Manya Rathore
Research expert covering India
Unorganized sector in India - statistics & facts
Accounting for around 90 percent of India’s workforce, the unorganized sector is a significant contributor to the economy of the most populous nation. Generally used interchangeably with the shadow or informal economy, the sector employs workers in jobs where they do not have access to social security benefits, written job contracts, paid leave, or health benefits under existing labor legislations. This large, yet quasi-invisible sector includes jobs like street food vendors, kirana (local retail) store owners, household workers, laborers in informal businesses, delivery persons, drivers, electronic waste collectors, and ragpickers, among others. Agriculture, the biggest employer in the country, is largely an informal sector.
The lack of documentation and registration kept many migrants and other unorganized workers from accessing government relief, and let employers evade their obligation towards workers during the COVID lockdown. The cash-intensive sector was also adversely impacted by demonetization and Good Services Tax.
For years, informality has been calculated as a proxy derived from the formal sector - wherein all the workers and enterprises not part of the formal sector were considered informal. The Indian government has been using the Employees Provident Fund scheme’s data among others as a measure of payroll employment and formal job creation.
Moreover, the formalization of enterprises does not come without costs. Cost of compliance and complex labor laws keep most informal enterprises unregistered or loosely registered. Additionally, low productivity and a lack of competitiveness or capacity to face formal enterprises are some of the reasons hindering the process of formalization.
Invisible, informal, and unaccounted
Despite the magnitude, the informal economy seldom features in the GDP estimates of the country. The sector consists of activities operating outside the regulatory framework that potentially add value to tax revenue and GDP but are not completely accounted for. Even though most Indian homes would struggle without the labor of domestic workers, mainly women, there is an appalling gap in data on their numbers and wages. Domestic and other unorganized workers such as construction workers are subjected to the employer's whim.The lack of documentation and registration kept many migrants and other unorganized workers from accessing government relief, and let employers evade their obligation towards workers during the COVID lockdown. The cash-intensive sector was also adversely impacted by demonetization and Good Services Tax.
For years, informality has been calculated as a proxy derived from the formal sector - wherein all the workers and enterprises not part of the formal sector were considered informal. The Indian government has been using the Employees Provident Fund scheme’s data among others as a measure of payroll employment and formal job creation.
Why do MSMEs remain unorganized?
Micro, small and medium enterprises in India contribute over 27 percent to India’s GDP; however, most remain informal. Since businesses in an informal economy do not contribute to the tax base and tend to remain small due to limited access to formal finance, it impairs the country’s ability to gauge the socio-economic metrics truly. Hence, despite the development of robust growth in tax revenue in the country, the true picture of the unorganized sector where most incomes are below taxable limits and exempt from the Goods and Services Tax, is not reflected.Moreover, the formalization of enterprises does not come without costs. Cost of compliance and complex labor laws keep most informal enterprises unregistered or loosely registered. Additionally, low productivity and a lack of competitiveness or capacity to face formal enterprises are some of the reasons hindering the process of formalization.
Push towards formalization
To prevent the economic engine of India’s growth being fueled by skewed development and the vulnerability of unorganized labor, the sector requires formalization. This entails large-scale streamlining of regulatory processes, stronger labor laws, and enforcement of social security benefits among others. Employment Initiatives like NREGA, social security initiatives like Atal Pension Yojana, and National Health Protection Scheme, and portals like E-Shram are some of the steps towards recognition and securing the rights of unorganized workers. Additionally, various micro-credit programs and digitalization are steps towards the development and financial inclusion of MSMEs and unorganized workers in the country. Despite various measures, India faces a mammoth task of fixing the regulatory system and easing the compliance burden to incentivize formalization.
