Mains Practice Questions

Introduction

The informal sector constitutes over 90% of India’s workforce and contributes nearly 50% to GDP, playing a dual role as a critical employment generator and a vulnerability-prone segment. Formalizing this sector without undermining its employment potential is a pressing challenge for policymakers.

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Challenges in Formalizing the Informal Sector:

• Structural Challenges
  • Absence of Documentation: Many informal businesses and workers lack proper documentation, making integration into formal systems difficult.
    • According to the e-Shram portal, over 94% of workers earn less than ₹10,000 per month, and many lack proper identification or records of employment history, making formal registration difficult.
  • Low Literacy Levels: As per the 2021 National Statistical Office report, only 77.7% of the Indian population is literate, with lower rates among informal workers, particularly women.
    • Limited financial and digital literacy among workers hinders their understanding of formal mechanisms such as the EPFO or e-Shram portal.
  • Fragmentation of Enterprises: Informal enterprises are often small, family-run, and scattered, making regulation and formalization efforts arduous.
• Economic Constraints
  • Cost of Compliance: Registering a business under the GST framework requires an upfront cost for tax filings and compliance, which is unaffordable for many small vendors or artisans earning subsistence-level income.
  • Credit Access Issues: Among the 64 million MSMEs in the country, only 14% have access to credit, as they lack collateral or formal documentation.
• Social Challenges
  • Gender Inequities: Women make up 52.81% of informal workers (e-Shram Portal) but earn 30-50% less than men for the same work.
    • They are further disadvantaged by the lack of childcare or maternity leave.
  • Cultural Resistance: Rural workers often view formalization with suspicion, fearing bureaucratic hurdles or loss of autonomy.
• Policy and Administrative Issues
  • Lack of Robust Data: The absence of comprehensive statistics (though progressed through E-shram but still lagging) on the informal economy hinders evidence-based policymaking.
  • Ineffective Grievance Redressal: Informal workers often have no access to mechanisms to address disputes or seek social security benefits. (Samsung India workers strike in October 2024)

Preserving Employment Potential While Formalizing:

• Gradual and Incentive-Based Formalization: Offering tax incentives and subsidized compliance costs for businesses transitioning to formal structures.
  • Providing financial literacy and awareness campaigns for workers to build trust in formal mechanisms like EPFO and digital payment systems.
• Flexible Labour Regulations: Adopting tiered compliance systems where smaller businesses have relaxed norms and gradually transition to full compliance.
  • Simplifying registration processes on portals like e-Shram to encourage participation without disrupting economic activity.
• Social Security for All: Expanding universal social security coverage to informal workers through schemes like PM-SVANidhi and Pradhan Mantri Shram Yogi Maan-dhan and effective implementation of Social Security Code.
  • Ensuring portability of benefits such as pensions, insurance, and healthcare across states and employers.
• Gender-Sensitive Measures: Enforcing equal pay for equal work under Article 39(d) and offering maternity benefits for female workers.
  • Encouraging women-centric self-help groups (SHGs) to foster financial independence and create avenues for skill development.
• Leveraging Technology: Using digital platforms to track, register, and manage workers’ employment histories and social security contributions.
  • Promoting digital payment systems and mobile banking to integrate informal workers into formal financial networks.

Conclusion

Formalizing the informal sector is indispensable for sustainable economic growth. While challenges like low literacy, gender inequities, and economic constraints persist, data-driven policymaking and incentive-based formalization can address these issues. A balanced, inclusive approach will ensure that formalization strengthens both the economy and its most vulnerable contributors.