It is also argued that the informal sector was not 52 percent but almost 42-44 percent of GDP - and despite the increase in legal activity, the informal sector has never shrunk by half.
  • High tax to GDP Ratio:In a situation where high levels of legalization are high, the tax-to-GDP ratio would have been significantly higher. However, it increased from about 16.5 percent to 17.5 percent.

Covid-19 Pandemic & Informal Economy

  • Migrant workers enter the web of insecure jobs: The first wave of COVID-19 by 2020 had exposed the serious flaws of the economic system that drove tens of millions of people into unprotected jobs overnight, with nothing else or a safety net.
  • It is the end of the majority of 90 per cent of Indian workers in the informal sector.
  • Small and medium scale farmers are turning their backs on the agricultural sector: Since 1991, an estimated 15 million farmers have moved out of agriculture, many because the economic system does not make farming profitable.
  • About 60 million people have been displaced as a result of dams, mines, roads, harbours, sculptures, industries, many of whom are poor or have no rehabilitation.
  • Failure of the private government package: The “Atmanirbhar Bharat” government (India confident), actually increased the control of remote and corporate markets in people's lives, and also increased environmental damage.
  • Social unrest: An economy that promotes high levels of vulnerability only exacerbates social ills, creating a climate conducive to social violence, class by category.
  • Eventually it will haunt us all, with the exception of the very rich who will flee to another safer place on earth.
  • Threefold increase in the number of unemployed people in cities: 67 percent of the workforce is employed, and urban and self-employed (non-agricultural) workers are significantly affected.
  • About 80 to 90 per cent of India’s workers are part of an ‘informal sector,’ outside the social security system.

Other challenges associated to informal sector

  • Inadequate safety and health standards
  • Non-compliance with the Minimum Wage Rules
  • Long Work Hours
  • Poverty and Debt
  • Impairment of Social Security Measures
  • Lack of Good Workplace environment

Opportunities in informal sector

  • Backbone of economy: India’s informal sector is the backbone of the economy. It employs the vast majority of the workforce, and the formal sector depends on its goods and services. The nation’s quality of life hinges on things becoming better for masses of informally employed people.
  • Growth perspective: The informal sector too has a plethora of opportunities for the takers and can be harnessed to get the best regarding both economic as well as growth perspective.
  • Better service record: In the informal sector, the workers taking profiles like driver jobs and housekeeping jobs are in direct contact with the employer. This improves their understanding of the employer’s likings and reservations and thus goes a long way in creating a better service record with the latter.
  • Easy hiring: In the case of white collar jobs, the usual methods of hiring are bugged with cumbersomely long rounds. This is usually not the case in the informal sector, where hiring is done with crisply shorter procedures
  • Protected from unsaid rules: Most of the blue collared opportunities in the informal sector fall in the unorganized sector. Earnings in this sector are protected from taxation by unsaid rules.
  • Unforeseen financial as well as logistical support:In case there is some unforeseen expense at hand for the personal staff, the employers generally offer financial as well as logistical support. This is because they tend to trust the workers over time and also because the problems of the workers are directly visible to them; this revelation makes them keen to sort things out for the best.

Women’s role vs. challenges they face in Informal economy

Although there is no precise and authentic information about the total number of woman workers engaged in informal sector, still an estimate is drawn on the basis of available information. As per census reports of 2001 regarding workers and their distribution, there are some 60 thousand women workers under the categories of main workers, marginal workers and those engaged in household industries.

                                                    According to another estimate, almost 90 percent of total women work force is engaged in the informal sector in India (National Perspective Plan for Women, 2000). On basis of previous researches and other reports, following categories of women workers in the informal sector have been identified:

  • Construction labour: Women labour have to work always as unskilled labour carrying construction material on their heads to the construction site, while the skilled/ semiskilled work is done by men.
  • Domestic workers: This category of employment goes mainly to women, especially young girls. In 1997-98, there were some 1.68 million female domestic workers, while the number of male workers was only 0.62 million. The household workers include part-time and full- time workers.
  • Garment workers: These women work with some big drapers, boutiques and stores; here too same bias is evident that the women work as helpers to male tailors (called as masters). These workers include those involved in knitting woollens.
  • Vendor: This is the most scattered category, which includes women engaged in selling different types of commodities, like broomsticks, cane baskets, utensils, petty cosmetics, bangles, vegetables and those running roadside tea stalls, etc. Nearly 40% of total vendors are women and 30% of these women are the sole earning members in their families.
  • Sales girls: These workers are further divided in two categories, one, those moving from door to and place to place, other, those working in shops (mostly women related items like jewellery, garments and cosmetics etc.).

Challenges for Informal women workers in India

  • No alternatives: The notable fact is that the informal women workers do not have any alternative choice to work due to dire need of income.
  • Limited opportunities: The limited opportunities available to women are mostly low paid, low status jobs in the informal sector; jobs which do not have any possibilities of betterment, advancement of efficiency or training, to enable them to enter better jobs at a later stage.
  • Patriarchal mind-set:In the overall state of unemployment and lack of opportunities, women hold a secondary place to men in the race of employment.
  • Unable to enter organized sector:It has been observed that women find it difficult to enter the structured system of organized sector. It is also found, that there is no economic reason for paying lower wages or giving only a particular type of work to women workers.
  • Discrimination: When they work for themselves, their wages and work is quite comparable with those of male workers (For example in case of vendors). There is discrimination in wages, nature of work, availability of work, on the basis of sex.
  • Exploitation: Bargaining power is mostly with the employers, so exploitation is naturally the fate of these poor workers. They come from that section of the society which must work to earn their livelihood and which is socially, economically and traditionally backward and least privileged.
  • No variation in nature of work: There is diversity in the nature of work. Some of them are construction workers, some are domestic servants, and some others are garment workers while few are petty traders in miscellany of goods. But there is little or no variation in terms of job like wage discrimination, job insecurity, leave / holidays and other benefits.

