Introduction
When we think of an economy, we often picture formal jobs, tax-paying enterprises, and regulated systems. Yet, for millions—especially in developing countries like India—economic life is governed by the informal economy. From roadside vendors to gig workers, these are enterprises and individuals who operate outside the regulatory framework.
According to the International Labour Organization (ILO), over 60% of the global workforce is employed informally. In India, estimates suggest that nearly 80-85% of workers belong to the informal sector. While the sector contributes significantly to GDP and livelihoods, it remains largely invisible in policymaking.
What is the Informal Economy?
The informal economy includes all economic activities that:
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Are not registered with the government
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Are not taxed or regulated by labor laws
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Do not provide formal employment contracts or social security
This includes:
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Street vendors
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Domestic workers
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Small family-owned shops
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Construction laborers
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Gig and platform workers (in some cases)
Note: Informality exists even within formal firms—contract labor, daily wagers, etc.
Size and Scope of the Informal Economy
| Region | Informal Employment (%) |
|---|---|
| India | 80–85% |
| Africa | ~85% |
| Latin America | ~50–60% |
| Europe (developed) | <20% |
India’s Informal Sector:
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Contributes ~50% of GDP
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Employs over 90% of women in the workforce
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Dominates in sectors like agriculture, construction, retail, and domestic services
Benefits of the Informal Economy
Despite its unregulated nature, the informal economy plays a critical socioeconomic role, especially in developing countries.
1. Employment Generation
It absorbs surplus labor from agriculture and provides livelihoods where formal jobs are scarce.
2. Low Entry Barriers
Requires little capital, infrastructure, or regulatory compliance—ideal for first-generation entrepreneurs.
3. Flexibility
Informal businesses can adapt quickly to local market needs and operate in low-demand areas.
4. Support for the Formal Sector
Many formal enterprises rely on informal labor, subcontracting, or supply chains for their operations.
5. Social Safety Net Substitute
In absence of formal social welfare, informal networks offer survival income for millions.
Challenges and Drawbacks
While it offers flexibility and opportunity, the informal sector also lacks protections that come with formalization.
1. Lack of Social Security
No health insurance, pension, maternity benefits, or job security.
2. Poor Working Conditions
Long hours, hazardous environments, and child labor are prevalent.
3. No Legal Recourse
Informal workers are outside the purview of labor laws and courts.
4. Low Productivity
Due to lack of technology, credit, and training, informal businesses often operate inefficiently.
5. Tax Revenue Loss
Governments lose potential revenue, impacting public investment.
6. Exclusion from Financial Systems
Lack of formal identification, credit scores, or business registration excludes many from formal banking.
Causes of High Informality in India
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Over-regulation of formal businesses
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Complex labor laws and tax compliance burdens
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Low education and skill levels
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Insufficient formal job creation
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Weak enforcement of existing laws
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Rural-urban migration without job absorption
COVID-19 and the Informal Economy
The pandemic highlighted the vulnerability of informal workers:
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120+ million jobs lost in India during lockdowns (mostly informal)
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Lack of savings or insurance meant immediate distress
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Relief measures (like PM Garib Kalyan Yojana) struggled to reach unregistered workers
This revealed the need for identification, data, and integration of informal workers into welfare systems.
Digitalization and Formalization: Opportunity or Threat?
Positive Trends
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UPI and digital wallets have increased transaction traceability
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E-Shram portal launched to register informal workers
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Gig platforms (e.g., Swiggy, Urban Company) provide digital job matching
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GST & MSME Udyam portal encourage business formalization
Concerns
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Gig workers often lack benefits despite digital traceability
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Formalization should not lead to exclusion or over-regulation
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Need for social protection portability (across cities, jobs)
Global Examples of Formalization
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Brazil: SIMPLES Nacional unified tax system for small businesses
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South Africa: Expanded social pensions to informal elderly workers
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Indonesia: Health insurance schemes for informal sector
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Thailand: Voluntary social security contributions for self-employed
What Can Be Done? – Policy Recommendations
1. Simplify Formalization
One-stop registration, simplified tax, and labor compliance for micro-enterprises.
2. Extend Social Security
Build portable, contributory schemes for pensions, health, and maternity.
3. Credit Access
Expand access to microfinance, priority sector lending, and digital credit scoring.
4. Skilling and Upskilling
Targeted training programs via PMKVY, skill councils, and NGOs.
5. Data and Identity Systems
Strengthen Aadhaar-linked welfare tracking and worker registration (e-Shram).
6. Inclusive Urban Planning
Legal vending zones, affordable housing, and transit support for urban informal workers.
Conclusion
The informal economy is not a temporary aberration—it is a core pillar of economic life in many developing nations. Rather than viewing it as a “problem,” policymakers must see it as a transition zone between unemployment and formality.
By protecting the rights of informal workers, investing in digital infrastructure, and creating low-cost paths to formalization, countries like India can ensure inclusive growth. A humane and pragmatic approach will turn informality from a liability into a ladder for economic mobility.
As the ILO says: “The future of work must include the informal workers of today.”