Informal Economy: Challenges & Opportunities

  • IASbaba
  • November 9, 2021
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Nov 6: Informal Economy: Challenges & Opportunities – https://youtu.be/6QTseEwobOs 


  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Informal Economy: Challenges & Opportunities

Context: The informal economy is a global and pervasive phenomenon. 

Do You Know?

  • India’s estimated 450 million informal workers comprise 90 per cent of its total workforce, with 5-10 million workers added annually. 
  • Nearly 40 per cent of these employed with MSMEs.

According to Internal Labour Organisation –

  • Approximately 60 percent of the world’s population participates in the informal sector. 
  • Although this is mostly prevalent in emerging and developing economies, it is also an important part of advanced economies.
  • In developing countries like India, large share of the population typically depends upon the informal economy. The economic growth and development in general and livelihood and wages in particular of the vast majority of workers in India crucially depend on the economic viability of the informal sectors. 

According to Periodic Labour Force Survey –

  • Over 90 percent of workers in India are informal workers. Out of these those engaged in rural areas is significantly more than urban areas. 
  • This is primarily because a large number of informal workers are engaged in farm or agricultural activites. 
  • Those in urban areas are involved primarily in manufacturing, trade, hotel and restaurant; construction; transport; storage and communications; and finance, business and real estate. 

Challenges in the Informal Economy

Employment around the world remains below its pre-pandemic levels, reflecting a mix of negative output gaps, worker fears of on-the-job infection in contact-intensive occupations, childcare constraints, labor demand changes as automation picks up in some sectors, replacement income through furlough schemes or unemployment benefits helping to cushion income losses, and frictions in job searches and matching.

Government diluted the labour laws; then they drafted the rules of the Code on Social Security without really taking into consideration the plight of the informal sector workers.

  • Issues of Exclusion: While on paper, the draft rules envisage wider coverage through the inclusion of informal sector and gig workers, at present the draft rules apply to manufacturing firms with over 299 workers. This leaves 71 per cent of manufacturing companies out of its purview.
  • Burden of Administrative Processes: The draft rules mandate the registration of all workers (with Aadhaar cards) on the Shram Suvidha Portal to be able to receive any form of social security benefit. Failure to register (Aadhar –driven exclusion or lack of adequate knowledge about process) will make then ineligible for the benefits. Also, migrant workers face the challenge of mandatary updating information on the online portal at regular intervals.
  • Ambiguity on applicability of benefits: It is unclear if a migrant worker with an Aadhaar card registered in her/his home state of Bihar be eligible for social security benefits in Gujarat where she/he is currently employed.
  • No-Right Based Framework: The Code does not emphasize social security as a right, nor does it make reference to its provision as stipulated by the Constitution. In addition, it does not stipulate any appropriate grievance redressal mechanism which will leave millions of workers vulnerable without clear social protections.


The pandemic has thrown-up unprecedented challenges and divergences but also delivered enticing growth opportunities.

Refer: https://iasbaba.com/wp-content/uploads/2018/02/Gig-Economy-IASbaba.jpg 

Service Exports As An Engine of Growth: Service exports are likely to be an important near term driver of growth. India’s global market share of services has continued to rise, revealing a growing comparative advantage. With the pandemic likely to provide a renewed thrust to off-shoring of services, India must stand ready to grab the opportunity, from both a regulatory and supply perspective.

Need of the hour:

  • Upgrade the skills of those who are already in the informal sector with government support through easier access to credit, technology and availability of markets.
  • A social security architecture to be provided by the government for informal sector workers. 
  • Less of regulation and more of support as against the government policy of more regulation and no support. Any attempt to regulate and bring the informal sector into the tax network will only add to costs without increasing productivity. 
  • Creating an eco-system to improve competitiveness and boost exports more broadly will be vital to India’s growth prospects over the next decade.
  • The formal and informal sectors are complementary to each other and any attempt to use one against the other will harm both. It is time to use the opportunity that the informal sector provides to strengthen and support it. This is not only essential for economic growth but the only way for growth with jobs.

Must Read: 

Can you answer the following questions?

  1. Should the informal sector be regulated? Discuss the pros and cons.

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