The informal economy: where most Indians work

Most Indians do not work in a registered firm with a written contract, paid leave and social security. They work on family farms, in small workshops, as street vendors, construction workers, domestic workers, drivers and shop helpers. The International Labour Organization's report on formalisation in Asia and the Pacific put informal employment in India at 88.8 per cent of total employment, close to 90 per cent, a level broadly unchanged since 2014. The informal economy is not a small fringe: it is where the great majority of Indians earn their living.

Two distinctions help. The informal sector means unregistered enterprises, typically small. Informal employment is wider: it also includes workers without social protection inside formal firms, such as contract workers in a factory or a delivery rider classified as a partner rather than an employee. That is why formalisation of firms alone does not solve the problem: a worker can be in a formal company and still lack a contract, pension or paid sick leave.

Informal work has advantages that explain its persistence. It absorbs labour quickly, needs little capital, and lets people combine farming with seasonal wage work or a small trade. But the costs are heavy: incomes are volatile, bargaining power is weak, workplace safety is poor, and shocks such as illness, a bad monsoon or a pandemic can wipe out savings. Women and young workers are disproportionately informal, and informal workers were hit hardest by the 2020 lockdown, when many lost work overnight and had to return to their villages.

Policy has tried several routes: simplifying registration, extending social security through new laws and the e-Shram database, giving street vendors credit, and recognising gig and platform workers in the Code on Social Security, 2020. Progress has been slow, and the ILO's finding that informality has stayed near 90 per cent is a warning against easy claims. The real test is not how many firms register, but how many workers gain a contract, a pension and protection against risk.