INDIA’S INFORMAL ECONOMY AND THE CHANGING WORLD OF WORK: TIME FOR POLICY RESTRUCTURING
The informal sector plays a vital role in all countries of the world. This accommodates about 80% of the global enterprises and employs around 60% of the population. It is inseparable from the mainstream economy and contributes roughly 70% of GDP and employs 85% of the workforce. As a “lifeblood” to many urban agglomerations, the informal economy, over the years, has raised its potential to create pathways for providing affordable and accessible goods and services, employment, entrepreneurship, and even supporting global exchange and supply chains. These informally produced activities, though, contain tangible economic values.
This paper shows that the informal sector’s contribution is diverse, multidimensional, and substantial, but it has gone structurally diverse, definitionally “fuzzy”, legally blurred, and it is further characterized by “dualism” and a major part undeclared to avoid taxation, labour laws, and social protection. Seen in the background of the constantly evolving “world of work”, due to the on-going “mega global’ trends, lop-sided growth pattern characterised by technological and social dualisms, it is brought out that there are daunting challenges before the informal sector. Its “pain-points” require policy-restructuring, reshaping, and recentring. India, by federally institutionalizing creative collaborations, innovation promotions, and guided partnerships in value chains, as shown by many case studies, can promote transition to the formal economy. This will strengthen India’s resolve to be one of the developed countries as envisioned for ViksitBharat@2047.
India is said to be the land of contrasts, complementarities, and contradictions. The co-existence of formal and informal sectors is one such example. The Informal sector (IS), today, has emerged as the most vibrant, diversified, and dynamic segment of the economy in almost all developed and developing countries. Today, the informal sector (IS) accommodates about 80% of global enterprises and employs around 60% of the population. The GDP share is nearly 15% in developing countries.
In India, the informal economy is inseparable from the mainstream economy and serves as a “lifeblood”, while contributing about 70% to GDP and accommodating almost 82% of the non-agriculture workers. Over the period, the IS has raised its potential by creating pathways to provide an affordable and accessible set of goods and services, stable employment, and entrepreneurship, supporting international exchange, global supply chains, and assuming the role of a ‘feeder economy’. The global “Megatrends”, realignments, and technological advances like Artificial Intelligence, no doubt, hold growth potentials, but add serious complexity to the “world of work”. Supporting workers in the informal economy, also known as “gig” and “nano” segments and resolving their negative impacts can help achieve the UN’s Sustainable Development Goals (SDGs). Thus, the transition of the informal sector into formal economy is crucial for India to become the ‘Viksit Bharat’.
UNDERSTANDING THE INFORMAL SECTOR
The informal sector’s origin can be traced to the Kenya Mission Report (1972) of the International Labour Organization (ILO). It was referred to as the “way of doing things” in which the family owns the business, operations are small, entry is easy, resources are indigenous, sales are made generally in unregulated but competitive markets, and skill requirements are neither capital intensive nor comprehensive. Given the small-scale enterprises with tailored services provisioning, household responsibilities, and earning opportunities, are mixed with flexibility in working hours.
The informal sector is unorganized, and it’s a part of the household sector, which includes unincorporated enterprises owned by households comprising establishments and own-account enterprises with one hired worker, other partnership enterprises, and unincorporated proprietaries. Thus, the unorganized sector is a much broader term. It comprises unincorporated partnerships and proprietaries, cooperative societies’ managed enterprises, private and public limited companies, and trusts (non-ASI), as explained in National Accounts Statistics.
Interestingly, the activity range is diversified and varies widely from research and consulting to production activities using highly skilled freelancing workers. It carries an intrinsic economic value and is produced by economic enterprises, companies, entrepreneurs, and workers, who are further fueled by creative entrepreneurship, innovative approaches, and further flourish outside the formal regulatory frameworks of the government.
This conceptual range, diversity, and duality give rise to multiple meanings to the IS, including ‘gig economy’, ‘shadow economy’, ‘nano firms’, and unorganized, disorganized and unincorporated sectors. This adds to the fuzziness and complexity in identifying legal and structural dimensions and formulating in policymaking and evolving a patent strategy for transitioning the informal sector into a formal one. In the background of global “Megatrends”, the Global Forums (e.g., ILO) have argued for an operational definition of the formal and informal sectors, and also of the household own-use and community sector producing units’ formal status and the planned destination of the production (ILO).
