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

Academics urge Azim Premji University to drop FIR against Student Reading Circle

By A Representative A group of academics and civil society members has issued an open letter to the leadership of Azim Premji University expressing concern over the filing of a police complaint that led to an FIR against a student-run reading circle following a recent incident of violence on campus. The signatories state that they hold the university in high regard for its commitment to constitutional values, critical inquiry and ethical public engagement, and argue that it is precisely because of this reputation that the present development is troubling.

'Policy long overdue': Coalition of 29 experts tells JP Nadda to act on SC warning label order

By A Representative In a significant development for public health, the Supreme Court of India has directed the Food Safety and Standards Authority of India (FSSAI) to seriously consider implementing mandatory front-of-pack warning labels on pre-packaged food products. The order, passed by a bench of Justices J.B. Pardiwala and K.V. Viswanathan on February 10, 2026, comes as the Court expressed dissatisfaction with the regulatory body's progress on the issue.

Vaccination vs screening: Policy questions raised on cervical cancer strategy

By A Representative A public policy expert has written to Union Health Minister J. P. Nadda raising a series of concerns regarding the national Human Papillomavirus (HPV) vaccination campaign launched on February 28 for 14-year-old girls.

UAPA action against Telangana activist: Criminalising legitimate democratic activity?

By A Representative The National Investigation Agency's Hyderabad branch has issued notices to more than ten individuals in Telangana in connection with FIR No. RC-04/2025. Those served include activists, former student leaders, civil rights advocates, poets, writers, retired schoolteachers, and local leaders associated with the Communist Party of India (CPI) and the Indian National Congress.

The new anti-national certificate: If Arundhati Roy is the benchmark, count me in

By Dr. Mansee Bal Bhargava* Dear MANIT Alumni Network Committee, “Are you anti-national?” I encountered this fascinating—some may say intimidating—question from an elderly woman I barely know, an alumna of Maulana Azad College of Technology (MACT, now Maulana Azad National Institute of Technology - MANIT), Bhopal, and apparently one of the founders of the MACT (now MANIT) Alumni Network. The authority with which she posed the question was striking. “How much anti-national are you? What have you done for the Alumni Network Committee to identify you as anti-national?” When I asked what “anti-national” meant to her and who was busy certifying me as such, the response came in counter-questions.

Development vs community: New coal politics and old conflicts in Madhya Pradesh

By Deepmala Patel* The Singrauli region of Madhya Pradesh, often described as “India’s energy capital,” has for decades been a hub of coal mining and thermal power generation. Today, the Dhirouli coal mine project in this district has triggered widespread protests among local communities. In recent years, the project has generated intense controversy, public opposition, and significant legal and social questions. This is not merely a dispute over one mine; it raises a larger question—who pays the price for energy development? Large corporate beneficiaries or the survival of local communities?

Minority concerns mount: RTI reveals govt funded Delhi religious meet in December

By Syed Ali Mujtaba* Indian Muslims have expressed deep concern over what they describe as rising hate speech and hostility against their community under the BJP-led government in India. A recent flashpoint was the event organised by Sanatan Sanstha titled “Sanatan Rashtra Shankhnad Mahotsav” in New Delhi on 13–14 December 2025.

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Rajiv Shah Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

From neglect to progress: The story of Ranavara’s community-led development

By Bharat Dogra Visitors to Ranavara, a remote village in Kherwara block of Udaipur district, are often surprised by its multi-dimensional progress. The village today is known for its impressive school building, regenerated pastures, expanded tree cover, and extensive water conservation and supply works. These achievements are the outcome of sustained community efforts over several years, demonstrating how small, consistent initiatives can lead to significant change.

Search This Blog