India’ Informal Sector

The informal economy is a global and pervasive phenomenon. According to International Labour Organisation, approximately 60 per cent of the world’s population participates in the informal sector. Although this is mostly prevalent in emerging and developing economies, it is also an important part of advanced economies.

In developing countries like India, large share of the population typically depends upon the informal economy.

Need for Governmental push for Formalisation

• Informal operations pose many challenges to the government, like the inability to raise tax revenue, collect data, and regulate firms.
• India’s informality is one reason why its tax-to-GDP ratio has been stuck, impacting education and health care.
• Formalization will help individuals and firms grow and achieve scale and productivity.
• Due to more revenues to the government, the tax to GDP ratio will increase which might lead to more investment in social sector.

Why firms want to remain informal?

• Most businesses hide from the regulatory system, which imposes too high a burden.
• If firms actually comply with all the regulation, their costs will be too high to offer competitive prices to the customers.
• Customers will look elsewhere (usually imports or the informal economy) and the firms will go out of business.
• The worst affected will be the micro, small and medium enterprises (MSMEs).

Challenges

• In manufacturing sectors, temporary employees continue to exist who get affected when there is a downturn.
• Startups which get funded are mainly in technology disciple, they do not generate the kind of jobs country needs, white collared jobs are generated by them that too replacement jobs.
• There is a need to make distinction between capital investment and job creation because that linkage is broken now.
• Incentives should be given on the value of one’s investment.

Way Forward

• Government needs to focus on agriculture which has large percentage of informal workforce.
• Credit support to help small scale industries stand on their own is crucial step in bringing them to the organized sector.
• Need for labour law reforms to reduce the regulatory cost of employment.
• Capacity building and helping business to strengthen so that they are able to formalize.
• Tax incentives should be given to the groups who have contributed for formalisation of laborers.
• Complying with law must become easier and in parallel, law enforcement should become more effective.