GLOBAL INFORMAL ECONOMY
The informal economy is pervasive across the globe. It is also deeply entrenched in low-income level developing economies (sub-Saharan Africa, Latin America, southern Asia, etc), contributing about 39% of GDP, as against about 15% for high-income advanced countries. As per the IMF estimates, about 60% (roughly 2 billion) of the globally employed population (aged 15 & above) is working in the informal sector, and the global enterprises found in the informal sector turn out to be around 80%. Around 85% of the informal sector workers are employed in small, unorganized, low-productivity, and sluggishly growing human and capital accumulation (ILO) activities. As per the OECD estimates, 94% of workers with no education are in the informal sector.
Women’s role and representation in the informal sector hold a special place. It can be gauged from their share in labour force participation rate (in the age group 25 – 54), which comes out to be around 61% as against men’s 91% in 2022. Women, globally, constitute about 80% of domestic workers but earn 80% of what men earn. In addition to facing “motherhood wage penalty” in about 69 economies (out of 190 assessed in 2023), the government has enacted laws that constrain women’s decision to work. Unfortunately, about 73% of women in wage employment (at the global level) do not have access to any type of social protection. This ratio is equally high (75%) for India & 96% for Sierra Leone. Women’s representation in vulnerable and informal employment is extremely high (about 90%, 2018). The share of food-insecure women (severely or moderately) is higher (32%) than compared to men (28%).
INDIA’S INFORMAL SECTOR: SIZE, COMPOSITION & CONTRIBUTION
The size of the Informal economy assumes importance in driving both growth and jobs. As per the Economic Census (6th Round 2013-14), there are a total of 45 million firms outside agriculture. The number of unincorporated firms has risen to 65 million from 63.5 million as per the Annual Survey of Unincorporated Sector enterprises (ASUSE 2024, NSS). The share of female proprietors is about 24 percent. However, inter-state variations are extremely high, ranging from 4 percent for services in Bihar to 78 percent for manufacturing in Telangana as pointed out in the recent studies. Surprisingly, the wage workforce fell to 110 million in 2022-23 from 113 million in 2015-16, indicating increased work productivity. In the case of women workers, they constitute about 25 percent of the unincorporated labour force and about 7 percent of the workforce with part-time work arrangements, as against 41% of women’s percentage in the workforce. About 30% of GDP is generated in the informal sector, and this figure rises to nearly 50% if the unincorporated sector is also included. Almost 85% of the workers are employed in the informal sector, who do not have any formal or written job contract. Even in the hi-tech private sector, 86 percent of the employed workers work outside the formal contractual framework of labour laws. As per the Government of India’s ‘e-Shram’ Portal, 52% of the informal workers are from the agriculture sector, and about 10% are domestic workers, followed by 9% of construction workers. The government must protect all those gig and freelancing workers engaged in India’s growing global capability centres (spread across major cosmopolitan cities like Bangalore, Gurgaon, Hyderabad, Pune, etc.) managed by MNCs for monitoring their R&D activities, innovations, and core businesses. So is the case for all those working in India’s e-commerce exporting sector.
INFORMAL ECONOMY IN THE CHANGING “WORLD OF WORK” & MEGATRENDS
We live in a dynamically changing global world, which is now seeking new alignments and trading partners with rising tariff wars. Simultaneously, the forces of change underlying the ‘world of work’ are constantly evolving. The world, over the period, has gone relatively more affluent and digitally connected, but it continues to be unequal with a high degree of ‘informality’, and geopolitical instability. The rising technology penetration (including AI) is also adding unpredictability, uncertainty & even vulnerabilities. The voices of “slowbalization”, deglobalization, globalization-induced economic-reversal, and deep-rooting of the ‘gig economy’ have become louder.
All such developments have influenced the ‘world of work’ and made it more complex. The cost, delivery, after-sales service, and the time factor, right from organizing inputs to converting those into output flows and from production to the consumption points, have become critical determinants. The “Double-Dualism”, with an extremely high share of the IS and high population dependence on agriculture, also adds to this complexity. Many see growth potential, but others add structural challenges, simultaneously for getting stronger for the governance of the economy as well as the IS. In the case of India, it has been argued that the lop-sided growth and development pattern and sectoral dualism have added to the this informality. Policies related to liberalization, privatization, and globalization (LPG) have resulted in indiscriminate, non-sequential, and uncoordinated sectoral developments.
