Three Mantras For Informal Sector

Context: An overview of strategies needed to drive formalization of India’s vast informal sector.

About informal sector

• Size: Consists Of casual workers and self-employed persons, accounting for 80% of the workforce and 50% of the GVA in India.
• Challenges:
  • Informal enterprises are small in size and deploy very little fixed capital.
  • Majority of informal enterprises are semi-permanent in nature and with low margins of profit.
  • Sub-optimal and wages are low, mainly driven by low levels of labour productivity.
  • High levels of corruption:
    • On one hand, corruption prepares the breeding ground for informal enterprises, and, on the other hand, it effectively curtails any scope of their transition into viable economic entities.
    • This vicious life cycle of labour-dystocia and severely stunted growth of informal sector enterprises is the crux of pervasive and persistent informality.
  • Increasing concentration of workers in low productive jobs: Micro enterprises constitute more than 90% of total enterprises in the total formal and informal sector.
  • Supply shocks: On backdrop of Covid-19 pandemic.

Way forward

• Incremental processes: Facilitating the natural progression of enterprises from informal to formal.
• Policies to deter factors behind the creation of new informal enterprises:
  • Correct incentive regime: That promotes voluntary dwarfism in the informal sector.
  • Effective use of technology: E.g.
    • Shram Suvidha Portal - Transparent and accountable one-stop-shop for compliance with labour laws.
    • The Startup India Mission nudges the enterprise eco-system towards formalization.
  • Expand the concept of portability: Portability of benefits (welfare measures for workers and incentives for enterprises) imparts agility and dynamism to informal enterprises.
  • Migrate to optimum industrial locations: Facilitating up-gradation of competitiveness through effective forward and backward linkages.
  • Leveraging Skill India Mission: According to the Ministry of Skill Development and Entrepreneurship’s Annual Report 2018- 19, India needs 614 million workers, about 15% of them in construction and real estate alone.
    • Under PMKVY 2.0, National Skill Development Corporation (NSDC) has trained 7.3 million persons by December 2019.