Informal Sector in the Indian Economy

 Why is it in the news ? 

1.According to the National Sample Survey Organisation (NSSO), as of 2024, the informal sector in India constitutes around 73.2% of all workers engaged in the non-agricultural sector, indicating a significant portion of the workforce is employed in the informal economy. Thus, the informal sector consists of small and medium enterprises and household proprietary  and partnership establishments. It accounts for almost half of India’s economic output and more than 3/4th of employment. But the sector has faced challenges so much so that over the last seven years many units have shut down; about 17.45 lakh jobs have been lost on account of demonetisation (2016), GST implementation (2017) and Covid 19 according to Annual Survey of Un-incorporated Enterprises  (ASUE). This is why the government has been focusing on formalising the informal sector and improving the welfare of its workers through various schemes and reforms. As India is embarking upon higher growth in the economy, the growth of the informal sector is a must for sustainable development. 

Introduction

1.The share of the informal unorganised sector is almost 50% in the Indian economy. 

2. Unorganised/ informal sector refers to those enterprises whose activities or collection of data is not regulated under any legal provision and those who do not maintain any regular accounts. Non-availability of regular information has been the main criteria for treating the sector as unorganised. This definition helps to demarcate organised from the unorganised sector. For example, units not registered under the factories act 1948 constitute unorganised components of manufacturing on account of activity not regulated under any act. In case of the sectors like trade, transport, hotels, restaurant, storage, warehousing, services and all non-public sector units constitute the unorganised sector. However, the enterprises covered under annual survey of industries do not fall under the purview of unorganised sector survey. 

3. According to the national commission for enterprises in the unorganised sector, the unorganised sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietor or partnership basis having less than 10 total workers. 

Characteristics and problems of the informal economy

1. The informal economy consists of economic activities that are not regulated by the government and thus operates outside formal legal frameworks like taxation, labour laws and business regulations. It includes self employed workers, daily wage labourers, street vendors, domestic workers, small scale farmers and workers engaged in unorganised enterprises. Self employed workers in the non-agricultural sector are street vendors and hawkers, auto rickshaw drivers, small shopkeepers and retailers, barbers, tailors, cobblers, mechanics and handicrafts and cottage industry artisans. Agricultural workers include small and marginal farmers, landless labourers, sharecroppers and tenant farmers, plantation workers and fisherman and livestock rearers.  Vulnerable groups include workers employed in firecracker industry, beedi making, anganwadi and asha workers, rag pickers and migrant labourers. Informal enterprises include repair shops, roadside food stalls, tea vendors, small factories and workshops and unregistered textiles and garment units.  

2. Informal economy have following problems- 

• No fixed wages, social security or job stability. 

• Lack of formal contracts and legal protection. 

• Often cash based transaction with minimum tax contributions

• Low productivity and poor working conditions

• High vulnerability to economic shocks

• Gender inequality in remuneration

• Limited access to credit

• Seasonal employment 

• Restricted access to government support and financial services

Government’s initiative to address challenges of informal sector

1. Employment 

• Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provides 100 days of paid employment in rural areas. The Government allotted  86,000 crores in the budget of 2025-26. 

• National Rural Livelihood Mission - It is focused upon generating self employment and organising self help groups for self employment.

• Din Dayal Upadhyaya Gramin Kaushal Yojana - It aims at skilled development and job placement for rural youth. 

2.Financial inclusion and credit support

• Pradhan Mantri Mudra Yojana - It provides collateral free loans to micro and small businesses. 

• PM SVA Nidhi 2020 - It provides loans up to 50 thousand for street vendors to start businesses. 

• Stand up and start up India - It encourages entrepreneurship among SC/ST and women. 

3. Skill Development Initiatives - 

• Skill India Mission (2015) - Training programmes have been launched for informal workers to increase their efficiency and skill upgradation. 

• Digital India Programme - Encourages digital payments and financial literacy. 

4.Formalisation and labour law reforms - 

• Code on social security 2020 - It extends social security benefits to unorganised workers. 

• GST composition scheme - Simplifies tax compliance for small businesses. 

5.Social security and welfare scheme 

• Atal Pension Yojana - It targets unorganised sector workers

• Ayushman Bharat  (PM-JAY) - Free health insurance up to 5 lakh for informal workers and their families. 

• Pradhan Mantri Shram Yogi Maan Dhan - Pension scheme providing ₹3000 per month after retirement. 

• E-Shram portal (2021) - A national database to provide social security benefits to informal workers. 

Way Forward 

1. Promote formalisation by simplifying business registration and reducing compliance burdens. 

2. Encouraging digital inclusion by providing training in digital payments and business management.

3. Easing credit access by providing microfinance and low interest loans. 

4. Improving skill upgradation of informal workers to increase their employability. 

5. Strengthening and expanding social security networks by providing pension, health and insurance coverage. 

Conclusion

1. The informal sector in India constitutes farmers, daily wage earners, small traders , contract workers and self employed individuals. 

2. They contribute 50% to the GDP of India but they lack social security, poor condition of work, have poor wages and lack of legal protection. 

3. Government has launched many programmes for their welfare. It is necessary to formalise them into the Indian economy so that they can get easy access to finances. 

4. The more financial inclusion of the informal sector is obtained, the more would be beneficial for the Indian economy. 

5. The informal sector is crucial for absorbing the labour force that cannot find employment in the formal sector.