Growth of Informal Sector in India - Economy Perspective


By

Mr. S. Baskaran
Sr. Lecturer MBA
HKBK College of Engineering
Bangalore

Mrs. J. Suhashini
Lecturer - MBA
PSNA College of Engg. and Tech.
Dindigul
 


Introduction

The informal sector plays a vital role in economic development of all the countries. Particularly, developing countries one third of national income comes from this informal sector only. The informal sector reduces the unemployment. The entrepreneurs are in this sector for their livelihood, not for making more profit. Some informal entrepreneurs are earning more than the formal employees in our country, like vegetable vendors, agents, brokers, foot-path traders etc. Majority of the entrepreneurs are community based in this sector. In India, each community has their own business. Rural, urban and city side also community based entrepreneurs are more. For example, foot wears and beauty parlor etc. The informal sector develops the Indian economy invisibly. Most of the rural and urban people are continuing their family business, because of lack of employment opportunity, In India most of the family businesses are in the informal sector. The earned income from this sector has utilized for the purpose of their children education, family commitments, personal savings, etc. So the government should take necessary steps to convert this sector into formal.

Informal Economy

The informal sector constitutes largest portion of the economy in terms of value addition, savings, investments etc. The share of formal sector is around 12 -14 percent in our national income while that of informal sector is more than 30 percent. 1n the case of United States, the share of corporate business is nearly 70 percent.

The informal forms of organizations are major players in such activities as manufacturing, construction, transport, trade, hotels and restaurants, and business and personal services. The informal sector plays a significant role in the economy in terms of employment opportunities and poverty alleviation. This sector generates income-earning opportunities for a large number of people. In India, a large section of the total workforce is still in the informal sector, which contributes a sizeable portion of the country's net domestic product.

While analyzing the composition of the Indian Economy, it is of two major sectors namely, organized and unorganized. The organized sector contributes two third to the GDP. Whereas the remaining 1/3 is by unorganized sector. The following statistics by National Account Statistics reveals the contribution of unorganised sector to the NDP.

Definition by NSO

"Enterprises typically operating on a small scale with a low level of organization, low and uncertain wages, and no social welfare and security."

Importance of Informal Sector in Indian Economy

About 370 million workers constituting 92% of the total workforce in a country were employed in the unorganized sector as per NSS Survey 1999-2000. It plays a vital role in terms of providing employment opportunity to large segment of the working force in the country and contributes to the national product significantly. The contribution of the unorganised sector to the net domestic product and its share in the total NDP at current prices has been over 60%. In the matter of savings the share of household sector in the total gross domestic saving mainly unorganised sector is about three fourth.

Features of Informal sector

  • Low level of organization; small in scale usually employing fewer than ten workers and often from the immediate family;
  • Heterogeneity in activities;
  • Easier entry and exit than in the formal sector;
  • Usually minimal capital investment; little or no division between labour and capital;
  • Mostly labour intensive work, requiring low-level skills; there is usually no formal training as workers learn on the job;
  • Labour relations based on casual employment and or social relationships as opposed to formal contracts; employer and employee relationship is often unwritten and informal with little or no rights;
  • Due to their isolation and invisibility, workers in the informal sector are often largely unaware of their rights, cannot organise them and have little negotiating power with their employers and intermediaries (ILO 2000).

Informal or unorganized sector workers dominate the Indian labor market and represent some 90% of the total Indian workforce. India's unorganized sector is one of the largest, if not the largest, in the post-industrial world. Informal employment that characterizes the unorganized sector comprises both self-employment in informal enterprises (small or unregistered) and wage-based employment undertaken without a transparent employment contract in both informal and formal sector enterprises. 

The informal sector contribution

The contribution of unorganized sector in net Domestic Product is 56.7% in 2002-03. Thus, the major chunk of NDP is provided by the unorganized sector.

Sector Share in Net Domestic Product (2002-03)

                                                                           Source: NAS 2005

Further, the sectorial composition in the NDP can be appreciated by the appended figures.


Industry wise distribution of NDP in organized and unorganized sectors shows that in agriculture sector, the share of organized sector is only 4% whereas 96% share is contributed by the unorganized sector. Due to this reason, the informal activities are studied in the non agricultural sectors only. In mining, manufacturing sector 60% share in NDP is of organized sector while 40% share is contributed by the unorganized sector. In service sector contribution of organized sector is 53% while 47% of the share is contributed by unorganized sector.

Main Industries of Informal Activities

Sector wise distribution of different industries (2002-03)

Industry

Organized sector
(% of NDP)

Unorganized sector
(% of NDP)

Total

Agriculture, forestry, fishing

4.1

95.9

100.0

Mining, manufacturing, electricity and construction

60.5

39.5

100.0

Services

53.1

46.9

100.0

Total

43.3

56.7

100.0

                                                                               Source: NAS 2005

Status of non-agricultural informal enterprises

Only 12% of the enterprises in the rural areas are registered with any registration agency whereas in urban areas this percentage is a little higher at 31%.

    Status of registration with any act/authority   

Percentage of enterprises by location

Rural

Urban

Combined

    1. Registered
    2. Unregistered

11.6
88.4

31.3
68.7

20.2
79.8

Total

100.0

100.0

100.0

     Source: NSS 55th round report on non agricultural enterprises in informal sector in India, 1999-2000.

Conclusion

The informal sector provides opportunity to both educated and uneducated people in all the areas in developing countries. This is not solution for economic crisis or recession. All the people need some basic income to run their family and to manage their children's education. The government should take much care about this sector, because contribution of this sector is more than formal sector.
 


Mr. S. Baskaran
Sr. Lecturer MBA
HKBK College of Engineering
Bangalore

Mrs. J. Suhashini
Lecturer - MBA
PSNA College of Engg. and Tech.
Dindigul
 

Source: E-mail November 8, 2010

          

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