Mitigating the challenges

  • Role of society:Though it seems difficult to meet the challenges that women workers face in informal economic sector in India, yet the society has to meet this challenges at any cost. Thus, It has to be done so far in the interest of the country is concerned and if half of the work force is forced to earn as low as two third of the other half, the ultimate sufferer is the economy as a whole.
  • Government help: A very large proportion of women workers admitted that if they were given some help from the government in the form of money or training or machines etc., they could also have a more honourable living.
  • Self-help group: A ray of hope has emerged in the form of Self Help Groups some of which are working in this area as well.
  • SEWA: To mention the most prominent a reputed group is ‘Self Employed Women Association (SEWA), which is working to organize the self-employed poor women with an objective to make them fully employed.
  • National Commission on Enterprises:NO doubt, the National Commission on Enterprises in Unorganized Sector is established by the Government of India in 2004 to frame rules and regulations to safeguard the interests of workers. The outcome is yet to be seen.
  • Grievance readdressal: It is strongly recommended that mere framing of policies and Acts may not serve the purpose. Work has to be done at the grass root level with proper feedback system in place to ensure that policies of equal treatment for equal work are actually giving results.

Recent Government initiatives

  • Principles of Guidance: A number of guiding principles of national policy relating to social security features are enshrined in the Indian constitution. Legal measures such as the Employee District Insurance Act (1948), the Minimum Wage Act (1948), the Coal Mining Funding Act (1948), the Labor Benefit Fund Act (1952), the Maternity Benefit Act (1961) and the Contract. Labor Act (1970) etc. is essential for the well-being of employees.
  • National Commission for Entrepreneurship in the Informed Sector: India is probably the first country to establish, a commission called the National Commission for Enterprises in the Unorganized Sector (NCEUS) in 2004 to study the problems and challenges facing the informal economy.
  • Poverty-related development schemes: The Indian government has launched a number of poverty alleviation programs that have indirectly benefited the urban illegal sector since independence. Strategies such as Nehru RozgarYojana, MGNREGA and Swarna Jayanti Shahri Rozgar Yojana were introduced to provide support to the poor who make up the bulk of the informal sector.
  • Social Security: In order to provide for social security benefits, Parliament enacted the Social Security for Unemployed Workers Act, 2008. The government also introduced Atal Pension Yojana, Pradhan Mantri Suraksha BimaYojana, Pradhan Mantri Jeevan JyotiBimaYojana, Rashtriya Swasthya BimaYojana etc.
  • Skills development: To address the need for workers' skills in the informal economy, government has started various programs such as Skill India Mission, Pradhan Mantri Kaushal Vikas Yojana, Deen Dayal Upadhyay Grameen Kaushal Yojana, recognition of advanced learning etc.

Need of Hour

  • Caring for Migrant Workers: According to the Institute of Human Development Report, the total number of migrant workers at risk is from 115 million to 140 million.
  • Therefore, it is important that the draft laws clearly state how their implementation will take place in relation to illegal employees.
  • Strengthening MSME: About 40% of illegal workers are employed by MSMEs. Therefore, it is only natural that the strengthening of MSME will lead to economic recovery, job creation, and legitimacy.
  • Skilling under the Cost of CSR: Large corporations should also take on the responsibility of providing human resources in the informal sector at the expense of CSR (Business Community Responsibility).
  • Unless employees are unskilled and educated, they will not be accepted into the legal profession and efforts to legitimize them will lead to unemployment.
  • Simple regulatory framework: The transformation of informal sector into the formal sector is only possible when the informal sector is relieved of the burden of compliance and given sufficient time to adapt to the modern, digitally-enabled legal system.
  • Identifying the Invisible Work: The national policy of domestic workers needs to be brought in early to honour their rights and promote better working conditions.
  • Community Safety: Investing in public safety programs such as Atal Pension Yojna, PM Jeevan JyotiYojana, Rashtriya Swasthya BimaYojana, Aam Aadmi Bima Yojana can help improve the working conditions of employees.
  • The mention of Universal Basic Income in the Economic Survey 2016-17 is a good step in this regard.
  • Financial Support: Providing financial support to help emerging industries become independent is an important step in bringing them into the formal sector.
  • Strategies such as MUDRA borrowing and Start-up India help young people create a niche in a planned field.

Conclusion

The informal economy is a ubiquitous and complex concept. As many people in the legal and informal sector rely on it. In an informal economy, the social security of workers in the economy should be a priority for the government in building a social security network. The basic necessities of living a normal life i.e. food, clothing, shelter, hygiene, and education are the process of reaching the required income level. The focus should be on three aspects of safety namely, occupational safety, wage protection and public safety.