The Challenge Of Informality In The Indian Economy

National Commission for Enterprises in the Unorganized Sector defines Informality in employment as the absence of employment and/or social security and it is overwhelmingly associated with low income, poverty and vulnerability

Informal Workers in India

• Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of GDP. Combining the International Labour Organization’s widely agreed upon template of definitions with India’s official definition, the share of formal workers in India stood at 9.7% (47.5 million).
• Official PLFS data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers.
• The prevalence of informal employment is also widespread in the non-agriculture sector. About half of informal workers are engaged in non-agriculture sectors which spread across urban and rural areas.

Factors Driving Informality in India

• Differentiated and Multi-layered Informality: Industries thriving without paying taxes are only the tip of the informal sector’s iceberg. The large swathes of low productivity informal establishments working as household and self-employment units which represent “petty production” are still not in picture, thus strengthening their survival.
• COVID Pandemic: Despite (well-intentioned) efforts at formalization, the challenge of informality looms large for India. The novel coronavirus pandemic has only exacerbated this challenge.
• Failure to Recognize Informal Units as Petty Producers: Policy efforts directed at bringing the informal sector into the fold of formality by alleviating legal and regulatory hurdles are commendable. However, these initiatives fail to appreciate that the bulk of the informal units and their workers are essentially petty producers -self-employed and casual workers- eking their subsistence out of minimal resources. Therefore, these attempts will yield limited results.
• “Fiscal Perspective” of Formalization: In an attempt to promote employment, India protected small enterprises engaged in labor intensive manufacturing by providing them with fiscal concessions and regulating large-scale industry by licensing. Such measures led to many labor-intensive industries getting diffused into the informal/unorganized sectors. Further, they led to the formation of dense output and labor market inter-linkages between the informal and formal sectors via sub-contracting and outsourcing arrangements.
• Slow Pace of Transition from Informal to Formal: In many parts of the developing world, including India, informality has reduced at a very sluggish pace, manifesting itself most visibly in urban squalor, poverty and (open and disguised) unemployment.
• Underdevelopment: The persistence of a high share of informal employment in total employment is a result of lack of adequate growth or continuation of underdevelopment. This is also documented by a well-regarded study, ‘Informality and Development’ which argues that the persistence of informality is a sign of underdevelopment.

Problems Associated with Informality of Economy

• Labor Related Challenges: The workforce in informal sector faces-
  • Long working hours, low pay & difficult working conditions.
  • Low job security, high turnover and low job satisfaction.
  • Inadequate social security regulation.
  • Difficulty in exercising rights.
  • Child and forced labor and discrimination on basis of various factors.
  • Vulnerable, low-paid and undervalued jobs.
• Low Productivity: The informal sector basically comprises MSMEs and household businesses which are unable to take advantage of economies of scale.
• Poor Monitoring and Regulatory Control: The informal sector remains unmonitored by the government. As the businesses of the informal economy are not directly regulated, they usually avoid 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.
• Lack of Adequate Database: No official statistics are available representing the true state of the informal economy, which makes it difficult for the government to make policies regarding the informal sector.
• Poor-quality Products: Though the informal sector employs more than 75% of the Indian population, the value-addition per employee is very low.
• Thus, a major portion of our human resource is under-utilized.

Measures to Formalize the Economy

Since 2016, the Government has made several efforts to formalize the economy:

• Currency demonetization,
• Introduction of the Goods and Services Tax (GST),
• Digitalization of financial transactions
• Enrolment of informal sector workers on numerous government Internet portals
• Aatmanirbhar Bharat Abhiyan
• National skill development mission

The economy will get formalized when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.