top of page
Writer's pictureHindu College Gazette Web Team
Jul 26, 20237 min read

India’s Informal challenge: Formalising the informal sector

‘Beggars can't be Choosers’. This phrase literally and aptly sums up India's informal employment. The choice for the informal workers is not to earn 10,000 or more, it is 10,000 or nothing.


Introduction

When Union Finance Minister Nirmala Sitharaman presented the union budget this year, there was a considerable take away from her speech: only 6.25% of Indians pay income tax. The media came up with sensational headlines saying that the middle class is footing the bill every single time. But why is it that a small subsection of people pay a large proportion of all the income tax receipts received by the government? The reason is simple: most Indians don’t earn (only 40% are employed out of 130 crore), and those who do earn, earn below the threshold of 7.25 lakhs. In fact, the top 10% of earners have an annual income of just Rs. 3 lakh. Most of the lowest-income earners are concentrated in the informal sector.


According to the Periodic Labour Force Survey 2021-22 , 92% of the Indian workforce is employed in the informal sector, 87% of whom earn less than ₹10,000 per month; thus, it becomes imperative that we address this pauperized state of the informal economy. One way to do so is by transitioning from an informal to a formal economy, which has better job security, social security, and comparatively higher wages.


What is the informal economy?

Various organisations define the informal economy either based on enterprise or employment type. The 17th International Conference of Labour Statisticians (ICLS) defined informal employment as employees holding informal jobs that are not subject to national legislation, income taxation, social security, etc. Own-account workers and contributing family workers also come under informal employment. This is the primary definition that the Periodic Labour Force Survey uses in its statistical measures.The informal worker may be defined as a worker with no written contract, paid leave, health benefits, or social security. This definition incorporates the broad characteristics of informal employment.


The need to organize the unorganized sector

Anil Kumar, a slight man with piercing eyes, has worked as a daily wage construction worker his entire life in rural Alwar. He was forced into this profession when his father passed away when he was young. Forever dooming him into a profession where the question about the next meal remains a persistent one. When asked about how he makes ends meet, he replies, “You see, the daily wage here is ₹500 per day, and if we can get on a project (construction) for a long period, then the month is comfortably spent, but these are not long-lasting as work is not year-round; there are off seasons when there is no harvesting or sowing season or construction work going on.”


His problem is shared by millions of daily wage earners who's next meal and next job are uncertain. If they get sick or are unable to work, then there is no pay for them. Food on their table depends on their ability to get up and go to work the next day, and if they fall prey to accidents or die, there is no cover for them. There is no pension for them in old age. Recounting how the death of his father affected the family, Anil recalls, “As I am the eldest son of my family, I had to step up after my father’s death. Due to meager landholdings, agriculture was not an option. So I turned to being a daily wager and started supporting my family.” The death of the breadwinner of the family pulls the family deeper into the abyss of poverty.

Credits: Pinterest


The informal sector is often the worst hit in cases of economic upheaval. According to Oxfam's global report, 75% of the 122 million job losses in 2020 occurred in the informal sector. During the lockdown in 2020, informal migrant workers were seen migrating back to their hometowns due to job losses. The COVID-19 pandemic made us realise how vulnerable the informal workers were, and the need to provide social and financial security to them was more pronounced than ever. Anil surmises his experience of lockdown as “lockdown did not hit us at first as it happened during harvest season and there was plenty of work. After the harvest season, construction and Pepsi Agency (his gig job) were both locked down, so it was hard to get by. We relied on government rations and reverted to backfire wood for cooking after LPG subsidies were removed.”

If the government refuses to include certain professions under certain sectors or classifies those jobs as self-employment, then they lose out on the minimum wage. Such is the case with Azadpur agricultural mandi workers. The Delhi Government has not included them in the "schedules of employment" or Minimum Wage Act of 1948. Even though many workers have worked at the same place for decades, sometimes for the same trader, they are categorised as "self-employed" in labour records. This causes them to lose out on the minimum wage set by the Delhi Government at ₹660 per day, while these workers may earn 150–200 per day. They also lose out on community-based social security as they are often landless migrants who came to an unknown city in the hope of making ends meet. Unlike their rural counterparts, who often have tight-knit communities to help them in their times of distress,

The informal sector is often synonymous with the underground economy or shadow economy. This is so because the informal sector is often not on the ‘radar’ of the government as it tends to function outside of legal frameworks or guidelines. These enterprises are often outside the ‘tax net’ of the government. Outdated labor laws often help in tax evasion as workers that are not defined and paid informally do not pay any income tax. The loopholes in outdated tax laws help in tax evasion. It causes the state to lose out on valuable revenue streams. Many firms choose to operate in the informal sector due to the complexities associated with the regulatory framework. The firm may decide to transition to "formal" if the benefits, such as easy access to credit, power subsidies, etc., far outweigh the cost associated with transitioning.

