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India’s informal economy has not shrunk


According to a recent State Bank of India (SBI) Research report, the informal economy in India has been shrinking since 2018.


GS-III: Indian Economy (Inclusive growth, Government Policies and Interventions)

Dimensions of the Article:

  1. More about the Informal Economy
  2. About India’s Informal Workforce
  3. Issues with the SBI Study on the Informal Sector in India
  4. Issues with having a majority in the informal sector

More about the Informal Economy

  • Household enterprises that are not formed as distinct legal organisations and for which no comprehensive records are available are classified as informal enterprises by the International Labour Organization’s 15th International Conference of Labour Statisticians (1993).
  • Informal employees were classified as individuals who did not have access to social security during the 17th Conference (2003).
  • Internationally comparable estimates of both forms of informality (given above) are available based on these criteria.
  • India has a rate of 80% and 91%, respectively. The latter is greater since formal businesses use both formal and informal personnel.

About India’s Informal Workforce

  • India’s estimated 450 million informal workers comprise 90% of its total workforce, with 5-10 million workers added annually. (As per Periodic Labour Force Survey, 2017-18, 90.6 per cent of India’s workforce was informally employed.)
  • Informal Labour is largely characterized by skills gained outside of a formal education, easy entry, a lack of stable employer-employee relationships, and a small scale of operations.
  • The statistics of the ILO report indicates that 95% of the workforce is in the informal sector.
  • India’s informal sector is the biggest piece in our economy as it employs the vast majority of the workforce accounting for about half of GNP according to Credit Suisse, and the formal sector depends on its goods and services.
  • Between 2004-05 and 2017-18, a period when India witnessed rapid economic growth, the share of the informal workforce witnessed only a marginal decline from 93.2 per cent to 90.6 per cent.
  • Looking ahead, it is likely that informal employment will increase as workers who lose formal jobs during the COVID crisis try to find or create work (by resorting to self-employment) in the informal economy.
  • Further, according to Oxfam’s latest global report, out of the total 122 million who lost their jobs in 2020, 75% were lost in the informal sector.
  • According to the SBI research, the informal sector would account for just 15-20% of GDP in 2021, down from 52.4 percent in 2018. The informal economy in India has been shrinking since 2018.

Issues with the SBI Study on the Informal Sector in India

  • Lack of Standard Definition: The SBI study uses a number of different definitions of formality (digitisation, GST registration, cashless payments), none of which are widely utilised. These may be useful tools for fostering formality, but they cannot be equated with formality on their own or even in combination.
  • Impact of Pandemic: The SBI report conflates the decline in the informal sector’s proportion of GDP as a result of COVID-19’s economic impact with formalisation. The lockdowns, as well as the resulting economic slump, had a negative influence on the informal economy. The lockdowns had the greatest impact on industries with a higher level of informality.
  • Fall in Gross Value Added (GVA): The drop in informal activities might be to blame for the informal sector’s declining percentage of GVA. At best, calling this formalisation is deceptive. We don’t know if the decrease in GVA is temporary or permanent. It has certainly resulted in job losses, particularly in the non-farm sector.
  • Role of Agriculture: The proportion of agricultural workers in total employment increased dramatically between 2018-19 and 2019-20 (National Statistical Office’s Periodic Labour Force Survey). Agriculture is virtually totally unorganised, both in terms of businesses and employees.
  • Misconceptions regarding e-Shram portal: The number of employees registered in the new e-Shram site, according to the SBI, is another factor for the reduction in informality. Over 9.9 crore unorganised labourers have enrolled since the portal’s introduction. Registration, on the other hand, refers to the documenting of employees rather than their formalisation. The portal’s goal is not to provide social security benefits.
  • No Credible Database: There is no reliable database on India’s unorganised employees at the moment. In 2020, the government cried helplessness when asked for figures on how many migrant labourers were injured or killed during the lockdowns. These migratory labourers used to be, and still are, a component of the unorganised sector.
  • Homogeneous Entity: In the research, the formal sector was regarded as a single unit. In actuality, the formal sector is divided into several tiers.
  • Informalisation of the formal sector: Contractualization and outsourcing of labour have resulted in a large-scale informalisation of the official sector during the last three decades. The pandemic boosted the share of non-permanent, casual, and contract employees in the organised sector. As a result, a large amount of the formal sector’s production is really generated by informal labour within the official sector.

Issues with having a majority in the informal sector

  • The informal sector remains unmonitored by the government.
  • No official statistics are available representing the true state of the informal sector in particular (and hence the economy as a whole) which makes it difficult for the government to make policies. Unlike the formal economy, the informal sector’s components are not included in GDP computations.
  • Informal sector workers have no job security, minimal benefits, very low pay, and often face hazardous working conditions.
  • There is an expectation of increase in the number of people in informal sector with the issue that about 65-75% (15 million) of Indian youth, that enter the workforce each year are not job-ready or suitably employable.
  • In India Restrictive labour laws- which promotes ad hocism and contract hiring in the labour market to circumvent the rigid labour laws.

-Source: The Hindu

May 2024