Informality in India

THE INFORMAL SECTOR plays an important role in India’s labour market. According to official statistics, it contributes more than half of the gross value added in the economy, which varies across sectors, the highest being in agriculture, construction, and real estate. Informal employment, on the other hand, is more entrenched: It exists in both informal and formal sectors.

Chart 1 shows that about 88 per cent of India’s workforce is informal, or without any social security. About 8 per cent is informal employment in formal entities. An analysis of employment in India’s manufacturing sector, published in a World Bank report (Beaten or Broken, Informality and Covid-19), suggests that 1 per cent of formal entities generate 81 per cent of overall revenue, but employ only 15 per cent of labour.

Chart 2 also reveals that informal firms with 2-5 people form a third of establishments, employ 39 per cent of labour, but generate only 8 per cent of revenue. This analysis has been performed on the Consumer Pyramids Household Survey (CPHS) by the Centre for Monitoring Indian Economy (CMIE).

Covid-19 disrupted the labour market strongly. Charts 3 and 4 show how workers transitioned from one state to another, in two periods: Pre- and during the pandemic.

In four months from August to December 2019 (pre-covid), about 84 per cent of formal workers remained formal, while others either became casual workers, self-employed or unemployed, or stopped looking for work. About 13.5 per cent of casual workers (who probably earned daily or weekly but had steady incomes) became self-employed in that period.

But between April and August 2020, a period struck by the economic blow of Covid-19, only 38 per cent of formal workers remained formal, as 29 per cent became self-employed, and 22 per cent turned casual. They lost social security even as the economy is recovering. A section of the unemployed, too, got informal work in this period, showing some reversal in job losses.

At the national level, unemployment came back to usual levels after a spike during the lockdown, according to CMIE data. But labour participation has settled on a new normal, chart 5 shows.

A business-as-usual job scene, however, masks the impact on incomes. Those who got back to work, now work on lower wages. A study conducted by the National Council of Applied Economic Research in Odisha and Uttar Pradesh showed that 11-42 per cent respondents saw their incomes reduced by half, shows chart 6.