The State Of Informal Economy In India

As per the recently released ‘Outcomes of the 2021-22 and 2022-23 surveys released by the National Sample Survey Office (NSSO)’, Informal economy was the worst affected due to three significant economic shocks:  Demonetisation (November 2016), GST implementation (July 2017), and the Covid-19 pandemic (since March 2020).

• The surveys were carried out for unincorporated non-agricultural establishments in three sectors: manufacturing, trade, and “other services”.

Overview of Informal Economy In India

• Significant Economic Contribution: Small and medium enterprises (SMEs) along with household proprietary and partnership establishments collectively contribute nearly half of India’s economic output. Primary Source of Employment: This sector also serves as a crucial source of employment, accounting for over three-fourths of all jobs in the country.

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Informal Economy

• About Informal workers:  According to the Organisation for Economic Co-operation and Development (OECD), workers are classified as having informal jobs when their employment relationship, either by legal definition or in practice, does not conform to national labour laws, income taxation, social protection coverage etc.
• ASUSE Report by Ministry of Statistics and Programme Implementation (MoSPI): Data from Annual Survey of Unincorporated Enterprises (ASUSE) reveals that over the past seven years, a significant number of enterprises within the informal sector have ceased operations and approximately 16.45 lakh jobs have been lost within this sector.
• Share of workers employed in Informal Sector: In 2022-23, the informal sector saw a decline of 16.45 lakh workers (-1.5%), totaling 10.96 crore compared to 11.13 crore in 2015-16. 
  • Concurrently, the number of unincorporated enterprises increased by 16.56 lakh to reach 6.50 crore from 6.33 crore in 2015-16.
• Crucial for generating jobs: The informal sector plays a crucial role in generating jobs and absorbing especially semi-skilled and unskilled labour. 

• • It is closely watched for employment trends, especially when there is a slowdown in the formal sector.
• Pattern of Informal Employment Across States
  • Decline in Informal Sector Workers: 
    • Sixteen out of the 34 states/Union Territories recorded a decrease in informal sector workers in 2022-23 compared to 2015-16.
  • Post-Pandemic Increase in Informal Employment:
    • The share of informal sector workers increased in most states immediately following the pandemic.
    • This rise indicates economic distress and a shift away from the formal sector.

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Scope of Survey Coverage

• Manufacturing Units Beyond Factories Act and ASI
  • The survey includes manufacturing units not covered under the Factories Act, 1948, and those excluded from the Annual Survey of Industries (ASI).
  • Specifically, it encompasses informal establishments engaged in activities like cotton ginning, cleaning, bailing, and the manufacturing of bidi and cigar.
• Non-Captive Electric Power Generation
  • Units involved in non-captive electric power generation, transmission, and distribution, which are not registered with the Central Electricity Authority (CEA), are also part of the survey.
• Trade and Other Services
  • The survey extends to various entities under trade and other services sectors, including proprietary and partnership establishments (excluding LLPs), societies, trusts, associations, cooperatives, self-help groups, and non-profit institutions.

Key highlights of NSSO Survey Results

• Long Gap in Data Availability Addressed: The release of 2021-22 and 2022-23 survey results fills a significant gap since the last available data in 2015-16. This current data is crucial for understanding recent trends.
• Shift in Employment Dynamics: 
  • Decline in Overall Employment: The informal sector experienced a decline in overall employment despite an increase in the number of enterprises between 2015-16 and 2022-23.
  • Shift towards Self Owned Units: Own-account enterprises grew by nearly 4%, while hired-worker enterprises contracted by 3.2%, indicating a shift towards self-owned units over hired-worker units.
• Shifts on Manufacturing Employment: As the economy moved to more capital-intensive manufacturing, the data indicate a dent in employment in labour-intensive manufacturing in the unorganised sector.

Employment Trends from Periodic Labour Force Survey (PLFS)

• Shift Towards Agriculture
  • PLFS 2022-23 indicates a rise in agricultural workers over the past year, coupled with a decrease in manufacturing employment.
  • The share of persons employed in agriculture increased to 45.8% in 2022-23 from 42.5% in 2017-18.
• Gender Dynamics in Agriculture
  • There has been a significant increase in women’s participation in agriculture, with their share rising sharply to 64.3% in 2022-23 from 55.3% in 2018-19.
  • Most of this increase pertains to unpaid household work within the agricultural sector. 

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Challenges Faced by the Informal Sector

• Lack of Social Protection: Informal workers often lack access to social security benefits such as healthcare, pensions, and unemployment insurance, leaving them vulnerable in times of illness, old age, or economic downturns.
• Inconsistent Income and Job Security: Employment in the informal sector is often unstable and characterised by irregular incomes, making it difficult for workers to achieve financial stability and plan for the future.
• Limited Access to Credit and Resources: Informal enterprises frequently struggle to access formal credit and financial resources, hindering their growth and ability to invest in better technology or infrastructure.
• Lack of accurate Data: There are no official statistics available that reflect the true state of the informal economy making it a sector with “invisible workforce”.

Suggestions for the Formalisation of Workforce

• Recognizing Invisible Labour: It is essential to implement a national policy for domestic workers to recognize their rights and ensure better working conditions, acknowledging their contributions to the economy.
  • Invisible labour refers to unpaid work that goes unnoticed, unacknowledged, and thus, unregulated.
• Enhanced Social Security and Benefits: There is a need to Implement comprehensive social security schemes that cover health insurance, pensions, and unemployment benefits for informal workers to encourage their transition to formal employment.
• Skill Development and Training: Investing in skill development and vocational training programs tailored to the demands of the job market. Is the need of the hour.
  • This can help improve their employability and ease their transition into the formal sector.
• Encouraging Digital Payments: Promoting  the use of digital payment systems to increase financial transparency and traceability can help in the integration of informal businesses into the formal economy.

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