India heavily relies on the informal economy, employing over 80 per cent of its workforce, despite rapid economic growth. In both traditional and formal sector, informality persists due to limited job opportunities. Contract labour and outsourcing fuel informal employment. Formalising the economy is crucial given high informal employment, low education, and productivity
Even after two decades of rapid economic expansion, India continues to rely heavily on the informal economy, which employs more than 80 per cent of the workforce. Both the traditional informal economy and the growing informality within the formal sector exemplify this phenomenon. Due to the limited job opportunities within the formal economy, many individuals are compelled to seek employment in the informal sector. The increasing utilisation of contract labour and production outsourcing serves as the primary catalyst for the rising prevalence of informal employment within the formal sector. This signifies that merely encouraging the informal sector to transition to formalisation through a combination of incentives and enforcement is no longer adequate.
In this regard, initiatives such as the Unorganised Workers Social Security Act, the Contract Labour (Abolition & Regulation) Act, Workers’ Welfare Boards, and programmes promoting micro, small, and medium enterprises represent some of India’s efforts to combat informality.
In the year 2019-20, the informal sector employed around 82 per cent of the workforce, while the formal sector accounted for 17 per cent. This reflects the government’s endeavours to extend social security measures to employees in the informal sector. Within the economy, a staggering 91.3 per cent of workers lack written contracts, paid time off, and other benefits. The prevalence of outsourcing is underscored by the 11.71 per cent of informal workers within the formal sector (Figure-1). The proportion of informal employment within the formal sector escalated from 6.64 per cent in 2004-05 to 11.71 per cent in 2019-20.
The employment structure reveals a decline in the proportion of informal sector workers over time, accompanied by notable expansion in formal sector employment. This shift was primarily attributed to a decrease in agricultural employment, while all industry categories, except mining, witnessed robust growth in formal sector employment. Between 2004-05 and 2019-20, formal sector employment increased across construction, services, and manufacturing. Consequently, the percentage of workers within the formal sector rose from 11.6 per cent in 2004-2005 to 16.3 per cent in 2011-2012, further increasing to 18.1 per cent in 2019-2020.
The employment structure reveals a decline in the proportion of informal sector workers over time, accompanied by notable expansion in formal sector employment. This shift was primarily attributed to a decrease in agricultural employment, while all industry categories, except mining, witnessed robust growth in formal sector employment. Between 2004-05 and 2019-20, formal sector employment increased across construction, services, and manufacturing. Consequently, the percentage of workers within the formal sector rose from 11.6 percent in 2004-2005 to 16.3 percent in 2011-2012, further increasing to 18.1 percent in 2019-2020.
More particular, the share of informal employment increased across practically all industries in the formal sector, where one would anticipate increasing employment to be linked to an improvement in employment quality and the formal/informal status of work. If we consider the two terminal years for which we have the pertinent statistics, the share of informal employment in the formal manufacturing sector increased slightly. This percentage increased also slightly in construction. In the financial industry, the proportion of non-wage workers in the formal sector increased also. The percentage of non-formal employment in the real estate industry increased from 28.3 per cent to 52.2 per cent during the period 2004-05 to 2019-20. The share of informal employment increased significantly in the formal sectors of education, health, and community services. The overall rate of informal employment in the (formal) service sector increased quickly.
A big informal sector also has an impact on the government in terms of lost revenue because the entities operating in the informal sector do not figure toward the government’s fiscal revenue net. As a result, the informal sector hurts the interests of the working class, the government, and finally evens the employer. Informal markets are socially governed rather than by the government.
Many business associations and thousands of chambers of commerce exert societal corporatist control over apprenticeships, access to jobs, and work sites; they formally certify competences and skill; they handle contract disputes; they shape prices and set terms in derived markets; they organise collective insurance; they stand up for and defend their communities against threats from the state; and they create laws and regulations.
The rapid informalisation of employment in the formal non-agricultural segments severely impeded the shift towards formal employment even as the structure of employment in the economy shifted in favour of the non-farm and formal sector. The high persistence of informality in the economy is caused by the low levels of formal education and training among informal sector workers and low wages as well as low productivity prevailing in this sector. Therefore, government needs to consider to formalize the economy, for that a comprehensive framework is required.
(The writer is associated with Union Ministry of Labour and Employment. The views expressed here are his own)
