Q) India’s job crisis is more urban and it is more about having formal jobs. In this context, discuss the hurdles in formalization of jobs in India.

Why this question?

Issue of current importance.

Key demand of the Question 

The answer must discuss the hurdles in formalization of jobs in India and provide for adequate solutions in this regard.


Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.


Start with giving a brief about the job crisis prevailing in India, especially in the formal sector.


In the first part, discuss the causes of this job crisis and explain why formalisation is important in this regard.

In the next part, discuss the hurdles that need to be overcome in order to move ahead with the formalisation of jobs.


Conclude with steps that can be taken by the government.

Model Answer

National Accounts Statistics (NAS) defines the unorganised sector as an addition to the unincorporated proprietary or partnership enterprises, including enterprises run by cooperative societies, trust, private and limited companies. The informal sector can, therefore, be considered as a subset of the unorganised sector.

As per Periodic Labour Force Survey, 2017-18, 90.6 per cent of India’s workforce was informally employed. This estimate includes those who are employed in informal enterprises (unincorporated small or unregistered enterprises). It also includes informal workers in the formal sector (workers in the formal sector who are not provided any social security benefits by employers). 

Problems Posed by lack of Formal Jobs

  1. Productivity: The informal sector basically comprises MSMEs and household businesses which are not as big as firms like Reliance. They are unable to take advantage of economies of scale.
  2. Inability to raise tax revenue: As the businesses of the informal economy are not directly regulated, they usually avoid one or more 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.
  3. Lack of control and surveillance: The informal sector remains unmonitored by the government. Further, no official statistics are available representing the true state of the economy, which makes it difficult for the government to make policies regarding the informal sector in particular and the whole economy in general.
  4. Low-quality products and less value-addition per employee: Although the informal sector employs more than 75% of the Indian population, the value-addition per employee is very low. This means that a major portion of our human resource is under-utilized.

Hurdles in the process of Formalisation of the Jobs

  1. One of the biggest challenges facing the Indian economy is the size of the informal sector. At present, only 10% of India’s over 470 million workforce is in the formal sector.
  2. As the economy formalises, GDP and its growth rate will increase, that may not represent the true state of affairs in the economy.
  3. A forced shift from the informal to the formal sector can lead to job losses.
  4. Formalisation can have serious political ramifications, if not managed well.
  5. The focus on making the economy competitive via formalization is often met with accusations of compromising with labour rights, discouraging unionization, and favouring the rich at the cost of the poor.
  6. Red-Tapism: According to a 2015 study by the Centre for Civil Society, starting an MSME requires 12 licenses, 27 construction permits and 7 property registration requirements. There are 44 central statutes and over 150 state statutes governing every aspect of the employee-employer relationship. The process of formalization is too burdensome and costly for small enterprises to remain competitive.
  7. GST- The complexity and the cost of adhering to it are very high. The required computational skills, frequent filing and navigating an impossible classification system led the small businesses to fall into the trap of middlemen and incurs further costs.

Way Forward

  • Government needs to focus on agriculture which has a large percentage of the informal workforce.
  • Improvement in skill levels of the workforce needs to move beyond the age group, it should cater both service jobs and not just blue-collar workers.
  • Credit support to help small scale industries stand on their own is a 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 businesses 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.