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Formalizing the Informal Sector

Formalizing the Informal Sector

The dominance of the informal sector has emerged as a key characteristic of India's labour market landscape. While the informal sector produces almost half of the country's GDP, its employment domination is such that more than 90% of the overall workforce is employed in the informal economy.

Several efforts have been made by the government to formalise the economy. The introduction of the Goods and Services Tax (GST), Digital Payment Systems, and the enrolment of informal sector employees on multiple government portals such as e-Shram are all intended to foster economic formalisation.

The activities described above are based on the "fiscal perspective" of formalisation. Despite this, the formal sector outperforms the informal sector in terms of productivity, and formal workers have access to social security benefits. As a result, various factors of formalising India's informal labour must be considered.

Difference Between Formal and Informal Sector

The formal sector has a written contract between the employer and the employee, as well as pre-defined labour conditions. This sector is made up of a well-organized group of people who operate in the same environment and are legally and socially conscious of their rights.

Informal Sector: All unincorporated private enterprises owned by individuals or families involved in the sale and production of products and services on a proprietary or partnership basis are classified as informal.

Recent Government Initiatives related to the Informal Sector

Scenario of Informal Workers According to E-Shram Portal

Over 94% of the 27.69 million informal sector workers enrolled on the e-Shram platform earn less than Rs 10,000 per month. More than 74% of the workforce is comprised of Scheduled Castes (SC), Scheduled Tribes (ST), and Other Backward Classes (OBC). 61.72% of registered workers on the platform are between the ages of 18 and 40, while 22.12% are between the ages of 40 and 50. Females make up 52.81% of registered workers, while males make up 47.19%. Agriculture ranks first, accounting for 52.11% of all enrolments, followed by domestic and household employees (9.93%) and construction workers (9.13%).

Challenges Related to Informal Sector in India

Women make up the majority of informal participants, yet they receive the fewest benefits and face lower salary, income volatility, and a lack of a strong social safety net. It has also greatly hampered women's labor-force participation. According to the Periodic Labour Force Survey statistics, female labour force participation fell to 21.2% in March 2021, down from 21.9% the previous year.

Informal employment, by definition, lacks a written contract, paid leave, and hence does not pay minimum wages or pay attention to working conditions. The breadth and efficacy of the 2019 Wage Code for the informal economy remain limited. If a state government refuses to include a certain job inside a given sector, it is not covered by the minimum wage criterion.

Because the informal economy's firms are not directly regulated, they typically dodge one or more taxes by concealing revenue and expenses from the legal system. This is a problem for the government because a large portion of the economy is not taxed.

There are no official statistics available that reflect the true state of the economy, making it difficult for the government to formulate policies affecting the informal sector in particular and the economy as a whole.

Working hours that exceed labour standards are widespread in India's unorganised sector. There is no defined working hour in the agriculture sector in particular because there are no laws that can serve as a guideline for farm workers' working conditions.

Unorganized sector workers were far more likely to be poor than their organised sector counterparts. Poor nutrition intake, as a result of low salaries and health problems, endangers their life.

Many natural calamities, such as floods, droughts, famines, and earthquakes, have disastrous consequences on the informal sector. The lack of social security exacerbates the situation.

What Should be the Way Forward?

There is a need to relax restrictions for informal business conduct in order to pull informal businesses and their employees into the fold of formality. A self-help group effort that gathers informal employees can help to foster self-sufficiency and address concerns linked to their working conditions.

As part of the National Data System, a comprehensive statistical base on many elements of the informal economy is required to enable policymakers to make informed decisions. Vendors will be held more accountable for their space and its surroundings if they have space vending rights. The provision of vendor licences (limited in space and time) in exchange for fees is also projected to boost local government revenue. A portion of this cash might be used to provide drinking water, restrooms, and waste collection in public spaces.

Grievances from informal employees should be heard and resolved on a regular basis through a transparent and officially regulated procedure.

Equal compensation for equal effort is a directive principle of state policy (Article 39(d)), but women farm labourers typically earn less than their male colleagues. Through appropriate legislative support, the government should enhance and enforce this DPSP.

Last Modified : 12/11/2023



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