BharatNotes What is Informal Sector and Formalisation?
The informal (unorganised) sector consists of unincorporated private enterprises—owned by individuals or households on a proprietary or partnership basis, usually with fewer than ten workers—that operate largely outside labour law, taxation and social-security systems (NCEUS, 2008). Informal employment is a related but broader idea: it covers workers without social-security benefits or a formal work arrangement, including informal workers employed even within formal enterprises.
Formalisation is the process of integrating these enterprises and workers into the regulated economy—via business registration, GST enrolment, digital payments, financial inclusion (Jan Dhan accounts), and social-security coverage.
Scale in India (verified data)
India remains a predominantly informal economy. According to the Economic Survey 2022-23, the informal sector employs over 90% of the workforce while contributing close to half of GDP; NSO estimates place the informal sector's GDP share at about 45% (FY 2022-23).
The Periodic Labour Force Survey (PLFS) Annual Report for July 2023–June 2024 shows the dominance of own-account and casual work—proxies for informality:
| Employment status | Share of workers (PLFS, Jul 2023–Jun 2024) |
|---|---|
| Self-employed | 58.4% |
| Regular wage/salaried | 21.7% |
| Casual labour | 19.8% |
Self-employment is even higher in rural areas, especially among women, indicating low-earning, vulnerable work.
Drivers and instruments of formalisation
Key formalisation channels include:
- GST (2017) widening the registered tax base of enterprises.
- e-Shram portal (launched 26 Aug 2021)—a National Database of Unorganised Workers; over 30.68 crore workers had registered, with women at 53.68% (as per PIB/IBEF data). An Aadhaar-seeded Universal Account Number makes benefits portable.
- Four Labour Codes, which came into force on 21 November 2025, consolidating 29 central labour laws. The Code on Social Security, 2020 for the first time defines gig worker and platform worker and extends social-security coverage to them, funded partly by aggregator contributions of 1–2% of turnover (capped at 5% of payments to such workers).
- Digital payments (UPI) and financial inclusion that leave a verifiable transaction trail.
Significance and challenges
Formalisation promises higher productivity, better wages, social protection, wider tax revenue and stronger data for policy. However, abrupt formalisation can disrupt livelihoods, raise compliance costs for tiny units, and push some activity further underground. The policy aim is therefore gradual, incentive-led formalisation that preserves jobs while extending protection.
UPSC angle
Connect the term to jobless/low-quality growth, the gig economy, the labour codes and social-security architecture. Be precise with definitions (informal sector vs informal employment) and cite current data sources—PLFS for employment status and the Annual Survey of Unincorporated Sector Enterprises (ASUSE), now moving to quarterly estimates (from Jan 2025), for enterprise-level informality. This is a foundational concept that underpins many employment and inclusive-growth questions rather than a single recurring PYQ.
