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The Transformation Of India's Informal To Formal Economy

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The Transformation Of India's Informal To Formal Economy

The move to formalization dictates a comprehensive approach that can bring unorganized employees into formal protection and support channels while keeping their dynamic potential.

Ms Swati Jha and Dr Amitava Ghosh are the Founders of SSA Compliance Services LLP
Ms Swati Jha and Dr Amitava Ghosh are the Founders of SSA Compliance Services LLP

SSA Compliance Services LLP

July 4: The informal economy has been the topic of extensive research and policy debate over the last few decades. Our understanding of its dimensions has evolved significantly from the earlier restrictive nomenclature of the "informal sector.' 

  

We are prioritizing work in the informal economy in the short term, particularly by ensuring that those who are already in the informal economy are recognized in the law and have rights, legal and social security, representation, and voice. GOI defines a formal job as providing access to at least one social security benefit, per the Task Force Report on Employment Statistics. 

  

Almost 10% (or 47.5 million) of the workforce had formal employment and had access to social security. Many others were employed informally, and many workers are in formal employment. Most workers (347.4 million) are in the unorganized sector (Gig/Platform/Casual). 

  

The move to formalization dictates a comprehensive approach that can bring unorganized employees into formal protection and support channels while keeping their dynamic potential. 

Challenges to Formalization of Workforce Not widening the tax and curbing tax evasion are indisputably required. However, research worldwide demonstrates that legal/regulatory barriers are the primary obstacle to formalization. 

  

It is commendable that policymakers are working to incorporate the informal sector into the formal economy by removing legal and regulatory barriers. On the other hand, these attempts overlook the fact that most informal units and their workers are fundamentally self-employed and casual workers scraping by on little resources. As a result, these efforts will have limited success. Increased digitalization and official record registration (E-Shram Portal) are necessary and sufficient conditions for any employee or worker to be classified as formal. 

  

The Path to Formalization Flexible Labour Markets: 

Low labour flexibility is a problem that has affected India's manufacturing sector for decades hence making labour markets, as well as social safety nets, more flexible, investing in human capital and prioritizing a conducive legal and policy framework, will lead to the creation of enough formal employment opportunities. 

  

Removing migration barriers by creating a national, portable, Aadhaar-linked benefits system, subsidized rental and housing facilities, and temporary housing for migrants in city planning will support diverged State Labour Laws with noticeable differences in the formalization process. According to the IR Code, 2020 (yet to be implemented), the government can increase this threshold by notification. This barrier should be increased tenfold, at least in step with GDP growth, to reflect the modern environment and give companies more freedom in shaping their workforces in response to changing needs for skills/technology levels and workflow practices. 

  

Exemption of Downsizing: 

An amendment to exempt downsizing from the applicable provisions when it is done in reaction to changes in demand, technological interventions, or seasonality in export orders would lead to more formal employment. Work domicile rules might be made more flexible among states. Finally, labour compliance could be improved by standardizing and simplifying procedures across several acts. 

  

Strengthening MSMEs: 

MSMEs employ about 40% of the informal workforce. As a result, it is logical that the strengthening of MSME will contribute to economic recovery, job creation, and economic formalization. Due to India's job promotion policy, several labour-intensive sectors and activities have been spread into the informal or unorganized sector. Interventions in policy, fiscal support, education, and upskilling all play a significant part in the formalization of the economy. By investing in capital and educating and empowering the workforce, informal businesses will become more productive, and formalization will follow. 

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