Be it roll out of the Goods and services regime or imposition of  demonetization or outbreak of current COVID pandemic, much of the impact was felt by the informal unorganised sector, which largely deals on daily cash basis and operates mostly outside the regulatory ambit. The net beneficiary was the protected and well regulated formal/organized sector.

The Indian economy has been divided into two blocks, the organised one which is witnessing rising fortunes and galloping profits and the informal one which is a real decline in the casual wages in the rural areas. 

The informal/unorganised sector in its current form is in an urgent need to undergo effective formalisation in the least possible time as this sector stands as a primary provider of jobs to a proportion of the Indian working population.


  • Worstly Hit: The National lockdown has worstly hit the Informal sector workers than their formal sector counterparts. Without a proper safeguard, there were painful accounts of displaced informal workers trying to reach back to their homes. The overall wage levels were 2.5 times lower than urban india. According to data from the Labour Bureau the real wages of non-agricultural workers have declined 1.6% per annum in the last two years, and for agricultural workers, they fell 0.4% per year.

  • Shrinking of Informal Sector: According to the State Bank of India’s (SBI)  report-‘Ecowrap’, it is claimed that the informal sector’s share in the overall economy has shrunk from 52% in 2017-18 to  just 15- 20%. The report further stated that construction & housing and food services & trade are the two sectors that witnessed the sharpest declines in their shares of the informal economy. The contribution of our unorganised sector in Gross Value Added (GVA) is close to around  44% in 2019-20 which was marginally higher than in 2017-18.

Associated Challenges

  • Lack of authentic data: The unavailability of real-time economic indicators and data makes it hard to track India’s large informal sector, which employs around 80% of the labour force and produces about 50% of GDP.

  • Digitisation of Records: The digitization of workers on the E-Shram portal is not an indicator of formalization of jobs unless workers are able to get all the social security benefits listed on the portal. Increasing digitalization is neither a necessary nor sufficient condition for any enterprise/worker to be classified as formal.

  • Ambiguity Regarding the Standards of Economy: The real issue is whether formalization of the unorganised sector is a definite measure of improvement in the economy or the material condition of workers. The economy has performed terribly in worsening employment situations, decline in incomes and also in development indicators like HDI.


  • Responsibility of legislature: It is important to recognize the importance of the unorganised which provide livelihoods to a significant number of the people. The legislature & policymakers should define the  informal sector appropriately, provide labour legislation to protect employment, provide required wages and treat them on par with the formal sector. Moreover there is an urgent need for a legal institutional regulatory mechanism to improve the working conditions and well- being of those engaged in the informal sector.

  • Understanding Formalisation: There is a need to comprehend the difference between “natural” formalisation and “forced formalisation”. Formalisation of the unorganised sector will not be sustainable if it comes only with the support of external pressure or leads to deep distress in the informal sector. In contrary,  a sustainable formalisation happens with support of policy and legislative changes that help small and informal industries to grow over time into medium or larger formal sectors. 

  • Security to unorganised Sector: What is needed now is protection for unorganised sector workers in the ambit of social welfare schemes so that the problems they are facing does not lead to a permanent fall in demand. For eg MGNREGA has witnessed many hurdles.

  • Urban Social Welfare Structure:The economic structure in India doesn’t have an equivalent urban social welfare scheme which provides more of a cause to set up a more permanent direct urban social welfare structure. Innovative reforms that assist small businesses/ firms in growth are also essential. For instance, lowering the regulatory burden associated with nascent firms.

Download Plutus ias daily current affairs 20 November 2021

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