Government efforts at formalization

The Indian Government has taken several measures to formalise the informal economy. Many are related to employment generation, bringing enterprises under a regulatory framework, providing financial security to workers in unorganised sectors, etc.

The Government has implemented the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) to facilitate employment generation and bring informal workers under the ambit of social security.


Atmanirbhar Bharat Rojgar Yojana (ABRY), a successor to PMRPY, was launched to provide relief to COVID-19-hit sectors and generate employment to fill the void left in the wake of the COVID Pandemic. Under the scheme, the government was paying both the employer's share (12% of wages) and the employee's share (12% of wages) towards the employee's provident fund. This scheme encouraged enterprises to get registered with the Employee Provident Fund Organisation (EFPO) and reduce their financial burden.


Another big step towards extending financial security benefits to unorganised workers is the e-Shram portal. Through the e-Shram card, agricultural workers, labourers, and gig workers in the unorganised sector can get various benefits that include a pension of ₹3000 after 60 years, death insurance, financial aid in case of disability, etc. According to the e-Shram website, 28,92,06,404 cards have been issued. The e-Shram card contains employment details, skills, education, and other valuable data that can help the government methodically formulate and deliver schemes that can bring greater benefits to workers in the unorganised sector.

MSME’s are mostly proprietorship firms working under a business model that is vulnerable to sudden changes. While the government has taken scores of positive steps, like the Udyam scheme, to streamline the processes of registration of MSMEs and filing of tax returns, there are still many processes that need to be simplified.

For example, in Delhi, you need 45 permits to formally open a restaurant.

“The list of licences you need to open a restaurant is never-ending; you need permits from MCD, Nagar Palika, the fire department, an NOC from the police, etc. Getting a permit is like any other government work; you need to have patience. But I only have a licence from FSSAI as my shop’s area is only 8*8( permits are required only if the built-up area exceeds 10*10). Owner, Khalsa Dhaba, Malka Ganj, Delhi.

With more than 40% of the population working in the agriculture sector, it becomes extremely important that the government attempts to formalise the sector. The Kisan Credit Card Scheme aims to provide instruments of formal finance to farmers. KCC holders will be eligible for loans up to Rs. 3 lakh. This scheme ends the reliance of farmers on informal finance channels and gives them easy access to credit with flexible repayment norms.

Way forward

While the best way to formalise the informal sector can be debated, there is no doubt regarding its importance. The informal sector is what keeps the economy running, a fact that was further corroborated during the pandemic. The informal sector presents unique challenges and opportunities. Due to its informal sector and cheap labour, India has an advantage over developed nations. While cheap, unskilled labour might be advantageous in the short run, the long-term initiative should be skilling the workforce. A skilled workforce will lead to the development of human capital and, in the long run, better job prospects. The Ministry of Skill Development and Entrepreneurship was created in 2014 to coordinate skill development efforts across the country.

The government needs to focus on the implementation of four new labour codes legislated In 2019. These replaced the existing 29 labour laws. The codes were aimed at simplifying the half-a-century old antiquated procedures and reducing compliance costs, overall enhancing the ease of doing business. The Code on Wages has stipulated minimum wage for all, including those in the informal sector. The Code also gives workers the right to receive overtime pay. Social security benefits including pensions, health insurance and other benefits are provided for in the Code on Social Security. Compliance of the new codes remains a significant challenge as extending and ensuring minimum wage for all is a task fraught with challenges.


The priority of the government should be taking 'care' of those in the informal sector. Many schemes have been launched in that direction, but their ground effect remains doubtful. To assess the ground effect of welfare schemes, the government needs the latest census data and should stop relying on outdated data. To rectify a problem, we first need to identify the problem and then start working on a solution.

 

By: Hemanshu Yadav

Hemanshu Yadav is a English Honours student at Hindu College, University of Delhi.

 

References


43 views0 comments

Comments

Rated 0 out of 5 stars.
No ratings yet
Add a rating
bottom of page