Context: Given the havoc caused by the COVID-19 across the world, that has claimed both lives and livelihoods, it is of significant concern for developing countries such as India that host a vast informal workforce with no labour, social or health protection.

More on the news:

  • The informal sector is ill-equipped to cope with the medical and economic costs of the virus.
  • It comes largely as a consequence of the persistent neglect of the informal economy over the years.
    • It is generally believed that the informal sector is a marginal or temporary sector where people subsist meanwhile looking for formal employment.

Size of the informal Economy

  • Going by the statistics, the size of the informal economy is far from insignificant. 
  • Nearly, 90.6 per cent of India’s workforce was informally employed (Periodic Labour Force Survey, 2017-18). 
    • This estimate includes those who are employed in informal enterprises cum informal workers in the formal sector.
  • During the period expanded between 2004-05 and 2017-18, while India witnessed rapid economic growth, the share of the informal workforce witnessed only a marginal decline from 93.2 percent to 90.6 percent. 
    • While there was some decline in the share of workers employed in informal enterprises over this time period (from 87.4 percent to 81.1 percent), the share of informal workers in the formal sector increased from 5.8 per cent to 9.5 percent.
    • In the end, the total share of people employed informally  didn’t change much. 

Informal enterprises implies Unincorporated small or unregistered enterprises.

Informal workers in the formal sector corresponds to the workers in the formal sector who are not provided any social security benefits by employers.

Need for policy discussions on Informal Sector

  • COVID-19 crisis
    • Going ahead, it is likely that informal employment will increase as workers who lose formal jobs during the COVID crisis may resort to self-employment in the informal economy. 
      • Further formal enterprises are likely to continue hiring informal workers given more flexibility and low labour costs.
    • By reading the signs, informality is here to stay and there is an urgent need to place the informal economy at the centre of the policy discussions.
  • Understanding the heterogeneities
    • Informal sector encompasses various drivers of informality
    • Some of the self-employed persons choose to be in the informal economy voluntarily to avoid registration or taxation.
      •  Others do so for a subsistence living in the absence of alternative employment opportunities.
    •  Few informal enterprises, except perhaps some survival activities, operate in isolation from formal firms. 
      • They source raw materials from and/or supply finished goods to formal firms either directly or through intermediate (formal/ informal) firms. 
      • But they choose to remain in the informal sector as they are deterred by the costs of formalisation or don’t see much benefit from formalisation.
      • I think this would be a better line here.
    • The phenomenon of informalisation of wage employment in the formal sector is a consequence of means employed to cut labour costs by avoiding payroll taxes and employer’s contributions to social security or pensions.

Way Forward 

  • Formalising the informal economy
    • Given the multiple drivers of informality , a multi-pronged and comprehensive approach is needed to facilitate the transition. 
    • It calls for creating more formal jobs through labour intensive growth so that informal workers can move to these jobs. 
      • Further, it requires registration of informal enterprises  and bringing them under the ambit of taxation
      • The demonetisation and introduction of GST formalised them only in a legal sense but it should serve the purpose of increasing productivity of informal enterprises and incomes of the informal workforce.
      • The process should provide them with technical and business skills, infrastructure services, financial services, enterprise support and training to better compete in the markets. 
      • Further, the obstacles in the path to entrepreneurship needs to be removed. 
      • All in all, the transition process needs to be made organic.
  • Tackling the work deficit
    • The formalisation of informal enterprises also calls for reducing the decent work deficit in informal employment. 
      • It requires protecting informal workers by providing them a social protection floor, ensuring a set of basic working conditions such as adequate living wages, limits on hours of work and safe and healthy workplaces and increasing their collective representative voice. 
  • Imminent redressal
    • The immediate need is to provide emergency relief to cushion the effects of the medical and economic shocks of the COVID-19 on informal workers.
    • They should be provided with adequate income support along with free public provision of basic food items, other essentials and effective health services.
    • In this line PM Gharib Kalyan Yojana is a welcome step as it extends the relief provisions for labourers, farmers, destitute women, etc


Image Source: BusinessLine