Backed by ICT and further followed by several initiatives including “Make-in-India” policies, “Aatmanirbhar Bharat”, coupled with other promotional measures like “ease-of-doing” business, industrial corridors, PLI scheme, national missions, like semiconductor mission, and AI India Mission, are seen as fragmented, and “short-termism’ orientations. They failed to check growing triple dualism (India vs Bharat dichotomy, high population dependent on agriculture, widespread & Informal sector; bullock technology coexisting with satellite technology). The lop-sided pattern of economic growth and development coupled with poverty, high and rising inequalities, low employment opportunities for about 12 million young workers added every year, the rising competitive markets characterized by all-round digitalization, which raised levels of financial inclusion and monetization, and AI-driven technologies leading to automation, did not check the high degree of informality nor brought positive impact on the social and labour protection systems as brought out by OECD (2023).
It has been argued in global forums that these trends require redressal through collective efforts, otherwise, it will be difficult to achieve SDGs and related UN Agenda 2030, check economic informality, and foster transition to formalized economic structures and healthy work cultures.
INFORMAL SECTOR – “PAIN-POINTS”
In India, the job generation remains far behind the pace of labour growth. Every year, about 12 million young workers are added to the existing active workforce, who must be provided with livelihoods. If they remain unemployed and “uncompensated” for long, the socio-economic and political costs of the country are likely to be high. Economists argue that there will be deflating impacts on household incomes, social welfare, and effective demand, besides adding vulnerabilities. A “silenced” and “overlooked” reality – around 86 per cent of those employed, including in hi-tech private and state sectors, do not have any formal contractual system. It is also depressing to note that the unionized part of India’s labour force is small, about 10%. As per the registration at ‘e-Sharm’ Portal, 94% of workers earn below Rs. 10 thousand with just minimal social security.
The research studies considering bylaws regulating cart-pushers, hawkers, and kiosk owners have shown that licenses once introduced turn out to be irrelevant, prohibitive, and outdated, involving complex procedures and high costs. It is because policy frameworks came from Town Planning Legislation, Police Acts, Motor Vehicles Acts, etc., which were designed for the formal economy, and failed to consider the real issues of informal workers. Thus, given workers’ diversity, scatteredness, and activity scope (street vendors, drivers, maids, construction workers, junk-shop dealers (“kabadiwala”), itinerants/delivery boys, hawkers, waste pickers etc.), workers’ mobilization and institutionalized forums for bargaining become a herculean task. Labour laws are found to be missing to protect a vast array of disguisedly self-employed workers.
The women constitute the majority, but they receive far fewer benefits in the informal economy. They get a lower salary, are not covered in safety nets, face income volatility, and lose on the front of female labour force participation (FLFP), which declined to around 21% in March 2021. The ICRIER’s study also brings out a long-term decline in FLFP, especially in sectors such as textiles, food, and tobacco. Further, it is also noticed, skill training among female workers is very low. Out of the 23% of women in the labor force who have some skills, 81% had only informal training. The leading states in the skill training include Chhattisgarh (80%), Delhi (64%), and West Bengal (47%), as per the published studies. This low FLFP is also influenced adversely by the conservative social norms and beliefs, resulting in a skewed sex ratio, continued unwillingness to defy tradition, low autonomy and mobility among females, and safety concerns of growing fears of street violence. This goes against the Directive Principles of State Policy (Article 39(d)), which ensures equal compensation for equal pay. The 2019 Wage Code is neither inclusive nor binding. The government agencies can be circumvented by concealing records of the workforce, taxes due, expenses incurred, etc. In the absence of defined laws and guidelines, the existing socio-economic and cultural inequalities and further feminization of domestic work get perpetuated. Therefore, ensuring secure and dignified employment of informal workers is a serious challenge that requires multiple strategies and approaches in which legal intervention and institution-building are central.
Thus, the policy framework and strategy must go beyond statically stationary social norms and the usual economic explanations responsible for low FLFPR. The role of social norms, the shifting labour demand determinants, distance from home etc. must be well recognized along with the potential and further economic contribution of the IS, while looking into the role of linkages and the value chains integration. Some lessons can be taken from some case studies conducted by different NGOs. Delhi’s embroidery works & collection of tailors’ work orders’, integrating the waste pickers of recyclable materials like cardboard, metals, plastics and newspapers, etc. into solid waste management lines, and establishing the vegetable wholesale market to bring together the rural producers and urban street food vendors are given as the best examples. The cooperative model and the Self-help group approach can be worked out. Grievances from informal employees should be heard and resolved regularly through a transparent and officially regulated procedure. Access to finance is vital, as it helps in the growth of their businesses, acts buffer against risks, improves their competitiveness, and, ultimately, improves their livelihoods.
As discussed above, such linkages between the formal actors and the informal workers can be made productive and useful through collective efforts, by initiating formalization programs, expanding social protection, microfinance, and financial inclusion programs, and so on. India’s continued edge of to have the demographic boom – with 65% of its population under 35 (over 600 million people, aged between 18 and 35), and its share of the working-age population will hit 59% by around 2024 offers a best potential, but requires serious rethinking in the transformation to formality.
