An informal economy is made up of unregistered businesses where employers do not give social protection to their employees. Informality has decreased at a glacial rate, appearing most dramatically in urban filth, poverty, and unemployment. Despite tremendous economic expansion over the previous two decades, 90 percent of Indian workers have remained unemployed, accounting for about half of GDP.

According to official Periodic Labor Force Survey statistics, 75 percent of informal employees are self-employed or casual wage workers with lower average incomes than regular paid workers. When the ILO’s generally accepted definition is combined with India’s official definition (of formal jobs as those giving at least one social security benefit — such as EPF), the percentage of formal employees in India is just 9.7 percent (47.5 million).

The need

• The formal sector outperforms the informal sector in terms of productivity, and formal workers have access to social security benefits.
• The continuance of a large proportion of informal work in total employment indicates a lack of appropriate growth or the continuing of underdevelopment.
• According to Oxfam’s most recent worldwide study, 75 percent of the 122 million individuals who lost their employment in 2020 did so in the informal sector. This highlights the need of providing social security to the informal sector.
• Because the informal economy’s enterprises are not directly regulated, they often dodge one or more taxes by concealing revenue and costs from the legal system.
• This is a problem for the government since a large portion of the economy is not taxed.

 Challenges of formalization

• According to the State Bank of India’s (SBI) recently issued study ‘Ecowrap,’ the informal sector’s proportion in the entire economy has shrunk from 52 percent in 2017-18 to 15- 20 percent. However, these findings do not indicate a long-term structural shift from the informal to the formal sector, but rather a transitory result of the harsh lockdowns enforced in 2020 and 2021.
• Policy initiatives to bring the informal sector into the fold of formality by removing legal and regulatory barriers are commendable. However, these programmes fail to recognise that the majority of informal units and their workers are fundamentally petty producers (self-employed and casual workers) eking out a living from little resources. As a result, their efforts will provide limited outcomes.
• The registration of workers on the E-Shram portal is no indication of employment formalisation unless the workers are entitled to all of the social security benefits specified on the platform. Increased digitization and registration in official records are not required nor sufficient for any enterprise/worker to be regarded as formal.
• Without a doubt, expanding the tax net and decreasing tax evasion are vital. However, worldwide data demonstrates that the idea that legal and regulatory barriers are the primary impediment to formalisation is incorrect.

Way forward

• MSME Strengthening: MSMEs employ about 40 percent of the informal workforce. As a result, it is obvious that strengthening MSME will contribute to economic recovery, job creation, and formalisation of the sector.
• Simpler regulatory framework: The informal sector can only move to the formal sector if it is relieved of the weight of regulatory compliance and given adequate time to acclimate to the new, digitised formal system. It is expected that streamlining registration processes, loosening business conduct laws, and decreasing formal sector worker protection requirements will draw informal firms and their workers into the fold of formality.
• Under-development is defined by the persistent dominance of informality in education, investment, and skill. When informal firms become more productive via increased capital investment and education, and when skills are transmitted to employees, the economy will become formalised and the nation will grow.
• Financial Assistance for Formalization: Financial assistance for small-scale industries to help them stand on their own is a critical step in bringing them into the organised sector. Schemes such as MUDRA loans and Start-up India are assisting the youth in carving out a place in the organised sector.

The Government of India has undertaken various initiatives in recent years to formalise the Indian economy, including the implementation of the Goods and Services Tax (GST), the digitization of financial transactions, and the enrollment of informal sector employees on government portals like as E-Shram. Despite these well-intended attempts at formalisation, India faces a significant challenge from informality. This problem has only been compounded by the new coronavirus epidemic. Lack of job stability, lack of social security benefits, and tax evasion all point to the need for the informal sector to be formalised at a quicker yet sustainable rate. Policy interventions, budgetary assistance, education, and upskilling all play important roles in the economy’s formalisation.

How to structure

1. Give an intro about what formalisations means- give India specific data and facts
2. Explain the need and how it benefits of formalisation
3. Discuss the measures taken by the government and mention the challenges
4. Suggest way forward
5. Conclude

Reference:

1. https://www.thehindu.com/opinion/op-ed/indias-economy-and-the-challenge-of-informality/article38335803.ece