March 06, 2022

Cruel Joke of Declining Informality

Sanjay Roy

RECENTLY, a weird claim has been advanced by certain quarters within policy circles that informality in India has declined, the share of the informal sector in output and employment has gone down, and that’s an achievement to be celebrated for obvious reasons. The proposition is based on the estimation that the contraction of the economy during the pandemic has thrown a large number of informal-work out of the grid and since during the recovery it is the formal sector that rebounded faster, and informal activities being slow in this process, led to shrinkage in output share of the informal segment.

Also, with the increase in registration through e-shram portals and EPFO more workers are included in the formal space and also by availing Kisan Credit Cards farmers got registered in the government’s books. Undoubtedly any sort of access to social security such as pension or access to credit is a welcome effort, howsoever scanty it may be, and even if it is a payment commitment to be realised at the end of 60 years of a claimant, it may create a premise for the struggle for more substantive gains in the future.

The number of registration in EPFO, however, records only entry and not the exit and most of the time since settlements of claims happen much later than the actual discontinuity of work, the net outcome in terms of total employment created cannot be assessed only by numbers of new entry. It is true that there had been a huge shift in employment from agriculture to non-agriculture in India in the past four decades and since agriculture has been the greatest repository of informal employment, there has been a marginal drop in the share of informal workers within the informal segment. But on the other hand, the share of informal workers within the formal segment has increased compensating for the fall in the informal segment. Hence combining both, informal work turns out to be more than 90 per cent of the total employment.


There is no clear-cut definition of the informal sector and mostly it is considered as a residual sector. Its existence and definition is predicated on the notion of ‘formal’ and mostly discussed in the context of developing countries where large swathes of the population are either trapped in subsistence agriculture or its urban and non-farm counterpart that is subsistence petty production. Low productivity, low technology, none or little involvement of hired labour and hardly any access to formal credit characterise informality. The notion of informality as it evolved essentially refers to a production organisation featuring certain characteristics of both labour and capital. The official definition of informality however separates informal enterprise and informal labour.

An enterprise that uses electricity but employs less than ten workers or one that does not use electricity but employs less than twenty workers are considered to be an informal enterprise. On the other hand, according to ILO’s definition, any worker who is entitled to at least one social security benefit shall be considered formal. Therefore, these definitions finally end up to a matrix of formal and informal enterprises and formal and informal workers that may overlap with each other. Hence there can be formal workers in the informal sector and informal workers in the formal enterprises or sector.

Going by the recent Periodic Labour Force Survey of the government, the share of workers who are entitled to at least one sort of social security is 9.6 per cent of the total workforce and if we count those eligible for multiple social security benefits it is only 4.6 per cent of total employment. The complexity of definitions essentially boils down to an administrative criterion that might help design policies but ridiculously fails to capture the structural dualities that persist in developing countries. The more minimal the criteria would be, the more workers would be counted in the bracket of the formal segment without any substantive change in their life and work.

The formal-informal binary actually fails to capture the complex processes of concentration and centralisation of capital which are accompanied by a simultaneous process of fragmentation of capital at the lower end. However, this is not a linear process as it was thought to be that competition would eventually destroy all small and petty producers and only large-scale production would exist. Instead in developing countries, the so-called informal employs the largest section of the population and they persist even though there had been considerable capitalist development. The reason was the nature of the capitalist development which did not give rise to a large base of standardised demand instead led to fragmented markets with limited scope for the growth of large scale enterprises. Persistence of subsistence level non-farm employment within low-productivity, low wage segment as paid or unpaid workers or self-employed is a typical feature of late capitalism that relies highly on the skewed distribution of income. But internationally to make this discourse appear benign the duality between formal and informal was promoted by ILO that acknowledged the existence and persistence of such activities as opportunities for employment when the ‘formal’ sector is not able to absorb the vast majority of the labour force.

In fact, the notion of formal which refers to factories in manufacturing and similar production arrangements in services is not confined to the number of employment rather extends far beyond that. It entails rights of workers, minimum wages, stipulated working conditions, severance payments and collective bargaining rights and so on. By limiting the operational definition of ‘informal’ simply to employment numbers or access to some social security provisions independent of the nature of occupation as well as that of production organisation, actually undermines the capital-labour relationship and the accompanying rights that historically evolved through protracted working-class struggles.


The neoliberal architecture of capitalist accumulation entails a production structure where global capital gets access to cheap labour and natural resources available in developing countries. Global accumulation and the politics of domestic capital aligning with the global multinational companies are internalised through the logic of competition. In fact, as countries compete with each other by reducing production costs, they effectively end up increasing the profits of big multinational buyers. Instead of enhancing the purchasing power of the people and building industrial capacities through autonomously defined priorities, what has been preferred by domestic capital is to collaborate with big capital as junior partners and get a share of profit emerging out of this global design of accumulation.

In such a scenario where reducing production costs is the only mode of attaining a larger share of standardised markets and since local monopolies hardly enjoy any control over input prices in a liberalised regime, it is only the labour whose wages and rights have to suffer to remain ‘competitive’ in the global market. In that context ‘informality’ appears as a prerequisite for enhanced exploitation, when all rights of workers are delegitimised. This is precisely the reason why informality or a state of devaluation of the worker has become the raison d’etre of present-day capitalist accumulation.

In the case of India according to the Annual Survey of Industries, the average employment size of factories has declined over time, the production relies more on subcontracting and outsourcing and more than a third of the workers in factories in India are contract workers. So, capital needs a flexible labour regime where they would enjoy the freedom of exploiting workers as they wish but at the same time as exploitation increases, they need to contain potential discontent by some paltry amount of transfer of money from the state exchequer in the form of social security provisions. The state in a sense offers full freedom to individual capitalists to exploit labour, disavow all legal liabilities related to working conditions in the name of competition, but at the same time has to keep in mind the collective concern of the capitalist class as a whole that the system does not explode. The current phase of capitalist development will therefore rely on informality in essence but may extinguish it by diluting the notion of formal employment and related rights that accompany such work contracts.  

Therefore, as opposed to playing down the structure of capital-labour relations and trivialising labour rights through the maze of definitional jugglery, it is important to protect the rights of workers, establish rights, particularly in the new spheres of work and also struggle for substantive provisions for social security and income protection that should be financed by enhanced taxes from the rich who are given a free hand to squeeze their workers in a flexible labour regime.