The Government of India as a part of building up its National Data System, should focus on a comprehensive statistical database, particularly covering wages, employment, innovations, R&D, and interrelationships with the formal sector. It should pass the test of authenticity, cross-checking, and consistency. Data so collected and regularly updated, should be made available for future purposes and policy making. The government portal is to be created to collect all data by registering all workers and sharing a scheme with them.
THE FUTURE OUTLOOK
Looking at the future is essential given India’s ViksitBharat@2047 dream and becoming one of the developed economies of the world by the end of this decade. The World Economic Forum (2024) brings out that the future of growth and development, sustainability, and climate change mitigation requires innovations, inclusiveness, sustainability, and resilience. For this to happen, a transition towards the formal economy must be made. It is more so because the informal sector’s contribution is diverse, multidimensional, and substantial, and this sector, over the period, has made critical pathways to support global exchange, supply chains, and promote entrepreneurship, and so on. It needs to be highlighted that an endless continuity of informality ultimately reduces revenues, productivity gains, encourages unfair competition, and hampers networking with channels of finance, social protection, etc. Also, Informal workers cannot always wait to see the silver lining in the “lighthouse effect” (the term used by ILO), coming from the formal sector. That is, when minimum wages are announced/set for formal workers, it acts as a reference price for the informal sector.
The ‘world of work’ has become more complex, with a constantly changing world, perhaps ever more quickly before, than in recent years. Complexities in managing the ‘world of work’ also come from the “Double-Dualism”. That is, the extremely high share of the informal sector on the one hand and the high population dependence on agriculture. Thus, the challenges ahead are daunting, against the backdrop of “mega global” trends.
There is a need to relax restrictions for informal business conduct to bring those into the fold of formality. The gamut of the ‘world of work’ needs a fresh look. The WEF stresses that this must be guided by 3 considerations: (a) democratic norms and institutions; (b) participatory approach, particulars including employer, employees, and business; (c) Government, employers, and employees to work in harmony to achieve human-centered, inclusive socio-economic development. This will help in prioritizing the needs, rights, and voices of people.
The handling of economic “informality” for social foundations and women’s economic empowerment, and gender equality is critical. Women are an extremely important constituent of the informal economy, yet they receive the fewest benefits, lower salaries, face income volatility, and are kept out of social safety and protection. The women’s labour force participation is also not very encouraging. This issue has also come up as a crucial matter in the “Decent Work Agenda’ and the 2030 Agenda for Sustainable Development.
The policymaking framework requires restructuring, reshaping, and recentering while undertaking a joint and collaborative approach in which the government, policymakers, businesses, NGOs, informal economy representatives, researchers, and local bodies are involved. The role of government (for finance, technology, infrastructure, education, knowledge, skills and training, etc.), along with the corporates, local platforms, and so on, is critical. This has given a renewed emphasis on industrial policy for development and transitioning from the informal to the formal sector. In general, employment generation at the rural non-farm level requires a good jump by formulating people-centred socio-economic policies. The women, given the job scarcity in general, are likely to remain behind men, given the socially determined disproportionate burden of domestic work and care responsibilities falling on the women. National collective efforts are required to strengthen people-centric and participatory democratic institutional structures and socio-economic-political frameworks, focusing on inclusive, integrated, peaceful, sustainable human development. Centre, state & local governments must come forward to rise above regional and business as usual approach to concentrate on diverse strengths including demographic, cultural, and regional dimensions to encourage entrepreneurship/innovations by reorienting education, knowledge, and skills.
India, by federally institutionalized creative collaborations, innovations, and guided partnerships in value chains, as shown by many case studies (to be further encouraged), can promote transition to the formal economy. This will contribute to the eco-efficient output, urban governance, and strengthen India’s resolve to be one of the developed countries as envisioned by ViksitBharat@2047.
(G K Arora is currently, the Professor-Emeritus, AUH, professor (Visiting), and Education Consultant. Earlier, he was associated with the University of Delhi as Principal, Fellow, IHC, and Adjunct Faculty)
(Prof. P.B. Sharma is the Vice Chancellor of Amity University of Haryana. Professor Sharma is widely acclaimed for his recent book, The Making of a New India – A Vision for India@2050. He has also served as the founder Vice Chancellor of DTU, President of AIUs, and Professor at IIT(D), while holding his Doctoral Degree from the University of Birmingham. A distinguished Academician known for his contributions to education, research, and scientific innovations.)
