Informal Sector /Unorganised sector

The Informal Sector, also known as the Unorganised Sector, refers to that part of an economy which is not regulated by formal legal and institutional frameworks. In India, it comprises workers and enterprises that operate outside formal registration, taxation, and social security systems. The sector plays a vital role in employment generation and poverty reduction but is characterised by low productivity, job insecurity, and lack of social protection.
The informal sector has historically been the backbone of India’s workforce, providing livelihoods to millions, particularly in rural and semi-urban areas. However, it also reflects the structural duality of India’s economy—where a large informal workforce coexists alongside a small formal sector.

Definition and Concept

According to the National Commission for Enterprises in the Unorganised Sector (NCEUS), the informal or unorganised sector includes:

• All unincorporated private enterprises owned by individuals or households engaged in the sale or production of goods and services of a less than registered nature.
• Workers employed in such enterprises or in households without formal work arrangements.

In simple terms, the informal sector consists of small-scale, low-capital, labour-intensive activities that function outside the purview of labour laws, taxation, and social security systems.

Characteristics of the Informal Sector

The informal sector is marked by distinctive features that differentiate it from the organised sector:

• Absence of formal registration: Enterprises often operate without licences or statutory recognition.
• Small size and low capital base: Generally family-owned or employing a few workers.
• Casual or informal employment: Workers are often without written contracts or job security.
• Lack of social protection: No provision of provident fund, pension, or insurance benefits.
• Low productivity and earnings: Limited access to credit, technology, and markets leads to low incomes.
• Predominance of self-employment: Many workers are own-account operators or unpaid family labourers.
• High vulnerability: Workers are exposed to income shocks, health risks, and seasonal fluctuations.

Composition and Sectors Involved

The informal sector encompasses a wide range of activities across both rural and urban areas. It includes:

• Agriculture: Small and marginal farmers, agricultural labourers.
• Non-agricultural rural sector: Handicrafts, cottage industries, animal husbandry, food processing, and rural services.
• Urban informal sector: Street vendors, construction workers, domestic helpers, small shopkeepers, rickshaw pullers, and home-based workers.

Major segments include construction, retail trade, transport, textiles, and repair services, which employ a significant share of informal workers.

Size and Contribution

The informal sector dominates India’s labour market and economic structure:

• As per estimates from the Periodic Labour Force Survey (PLFS), more than 80–85 per cent of India’s total workforce is employed in the informal sector.
• The sector contributes approximately 45–50 per cent of India’s Gross Value Added (GVA).
• Around 93 per cent of total enterprises in India are unregistered, reflecting the sector’s vast scale and heterogeneity.

These figures highlight its importance for employment generation, especially for low-skilled and vulnerable populations.

Distinction between Informal and Unorganised Sector

Though often used interchangeably, there is a subtle difference between the two:

In practice, the two overlap significantly, and both describe economic activities lacking formal institutional recognition.

Causes of Informality

The persistence and expansion of the informal sector in India arise from multiple structural and institutional factors:

• Surplus labour and limited formal employment opportunities.
• Low levels of education and skills.
• Complex regulatory environment discouraging small firms from formalisation.
• Ease of entry and low capital requirements.
• Weak enforcement of labour laws and tax compliance.
• Migration from rural to urban areas, leading to informal urban employment.

Advantages of the Informal Sector

Despite its challenges, the informal sector offers several advantages for a developing economy:

• Employment generation: Provides livelihood opportunities for unskilled and semi-skilled labour.
• Flexibility: Low entry barriers allow rapid absorption of surplus labour.
• Low cost of operation: Minimal regulatory and tax burdens.
• Support to formal sector: Acts as a supplier, subcontractor, or service provider to formal enterprises.

Challenges and Limitations

However, the informal sector is also associated with structural weaknesses and socio-economic vulnerabilities:

• Low wages and job insecurity: Workers often earn below minimum wage and face uncertain employment.
• Absence of social security: Lack of pension, healthcare, or insurance coverage.
• Gender disparities: Women workers are overrepresented, often in low-paying home-based or domestic jobs.
• Limited access to credit and markets: Financial exclusion restricts productivity enhancement.
• Poor working conditions: Unsafe work environments and absence of labour rights enforcement.
• Income instability: Seasonal employment and dependence on local demand cycles.

Government Policies and Initiatives

Recognising the importance of the informal sector, the Government of India has launched several initiatives to improve working conditions, productivity, and social security:
1. Social Security and Welfare Measures

• Unorganised Workers’ Social Security Act, 2008: Framework for social security coverage to unorganised workers.
• Pradhan Mantri Shram Yogi Maandhan (PM-SYM): Pension scheme for unorganised sector workers.
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY): Life and accident insurance coverage.
• Atal Pension Yojana (APY): Voluntary pension scheme for informal workers.

2. Financial Inclusion and Skill Development

• Pradhan Mantri Jan Dhan Yojana (PMJDY): Promotes banking access for informal workers.
• Pradhan Mantri Kaushal Vikas Yojana (PMKVY): Enhances employability through vocational training.
• Self-Employment Schemes: Such as Pradhan Mantri Mudra Yojana (PMMY) and Deendayal Antyodaya Yojana (DAY-NULM) for credit and entrepreneurship support.

3. Labour Code ReformsThe Code on Social Security, 2020 integrates various welfare laws to include unorganised, gig, and platform workers within formal social protection.
4. Digital and Institutional Initiatives

• E-Shram Portal (2021): National database for unorganised workers, enabling access to benefits.
• National Rural Livelihoods Mission (NRLM): Promotes self-employment and income generation among rural poor.

Impact of COVID-19 on the Informal Sector

The COVID-19 pandemic severely disrupted informal sector activities, especially during lockdowns. Migrant labourers, street vendors, and daily wage earners faced massive job losses and income insecurity. The crisis highlighted the vulnerability and lack of social safety nets in the informal economy, prompting renewed focus on universal social protection, formalisation, and resilience-building.

Strategies for Formalisation and Improvement

To strengthen the informal sector and promote gradual formalisation, the following measures are essential:

• Simplification of registration and compliance procedures.
• Extension of social security benefits to all categories of workers.
• Promotion of micro, small and medium enterprises (MSMEs).
• Access to credit, technology, and markets.
• Skill development and vocational training.
• Strengthening of labour inspection and grievance redressal systems.

Contemporary Significance

The informal sector remains a central feature of India’s development landscape. With rising urbanisation, gig work, and digital platforms, the boundaries of informality are expanding into new domains of employment. Policymakers now face the dual challenge of protecting informal workers while encouraging a transition to formality through inclusive labour market reforms and social protection mechanisms.