Formal vs Informal Economy
Notes
The informal (unorganised) economy consists of enterprises and workers without formal registration, written contracts, social security or labour protection. The formal (organised) economy is registered, regulated and taxed, with regular wages and social security.
India's informal sector
- The National Commission for Enterprises in the Unorganised Sector (NCEUS, Arjun Sengupta, 2004-09) defined unorganised enterprises as unincorporated private enterprises owned by individuals or households with fewer than ten workers, and unorganised workers as those without employment or social security benefits.
- About 90% of India's workers are in informal employment (including informal jobs within formal firms), contributing roughly 45% of GDP (estimates vary).
Basis | Formal sector | Informal sector |
|---|---|---|
Registration | Registered | Mostly unregistered |
Wages and contracts | Regular wages, written contracts | Irregular, no contracts |
Social security | EPF, ESI, pension, gratuity | Little or none |
Productivity | Higher | Lower |
Taxes | GST, income tax | Mostly outside the net |
Regulation | Labour laws apply | Weak coverage |
Examples | Government jobs, large firms | Street vendors, domestic workers, small farms |
Features of the informal sector: easy entry, small scale, family labour, low capital, low productivity, and poor working conditions.
Measures
- Unorganised Workers' Social Security Act, 2008 (a National Social Security Fund).
- e-Shram portal (2021) for registering unorganised workers (over 30 crore registered); PM Shram Yogi Maan-dhan (pension); Atal Pension Yojana; Ayushman Bharat.
- Code on Social Security, 2020 (including gig and platform workers); the GST, digital payments, Udyam registration and Mudra loans promote formalisation. Demonetisation (2016) and GST (2017) pushed formalisation.
- Gig economy: a NITI Aayog report (2022) estimated about 77 lakh gig workers in 2020-21, projected to reach about 2.35 crore by 2029-30; Rajasthan was the first State with a law for platform-based gig workers (2023).
Concepts: dual economy (Lewis, Boeke); informality gives employment but low tax revenue and little protection; formalisation raises productivity and tax revenue.
Key Points
- Informal sector: no registration, contracts or social security; about 90% of workers.
- NCEUS (Arjun Sengupta) defined the unorganised sector.
- Measures: Unorganised Workers' Social Security Act (2008), e-Shram, labour codes.
- Formalisation tools: GST, digital payments, Udyam.
- Gig and platform workers are now covered under the Code on Social Security.
MCQs
Q1. The NCEUS was chaired by: (a) Arjun Sengupta (b) C. Rangarajan (c) Suresh Tendulkar (d) Montek Singh Ahluwalia Ans: (a).
Q2. The e-Shram portal is for the registration of: (a) Organised workers (b) Unorganised workers (c) Foreign workers (d) Government employees Ans: (b).
Q3. The share of informal employment in India's total employment is about: (a) 30% (b) 50% (c) 70% (d) 90% Ans: (d).