In the last few years, the Government of India has made several efforts to formalize the Indian economy via the introduction of the Goods and Services Tax (GST), digitalisation of financial transactions and enrolment of informal sector workers on government portals such as E-Shram. Despite these well-intentioned efforts at formalization, the challenge of informality looms large for India. The novel coronavirus pandemic has only exacerbated this challenge. Lack of job security, absence of social security benefits, tax evasion, all point towards the need for the formalization of the informal sector at a faster yet sustainable pace. Policy interventions, fiscal support, education and upskilling have a major role to play in the formalization of the economy.
An Informal economy represents enterprises that are not registered, where employers do not provide social security to employees. In many parts of the developing world, including India, informality has reduced at a very sluggish pace, manifesting itself most visibly in urban squalor, poverty and unemployment. Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of GDP. Official Periodic Labor Force Survey data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers.
The transition of the informal sector to the formal sector can only occur when the informal sector is given relief from the burden of regulatory compliance and is given enough time to adjust with the modern, digitized formal system. It is believed that simplifying registration processes, easing rules for business conduct, and lowering the standards of protection of formal sector workers will bring informal enterprises and their workers into the fold of formality.
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