| Introduction: Define the focus keywords like informality, i.e. informal economy and formalization. Body: Briefly mention the steps taken by the government towards formalization. Provide some facts and figures to depict increasing or persisting informality in the economy. Mention a few challenges(3-4) of informality, along with 2-3 causes. Conclusion: Provide a brief conclusion with some effective ideas to tackle informality. |
The informal economy is the unregistered economy. It includes small firms that are below thresholds for regulation and are out of tax nets, with unregistered laborers who have no rights to work, at work, or to social security.
Efforts for formalization in India
Several efforts have been made by the government to promote the formalization or structural transformation of the Indian economy. Such efforts include Currency demonetization, digitalization of financial transactions, the introduction of the Goods and Services Tax (GST), e-Shram portal.
According to the Labour Ministry’s data, more than 4 crores (40 million-plus) workers have registered at the e-Shram portal.
However, the efforts towards formalization have not been successful.
What are the challenges of informality for India?
Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed. Official PLFS data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers. It also employs 94% of the country’s female workforce.
Social Security: Informal sector is not regulated; thus, they are not bound to provide a decent working environment and social security to their employees.
Inequality and gender divide: Low income in the informal sector is increasing the inequality in India. Also, as it is the source of employment for the majority of the female workforce, it also promotes gender divide.
Low productivity: The bulk of the informal units and their workers are essentially petty producers. Their productivity is very low due to inadequate financial resources, skills, and training.
Loss to exchequer: A huge segment of industries in the informal sector is thriving without paying taxes. It is a huge loss to the exchequer.
Causes behind the failure of formalization efforts
Excessive regulations: According to international financial institutions such as the International Monetary Fund, the informal sector exists due to excessive state regulations.
Policy failures: A few measures have led to either opposite or no effect on informalisation:
- Measures, such as fiscal concessions to small and labor-intensive manufacturing entities to promote employment, promoted more such entities.
- Sub-contracting and outsourcing arrangements led to the continuation of informal jobs in formal companies.
- Policy measures such as registration under numerous official portals such as e-shram portal do not ensure access to social security, considering the poor record of implementation of labour laws.
Underdevelopment: Studies such as ‘Informality and Development’ establishes a direct link between lack of adequate growth or continuation of underdevelopment and informality. It means the underdeveloped regions of the country tend to generate more informal employment.
Covid induced lockdowns have shrunk the size of the informal sector. However, it has resulted in the growth of gig economy. Huge employment in this sector is also another form of informalisation.
Conclusion
The majority of the informal units and their workers are petty producers. They cannot be brought into the formal economy through the easing of the legal and regulatory hurdles. The economy will get formalized when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.
