Formalisation of Informal Economy

Formalisation of the informal sector means bringing more of the unorganised sector into the formal fold by means of registration under laws governing manufacturing and income tax.

As per Economic Survey 2018, formalisation includes firms providing some kind of social security to their employees and when they form a part of the tax net.

According to the Task Force Report on Employment Statistics, the Government of India defines a formal job as providing access to at least one social security benefit. The informal sector/unorganised sector consists of own-account enterprises operated by own-account workers or unorganised enterprises employing hired workers.

Facts/Statistics regarding Informal Sector

•  As per the e-ashram portal, over 94% of the e-Shram platform’s 27.69 million informal sector workers earn less than Rs 10,000 per month. Scheduled Castes (SC), Scheduled Tribes (ST), and Other Backward Classes (OBC) make up more than 74% of the workforce. 61.72% of the platform’s registered workers are between the ages of 18 and 40, while 22.12% are between the ages of 40 and 50. Females account for 52.81% of registered workers, while males account for 47.19%. Agriculture is the most popular, accounting for 52.11% of all enrolments, followed by domestic and household workers (9.93%) and construction workers (9.13%).
•  According to a report by the State Bank of India’s (SBI) economic research department, India’s informal economy has shrunk to around 15-20% of formal GDP, down from 52% three years ago, following the implementation of GST, enhanced digitalisation, and demonetisation. At least Rs 13 lakh crore has come into the formal economy through various channels over the last few years, including the recent scheme on the e-Shram portal.
• According to the SBI’s ECOWRAP report, there is wide variation across sectors. According to the 2011 census, the informal size of the trade, hotels, transportation, communication, and broadcasting employs approximately 17 crore households. The informal sector in construction is also around 34%, and it is around 16% in public administration. The manufacturing sector has a 20% informal component.
•  According to the latest Quarterly Informal Economy Survey (QIES) report from World Economics, India’s informal economy accounts for 43.1 per cent of the total economy. As a result, there is enormous potential for formalisation over the next ten years, which will be critical for the future of the youth and the country.

Features of the Informal Sector in India

• Low level of Skill: The majority of jobs in the informal economy are labour-intensive and involve low levels of technology. It involves unskilled workers with little or no education. These people have no hope of finding work in the formal economy because they lack the skills required for specialised jobs in the formal sector.
• Easy entry: Entry into the informal sector is relatively easier due to the low skill requirements. For example, a person with limited skills and capital may find it easier to start a street vending business rather than a formal economy venture such as a grocery store.
• Low-paid employment: Workers’ wages in the informal economy are low due to workers’ low levels of skill. Furthermore, the ease of entry into this sector is due to the low wages offered to less-skilled workers.
• Small-scale operations: The informal sector in India is typically made up of small-scale operations, often run by self-employed individuals or small family businesses.
• Lack of social security: Workers in the informal sector generally have limited or no access to social security benefits such as health insurance, pension plans, or unemployment insurance.
• Lack of Regulation: The informal sector operates largely outside of formal legal and regulatory frameworks. As a result, there is little oversight of the working conditions, health and safety, and environmental impacts of informal sector activities.
• Gender skew: As per the Oxfam report, informal employment constituted 79 percent of total jobs in urban India; where female informal employment was 82 percent compared to 78 percent among urban male workers
• Sectoral Variation:  Agriculture has the highest proportion of unorganised sectors due to small and fragmented holdings. Informal workers in urban India are largely concentrated in construction, manufacturing and services. The informal sector accounts for over 80% and 99% of Indian manufacturing employment and establishments respectively.
• Social Breakup: Over 94% of the 27.69 crore informal sector workers registered on the e-Shram portal earn less than Rs 10,000 per month, and 74% are from Scheduled Castes (SC), Scheduled Tribes (ST), or Other Backward Classes (OBC) and 25.56% is from general category

Challenges

First, the combination of demonetisation, GST implementation, disallowance of cash transactions above a prescribed ceiling, and other steps to reduce the cash intensity of the economy has put pressure on the informal sector. The implementation of GST will reinforce the trend of rapid economic formalisation and a paper trail will be established, and most businesses will be unable to operate unless they are part of the formal economy.

Second, the formalisation of the economy will force the owners/capitalists to conform to Labour Laws and other compliances. This will increase the compliance cost of the companies, as a result, they will hire fewer workers. With the loss of jobs in the informal sector, lower-end consumption will also come under pressure and thus entities that are more focused on low-priced products catering to rural and semi-urban segments would face challenges.

Third, small enterprises may struggle to afford the costs associated with formalization, such as registration fees, taxes, and compliance costs. Additionally, the bureaucratic process of formalization can be time-consuming and complicated.

Fourth, since there are no official statistics available that reflect the true state of the economy, it becomes difficult for the government to formulate policies affecting the informal sector in particular and the economy as a whole. Most of the people involved in the informal sector are either illiterate or not much educated and hence they have little or no awareness of government policies.

Last, Many small firms and MSMEs find difficulty in getting credits from banking institution as being in informal sector they often lack official papers and thus transition from informal to formal sector becomes difficult. According to a recently released Blinc Invest report on the outlook for the MSME sector, approximately 40% of MSMEs in developing countries have unmet financial needs. In India, the overall credit gap in the MSME sector is INR 25 trillion, while MSMEs’ overall debt demand is Rs 69.3 trillion, growing at an 11.5% CAGR.

Way Forward

There is a need to focus on agriculture and the small and micro enterprise sector. While SMEs contribute 25-30% of GDP, they are mostly informal; additionally, more than 60% of farm employment is informal; and trade, transportation, restaurants, retail, wholesale trade, and mandis are not in the formal sector.

To bring informal businesses and their employees into the fold of formality, restrictions on informal business conduct must be relaxed. A self-help group effort that gathers informal employees can aid in the development of self-sufficiency and the resolution of issues related to their working conditions.

A comprehensive statistical base on many aspects of the informal economy is required to allow policymakers to make informed decisions. If vendors have space vending rights, they will be held more accountable for their space and its surroundings. The exchange of vendor licences for fees is also expected to increase local government revenue. A portion of this money could be used to provide public drinking water, restrooms, and waste collection.