What policy makers need to do to make the informal sector vibrant

Ranjula Bali Swain, Arup Mitra*
Many components within the informal sector share close linkages with the formal sector. In such a situation if the formal sector is growing rapidly it is natural that the informal sector would benefit from the percolation effects. However, in reality the informal sector is characterized in terms of low productivity and meagre earnings, explaining considerable overlaps with poverty and slum-dwelling in cities.
Agglomeration economies work and they contribute to productivity growth as a result of which the real wages in the cities tend to be higher compared to the rural areas. Yet, urban poverty exists which warrant an explanation. Some of the reasons of course can be envisaged in terms of a high degree of heterogeneity this sector possesses. There are residual activities with almost no entry barriers and they often involve excess supplies of labour relative to demand. Similarly, there are self-employed households both in manufacturing and services, operating with inadequate resources, low level of technology, poor market information and with almost no product or process innovation. Envisaging upward mobility in such segments is rather difficult.
Information asymmetry pertaining to the urban labour market is also a cause of poverty among many. The informal networks through which the urban job market information is accessed, are often seen as the cause of mismatches between labour demand and supply. Labour market segmentation and the lack of upward mobility occur because of the perusal of similar networks or the absence of network diversification.
Why the components which share a close tie with the formal sector firms still lack progress? The business outsourcing activities are carried out through intermediaries who deny a variety of benefits to the informal sector workers. With a contract to supply to the formal sector firms one would expect the informal sector enterprises to have the income security. Though in reality the fluctuations in consignments have not been substantial, prospects for improved wages have been ruled out by the intermediaries. Neither in terms of employment nor productivity and wages the units with a linkage with the formal sector are better-off in comparison to those who function independently. Similarly, the labour contractors who facilitate the informal employment in the formal sector stand out as the sole culprits.
After the recent pandemic and the lockdown hit the urban sector drastically the informal sector workers obviously suffered the most. Now, in the context of reviving the economy the urban informal sector must receive a great deal of planning and intervention. Given the heterogeneity, the recommendation of a uniform set of policy does not appear meaningful. However, a couple of strategies sound logical. The role of the intermediaries will have to be regulated; else, in the name of flexibility the informal sector workers will remain deprived of the minimum benefits.
There are irregularities and harassments regarding space on which the informal sector functions. Reservation of space will have to be provisioned as a public good and the rent seeking behaviour of the local government employees will have to be controlled. Product innovation and process innovation will have to be encouraged with greater disbursement of loans and dissemination of information about the market. Workers who experienced time independent mobility in the past unfold their success in generating savings and converting them into investible resources. Such willingness to pursue productive investment will have to be nurtured significantly for better outcomes to emerge.
—
*Professor Ranjula Bali Swain is Research Director, Center for Sustainable Research (CSR), Stockholm School of Economics & Professor of Economics, Södertörn University, Sweden; Arup Mitra is Professor, Institute of Economic Growth, Delhi

Comments

How community leaders overcome obstacles to protect forests and pastures in remote villages

By Bharat Dogra Dheera Ram Kapaya grew up in such poverty that, unable to attend school himself, he would carry another boy’s heavy school bag for five kilometers just to get a scoop of daliya (porridge). When he was finally able to attend school, he had to leave after class five to join other adolescent workers. However, as soon as opportunities arose, he involved himself in community efforts—promoting forest protection, adult literacy, and other constructive initiatives. His hidden talent for writing emerged during this time, and he became known for the songs and street play scripts he created to promote forest conservation, discourage child marriages, and support other social reforms.

Workers' groups condemn Gujarat Ordinance increasing working hours, warn of statewide agitation

By A Representative At a consultation organised today by the Asangathit Shramik Hit Rakshak Manch at Circuit House in Ahmedabad, leaders of major trade unions and labour rights organisations strongly opposed the Gujarat government’s recent ordinance amending the Factories Act and the draft rules notified under the Occupational Health and Safety (OHS) Code, 2020. Around 50 representatives from central trade unions, independent unions, and labour welfare organisations participated in the meeting.

Deaths in Chhattisgarh are not just numbers – they mark a deeper democratic crisis

By Sunil Kumar For a while, I had withdrawn into a quieter life, seeking solace in nature. But the rising tide of state-sponsored violence and recurring conflict across India has compelled deeper reflection. The recent incidents of killings in central India—particularly in Chhattisgarh—are not isolated acts. They point to a larger and ongoing crisis that concerns the health of democracy and the treatment of marginalised communities.

'Bengali Muslim migrant workers face crackdown in Gurgaon': Academic raises alarm

By A Representative Political analyst and retired Delhi University professor Shamsul Islam has raised serious concerns over the ongoing targeting and detention of Muslim migrant workers from West Bengal in Gurgaon, Haryana. In a public statement, Islam described the situation as "brutal repression" and accused law enforcement agencies of detaining migrants arbitrarily under the pretext of verifying their citizenship.

Gender violence defies stringent laws: The need for robust social capital

By Dr. Manoj Kumar Mishra* The tragic death of Miss Soumyashree Bisi, a 20-year-old student from Fakir Mohan College, Balasore, who reportedly self-immolated due to harassment, shocked the conscience of Odisha. Even before the public could process this horrifying event, another harrowing case emerged—a 15-year-old girl from Balanga, Puri, was allegedly set ablaze by miscreants. These incidents are not isolated; they highlight a disturbing pattern of rising gender-based violence across the state and the country.

The GMO illusion: Three decades of hype, harm, and false hope

By Sridhar Radhakrishnan Three decades of hype, billions of dollars spent, and still no miracle crop. It's time to abandon the GMO biotech fairy tale and return to the soil, the seed, and the farmer. “Trust us,” they said. “GMOs will feed the world.” Picture a world where there is plenty of food, no hunger, fields grow without chemical pesticides, children are saved from malnutrition, and people live healthily.

The myth of population decline: India’s real challenge is density, not fertility

By N.S. Venkataraman* India’s population in 2025 stands at approximately 1.4 billion. In 1950, it was 359 million, rising sharply to 1.05 billion by 2000. The population continues to grow and is projected to reach around 1.7 billion by 2050.

How natural and organic farming can be a key to combating the climate crisis

By Raj Kumar Sinha* On July 9, while addressing the “Sahkar Samvad” in Ahmedabad with women and workers associated with cooperatives from Gujarat, Madhya Pradesh, and Rajasthan, Union Home Minister Amit Shah emphasized that natural farming is essential for both our health and the health of the soil. This is a significant statement in the context of addressing the climate change crisis. Natural farming can play a crucial role in combating climate change. Also known as organic farming, it is a system of agriculture that can increase food production without harming the environment. Natural farming has the potential to reduce carbon emissions by 35% to 50%.

Indigenous Karen activist calls for global solidarity amid continued struggles in Burma

By A Representative At the International Festival for People’s Rights and Struggles (IFPRS), Naw Paw Pree, an Indigenous Karen activist from the Karen Human Rights Group (KHRG), shared her experiences of oppression, resilience, and hope. Organized with the support of the International Indigenous Peoples Movement for Self-Determination and Liberation (IPMSDL), the event brought together Indigenous and marginalized communities from across the globe, offering a rare safe space for shared learning, solidarity, and expression.

Search This Blog